Costamare's (CMRE) CFO Gregory Zikos on Q1 2018 Results - Earnings Call Transcript

Costamare Inc. (NYSE:CMRE) Q1 2018 Earnings Conference Call May 3, 2018 8:30 AM ET

Executives

Gregory Zikos - CFO

Analysts

Noah Parquette - JP Morgan

Ben Nolan - Stifel

Michael Webber - Wells Fargo Securities

Donald McLee - Berenberg

Max Scherzer - Morgan Stanley

Operator

Thank you for standing by, ladies and gentleman, and welcome to the Costamare, Inc. Conference Call on the First Quarter 2018 Financial Results.

We have with us Mr. Gregory Zikos, Chief Financial Officer of the Company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, May 2, 2018.

We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read slide number two of the presentation, which contains the forward-looking statements.

And I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.

Gregory Zikos

Thank you and good morning, ladies and gentlemen. During the first quarter of the year, the market continued with a positive momentum across the board with larger vessels capturing most of the upswing. During the same period the company delivered profitable results.

On April 27th, we accepted delivery of the containership vessel Polar Brasil, which is the second of the two 3,800 TEU newbuildings ordered together with our partners York. Upon delivery, the vessel commenced its seven-year time charter to Maersk line. In April, we acquired the 2008 built, 1,300 TEU sister containerships [meeting current rate]. These acquisitions were funded with available cash.

On the chartering side, we chartered in total 16 ships since last quarter and today we have no ships laid up. Finally, on the dividends, we declared our 30th consecutive quarterly dividend since going public. Insiders have decided, as has been the case since June 2016, to reinvest in full their cash dividends in new shares.

Moving now to the slides presentation. On Slide 3, you can see the highlights of our first quarter. Our adjusted earnings per share for Q1 was $0.12. We have no vessels laid up and we have entered into new or extended time charters for 16 ships since the beginning of the year. We recently acquired two sister containerships of 1,300 TEU with equity.

Last week, we took delivery of our last 3,800 TEU building, which concluded our current newbuilding program. The vessel was brought under our JV with York, and upon delivery she commenced her charter employment with Maersk.

We do maintain a strong balance sheet with net debt to book equity starting at 65%. Factoring in market values and based on our compliance certificates delivered to our lenders, we have the leverage ratio in the region of 45%. We have no balance sheet financing and we currently have no further capital commitments.

On the market, charter rates have increased substantially across the board since the beginning of the year with larger vessels capturing most of the upside. The increased containership demand has resulted in the percentage of idle fleet dropping at 1.4%.

On Slide 4 you can see a summary of our recent chartering activity. All ships are employed, and you can see that the majority of the vessels have been rechartered at higher rates.

On Slide 5, you can see the details on the refinancing of our original $1 billion facility, which has resulted in increased liquidity of $65 million over the next three years. We also extended the balloon payment of [$13.1 million] in one of our facilities for one more year.

During the previous quarter, we declared $0.10 cash dividend per share on our common equity and dividends for all four classes of our preferred stock. Insiders have decided to invest all their first quarter cash dividends in new shares under our dividend reinvestment plan.

On Slide 6, you can see the first quarter 2018 results. During the first quarter of this year, the Company generated revenues of around $93 million and adjusted net income of around $13 million. Based on the above, the first quarter adjusted EPS amounts to $0.12. Our adjusted figures take into consideration the following non-cash items, the accrued charter revenues, accounting gains or losses from asset disposals, swaps’ breakage costs, and prepaid lease rentals and other non-cash charges.

On Slide 7, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from first class charterers like Evergreen, MSC, Maersk, Cosco and Hapag Lloyd. We have $1.2 billion of contracted revenues in the remaining time charter duration of about three years.

Moving onto Slide 8, as of the end of this quarter, we had cash on balance sheet of around $250 million. We are conservatively managing our balance sheet, having brought down net debt from $1.7 billion in 2013 to less than $1 billion as of today, which represents a net debt to equity ratio of 65%. During the five-year period, we have raised debt funding of close to $750 million for new business.

And on the last slide we’re discussing the markets. Charter rates have moved up substantially since the end of 2017. The idle fleet, as already mentioned, currently is at a low level of 1.4%. The order book remains at historically low levels of less than 13%. As already mentioned, we are actively looking for new transactions in this market environment.

This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from Chris Wetherbee of Citigroup. Please go ahead.

Unidentified Analyst

Hi, guys. This is James on for Chris.

Gregory Zikos

Hi, good morning.

Unidentified Analyst

Good morning. The first question I wanted to ask is actually around the two small vessels you acquired, Michigan and Trader, is that more an indication of sort of values on the market or if you want to position yourself to get more exposure to improving rates?

Gregory Zikos

Those two ships, these are 1,300 TEU 2008-built vessels, which have been bought with equity during the last quarter and now the vessels go through dry-docking. We bought them because considering the physical condition of the vessels and the specs. We found that it made sense to buy those ships. Now, it doesn't mean that we have a preference for smaller vessels – larger [indiscernible]. As you can see from our fleet lease, we are quite flexible. We have up to 14,000 TEUs.

It is just that opportunistically we felt that the [value] of those ships, considering their earnings potential, it is something that made sense.

Unidentified Analyst

And you said that you basically saw – because of the condition that they are in – can you elaborate on that a little bit more?

Gregory Zikos

I think it is the specs of the vessels. And considering whether the earnings potential and the remaining useful life of those assets, and whether the charter rates expected to be received on the ships, and considering the price we felt that it is something that made sense. I cannot go into more detail now, but hopefully in the next quarter we are going to be able to provide you with more information regarding the chartering of those ships.

Unidentified Analyst

And then, could you also just give us a sense of how many more transactions like this you could possibly see available and this is something that we might see pickup in the future, or if this was more of something that sort of was one-off and opportunistic?

Gregory Zikos

No. I think there are a lot of deals to look at either [containerships] without charter like those two, or second-hand ships with immediate to long-term charter, which is something we look at as well. And I also have to mention that the newbuilding market is much more active now compared to the markets a couple of years ago. So, we are actively looking at transactions in all those three sectors, meaning second-hand ships with or without long-term charter, and those newbuildings.

Unidentified Analyst

Thank you.

Gregory Zikos

Thank you.

Operator

Our next question will come from Noah Parquette of JP Morgan. Please go ahead.

Noah Parquette

Great, thank you. I just wanted to ask, there were a few ships around 20 years or approaching 20 years, can you talk a little bit about your strategy? Do you think you can still extract value from some of these older ships before you scrap them or what are you thinking there?

Gregory Zikos

Yes. First of all I have to state that the containerships they have a useful life of 30 years, and also in the past we were managing ships older than 30 years. Also, if you look at our recent chartering activity, you'll see a 1997-built ship, who is like 21-years old now, the Maersk Kawasaki 7,500 TEU, which has been chartered for around 16,000 for a year.

So, as long as we feel comfortable with the technical characteristics and also the seaworthiness of the vessel, and as long as the asset is properly maintained if there is a market out there, which today for some vessels definitely there is, like this example I gave you, we see no reason why to scrap those vessels. And as a manager, we do have experience in managing older ships, and a lot of times the vessel tonnage may come out of rechartering and also releveraging older assets.

Noah Parquette

Okay, great. And one last one is, it has been a bit since the alliances have shaken out and you are seeing [some operation] now for some time, can you tell us if you are seeing any sort of increase in efficiency of how the ships are utilized or maybe more percentage of loaded containers, is there anything that is going on there that has kind of increased [shadow supply]? Thanks.

Gregory Zikos

Look, regarding efficiency and load rates, I don't want to enter into a discussion with now because it may vary from trader to trader and from line to line. So, I don't want to give a generic answer, which maybe misguiding. However, if you want to talk about trade growth I can tell you that since the beginning of this year, 2018, trade growth has been quite promising, and has been quite strong. But load factors etcetera I think this is something that should be firstly addressed to the [indiscernible].

Noah Parquette

Okay. That is all I have. Thank you.

Gregory Zikos

Thank you.

Operator

Our next question will come from Ben Nolan of Stifel. Please go ahead.

Ben Nolan

Thanks. Hi, Greg. So, coming back to what you were talking about a little bit on the first question, there has been a bit of noise out there that you guys are involved in a rather sizeable newbuilding order with a liner company, and that may or may not be true, but my question really revolves around how you are thinking about the capital needed for such transaction? Where do things, I guess, stand with respect to the York joint venture, would you expect any new business to that site to be done with them or not, and then ultimately how are you thinking through capital that is available for bigger things like that?

Gregory Zikos

First of all, regarding those rumors you are referring to we have also read the related articles, and I cannot comment on those. The second point is that we are looking at things, and our joint venture with York has an investment period, which expires in mid-2020, and there is still appetite.

Now, we look both at newbuildings, as we mentioned earlier, with charter and also second-hand ships with or without charter. We have cash on the balance sheet. We have cash on the balance sheet north of $200 million. We have a low level, and so however you look at it book values, or market values of vessels with or without leverage in the region of 50% or less. We have six ships which are debt free. We have positive cash flow from operation. That we are repaying our debt very prudently.

So there is cash available. [Entirely] with York or also on a standalone basis, if York does not wish to participate in some transaction, we will be actively looking at new business either second-hand or newbuilding. Of course, the first priority is to cover our downside and make sure the downside risk is something manageable, but we feel that today's circumstances make sense if some of us continue investing in containerships.

Ben Nolan

Okay. That is helpful, and I guess we will just cross that bridge when we come to it, I suppose, but – and then I wanted to follow on something that Noah was asking about, your employment of older assets and I think that has obviously been a hallmark of the company being able to stretch the useful life of things pretty well. But I was curious, especially on some of these ships that are north of 20, north of 25 years old you are continuing to be able to get contracts on, what sort of maintenance cost, obviously there are special surveys and that kind of thing. How much does it cost to keep those vessels in the market and just thinking through what sort of returns you need to be able to generate or cash flows you need to be able to generate in order to cover the presumably higher cost associated with your older assets?

Gregory Zikos

This depends on the specific asset size, whether it is a smaller or a larger vessel. But I can tell you that on average, if you go to our income statement then divide operating expenses by the ownership days, you will see that we have OpEx in the region of $5500 per day, or slightly less for a fleet, which is not like a 3 or 5-year old. So, I mean, the delta is not something which the delta in the operating expenses, it is not something that is prohibiting us from employing those ships on a profitable basis.

We have never chartered ships below breakeven levels and there is no reason to do it. It doesn't make any sense at all. However, as you mentioned, we have experience in managing older ships. It is something that the company has traditionally also been doing, and we have been in shipping for over 40 years. So if you have a 21-year old vessel, 7500 TEUs, which today get 16,000 from a top class charterer, for like a year or so, we see absolutely no reason why not continue employing the vessel, and I can tell you that whatever slight difference in the OpEx does not make this chartering less profitable, or sort of non-profitable at all. Especially those ships, whose debt has been more or less being paid back, and the debt obligations are sort of very light with maximum flexibility there regarding tenure and charter hire.

So, we will continue employing older vessels without, of course, meaning that we are not going to be looking at newbuilding, or [indiscernible]. However, we feel that covering a mix of ships does make sense.

Ben Nolan

All right. Okay. All right. Well that is helpful. Thanks Greg.

Gregory Zikos

Thank you. Thanks Ben.

Operator

And our next question will come from Michael Weber of Wells Fargo Securities. Please go ahead.

Michael Weber

Hi, good morning Greg. How are you?

Gregory Zikos

Hi, Mike. Good morning.

Michael Weber

Good morning. I wanted to follow up on Ben’s question around, tied to the [indiscernible] deal for a string of at least 4,000 key ships. I’m just curious, you mentioned you hadn’t chartered anything below breakeven and I think operational breakeven sure. But when you look at on a pure cash breakeven basis, some of the recent charters across the market on post-Panamax ton has been pretty close to a cash breakeven. And, so I’m just curious when you think about that within the context of new deal and another string of large assets. Has your math and your risk tolerance around residual value risk changed it at all from say, today kind of relative to where you were when you maybe started York’s JV? Are you less willing to take on residual value risk just given some of the evidence that you’re seeing on charter opportunities for open post-Panamax tonnage?

Gregory Zikos

Look, no, I mean, our tolerance levels and our risk appetite has not changed. So, I mean, again the biggest priority is to manage our down size risk. However let me say that today’s newbuilding price as compared to the newbuilding price as we witnessed back in 2005, 2006, 2007, 2008, 2009 whatever, it’s much lower. So, by default you have a better deal and you start from a lower CapEx point with something that makes the deal more solid, with some that has to do with the market. Leaving that aside, our sort of risk appetite levels have not changed, they do remain the same. But it definitely makes sense to do deals now compared to days that were affected back in 2007.

Michael Weber

Yes, I guess, the question was around appetite and maybe versus pace, right? So, your answer is that your cost basis on the ships has come down, so the required rate of return, in fact rate needed to get to your return hurdle is wider and then I guess that you need more term now than you maybe did two or three years ago? I mean, I guess, nothing changes in this parameters, I guess, my question would be why when we’re seeing, we saw pretty healthy stretch where there was a little bit of no employment for large tonnage, when we added the peak season, and then even this year, I mean, with year-over-year, the tonnage, the charter rates available for post-Panamax tonnage even though they’re up, it’s still well below the expected range associated with the vessels I’m assuming for even most the return calculation in the final purchase? So, I’m just curious, what else has changed within your math and if nothing, why?

Gregory Zikos

No, now we would not say, I cannot say that look our risk tolerance levels and power expected returns have not changed. We are doing exactly the same math on new business we were doing years ago. If the deal doesn’t make sense, we will simply not do it. We don’t have a reason to grow for the sake of growing. So, again we are going to be looking at the quality of the charter, we are going to be looking at the purchase price, we are going to be looking at the specs of the vessel, the charter, and also the tenure of the charter party. In order to see whether the risk showing to now, equity makes sense or not, those sort of fundamental things and the way we look at numbers have not changed, I can tell you that.

Michael Weber

Okay, all right. Maybe then moving on the, yeah, I’ve asked you this, I think I’ve asked you this before, but I guess on accounting change is coming down the pipes in a few years, it should impact at least some of the public counter parties that you have in terms of how they recognize their operating leases from the vessels, maybe your biggest counter party private, so it doesn’t look like it’s going to be - it’s going to directly impact the majority of your book, but like Maersk and some others that they exposed to the reclassification at some of their operating leases. I’m curious have you noticed any change in behavior from them around different - their sort of end around and certain structure that are available that could alleviate that burden either kind of JVs, COA structures, seamless, I think you’re starting to see that development a bit in L&G [Ph]. I’m just curious, has Maersk started to come up with that little - that subset of counter party that you got yet or is it still with that?

Gregory Zikos

No, that’s a good question. No, up until now we haven’t noticed any change regarding the appetite to plan the companies to chartering for a longer period of vessels a shorter one due to changes in accounting. And, during 2017, we chartered three ships to a major liner company, the two of them for seven years which go up until 2024, and the third one for three years which goes up until 2022 which is after the implementation of those new accounting standard. So, I don’t think that those new accounting rules have changed the chartering tenure. So, we have not noticed anything. I cannot predict the future. But that now if someone wants to charter for a longer period then they may well charter. And, I need to say that I’m not aware that those new accounting rules apply globally. So, I’m not sure…

Michael Weber

It doesn’t mean they can’t still do it. It just means it is going to be recognized the balance sheets, so you had to think about it a bit more?

Gregory Zikos

For Asian companies which maybe porting other - some specific Asian country accounting rules, I’m not sure whether they apply or not. I know that they apply under IFRS, they maybe apply under U.S. Government, but I’m not sure whether they apply in every single account in jurisdiction provide globally. But even - if that’s the case, we haven’t noticed anything up until now and again with some examples of long term charters concluded in 2017.

Michael Weber

Okay. And, again the bulk of your book is not going to be impacted by that gain. I guess last question I know I’ve asked you just before of it. We’ve seen a couple of other lines now stepping with some dual field options for long-term tonnage, this kind of relates to how you think about residual value risk especially with the greenhouse targets we have now set in maritime space for 2050. Have you done any more work around getting comfortable with dual field options in terms of owning L&G power tonnage potentially for regular customers or is it still spotty within the major lines that want to upset?

Gregory Zikos

Look, we’ve got to look at, first of all regarding the numeric relations sticking in 2020 regarding a low self-ignition. So, we have looked at various options and sort of and I can tell you that obviously our circumstance today, we would not opt for a scrabbles related type of solution, which we don’t think that it is - that it makes sense neither from a financial point of view nor not from a pure environmental point of view. And, if most people do not install scrabbles like it is the case as of today and you may find yourself on the wrong side, in case you decide to install them by yourself. So, we don’t feel that is some that today makes sense. Now we are evaluating various options, I don’t think that today I can get into more details, but the scrabble is something that we don’t feel it makes sense from menu point of view.

Michael Weber

Yes, I would assume your burning - your burning a healthy amount of MCR to begin with, there’s more around, the kind of long term CapEx cyclone where the people are actually pushing for a L&G power tonnage. I know CMA has, I don’t think MSC has, if not - there it seems there are couple of more lines that are popping up and looking at and I’m just curious whether or not that’s something you’ve been asked to kind of an investigate whether you got any more comfortable with it?

Gregory Zikos

No, up till now we have not reluctant, those mainly relate to newbiddings for larger vessels, it’s not serving that sort of [indiscernible] we have been asked. However we are following the situation and the big vessels - moving forward. But I cannot say something specifically at this point.

Michael Weber

Great, I will stop there and turn it over. Thanks Greg.

Gregory Zikos

Thanks. Thank you, Mike.

Operator

Our next question will come from Donald McLee of Berenberg. Please go ahead.

Donald McLee

Hey Greg, it looks like number of your charter extensions were relatively short-term nature despite being a center at higher rates. Could you just comment on how far along you think we are in the sector recovery and how that might be influencing a chartering strategy?

Gregory Zikos

The new chartering agreements we’ve had, there were - for peers ranging from some weeks to a year plus or if you look at the market, the average charter tenure, the first quarter 2018 versus the 2016 or sort of like beginning of 2017, it has become longer. At some point where the market is today, we may not also want to commit for historically low levels for a much longer period. But the bottom line is that both charter rates have been moving up substantially since last year and also that the charter tenures have been becoming longer. So, I mean, we can discuss, I mean, you want to discuss specifically some vessels because from a minded perspective I think that this is the situation, they disposed the news for containership owner.

Donald McLee

Okay, that’s fine. I can follow up on last specifically about a vessel. Going back to your earlier comments about the earning potential for the two theatres and just giving the liquidity, how do you think about the potential larger scale to strategic transaction in the theatre space, specifically did you look at the Santa Croce [Ph] deal and is that something that you might consider?

Gregory Zikos

Look, we look at everything, whether it’s smaller ships or larger vessels with or without charter. Now for smaller ships to have a long-term charter, of course then the number needs to make sense, the numbers need to work. So, I don’t know all the details of the transaction you’re referring to. But as far as we are concerned going forward if there are any large deals without a small or with bigger vessels we would definitely look at it. And, this is what we have been doing and transformation earlier, we are generally active.

Donald McLee

Okay, that makes sense. And, then the last one just on the blue net chartering JV, it’s been up there running for about 3 months now, can you comment on any tangible impact that you’ve seen so far?

Gregory Zikos

No, this is mainly a brokerage platform which is managing our ships together with vessels from other ship owner. And, they started the operations at the beginning of this year. As you mentioned it is gradually short period and it’s nothing more than a chartering brokerage type of activity. So, I don’t think that there is anything tangible or sort of noteworthy for me to mention at this stage.

Donald McLee

All right, that’s all my questions. Thanks for taking the time.

Gregory Zikos

Thanks. Thank you, Don.

Operator

[Operator Instructions] Our next question will come from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Max Scherzer

Hi, this is Max Scherzer [Ph] on Fotis. Thank you for taking the question.

Gregory Zikos

Yes, hi Max, good morning.

Max Scherzer

Good morning. Yes, can you give us some additional color on the refinancing maybe what’s the interest cost on that and then how do you compare your cost of capital or estimate your cost of capital relative to your peers?

Gregory Zikos

Yes, first of all regarding the refinancing. This refers to an old facility which we signed in 2008 originally at $1 billion. The loan outstanding as of the end of 2017 of fiscal ‘17 was $300 million. And, during the quarter we decided and we fully refinanced this facility of $300 million on a bilateral basis. This facility was amortizing down to zero. So, now we have a deed with lender a balloon of $88 million. Based on the new repayment profile, the balloon order is in place, the facility is maturing in June 2021. During this three year period, I would say that we have an incremental liquidity benefit of close to $65 million. Now the cost of that facility is a long reliance of the facility that was refinanced, not only bidding to sort of exact margin. But I can tell you that our cost of debt and our ability to [indiscernible] today, I think it is somewhat relatively competitive.

Max Scherzer

Okay, that helps. And, then maybe you could talk about the market a bit, I mean, what is your kind of projection for market tightening or listening in ‘18 or ‘19, where do you see the demand going in the coming months?

Gregory Zikos

We normally don’t predict the market especially for a year and half, up until 2019 because for containership which is a very, very long period. I can tell you that up until now we have seen the market tightening in terms of charter rates, in terms of ships availability and in terms of ships laid out being now less than 2%, which is a very low figure. And, we believe that the market may continue strengthening over the next months as well.

However I cannot go after that and I don’t want to predict the market. But I can tell you that today overall from a both trade growth perspective, six availability charter rates and momentum and charter duration, I think these are all positive factors. And, let’s not forget that we have another book which stands below 13%, which is again a historically low number for newbuildings and container shipping. At the peak of the market that I would like to remind you that at some point we had an order book of 60%. Now at 12% to 13% order book which is very same from 2020 onwards. I think that the fundamentals, the post-fundamentals other.

Max Scherzer

And, why you think the larger ships are getting higher rates or seeing rate growth faster than the smaller ships, I mean, is it a trade thing or certain routes are growing faster than others?

Gregory Zikos

Look, this is what we saw during the first quarter of this year. And, I will give you an example that $8,000 to your ship which in 2016 was yielding I would say $7,000-8,000 per day. It has been chartered and sort of now it’s getting $20,000 plus for a period of 6 to 12 months. So, I think that it’s all about supply and demand. And, there’s a lot of demand for those vessels and limited supply. So, generally the larger vessels have over the last months have outperformed the rest of the market. Without meaning that the main market which has not died across the board. But I mean most of the gains have come from the larger ships.

Max Scherzer

All right. Thank you. That’s all for me.

Gregory Zikos

Thank you. Thanks a lot.

Operator

Ladies and gentlemen this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Zikos for any closing remarks.

Gregory Zikos

Thank you very much for dialing in today in our Q1 results call. We are looking forward to speaking with you again with our Q2 results conference. Thank you very much, bye.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.