Costamare Inc. Q1 FY2021 Earnings Call

Thank you for standing by ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the Fourth Quarter 2021 Financial results. Pardon me, it’s the first quarter. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. I must advise you that this conference is being recorded today, Tuesday, June 1, 2021. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide number 2 of the presentation, which contains the forward-looking statements. And I will now like to pass the call over to your speaker, Mr. Zikos. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. We are pleased to announce the results of another profitable quarter. The market rebound that began in the second half of last year has continued, drawing strength from favorable supply and demand dynamics. Strong demand for goods, restocking of inventories and a balanced container vessel market have all helped the charter market reach levels that we have not seen for a decade. Since the beginning of the year, we have agreed to acquire a total of 15 secondhand vessels and we have taken delivery of our last two newbuildings, which have commenced their 10-year charters. Employment already secured for the new acquisitions, together with the newbuildings delivered, is expected to provide incremental contracted revenues of more than $830 million. Since our previous quarterly earnings release, we chartered out a total of 17 secondhand ships at increasingly high levels of hire. We have a total of 23 ships coming off charter over the next 18 months, which is a favorable position should the current market conditions continue. Finally, on the financing side, we have recently concluded the issuance and listing of the first shipping unsecured bond on the Athens Exchange for €100 million. Based on exceptionally high demand, the bond was priced at the low end of the yield range with a 2.7% coupon for a five-year period. Based on these business developments and our increasing long-term cash flows and liquidity, management is pleased to recommend to the Board of Directors to increase our second quarter 2021 dividend by 15%. Our balance sheet, together with cash flows from operations and liquidity position, provides us with the ability to increase the dividend without any impact on our growth plans. Moving now to the slides presentation, on Slide 3 you can see our company snapshot: More than 47 years in the shipping industry. Uninterrupted dividend payments since going public, strong sponsor support. We never had to restructure our debt, smooth debt repayment profile, fully aligned interests, steady management and ownership, and high growth potential with no legacy-debt restrictions. On the next slide, Slide 4, here you can see the resilience of our business model: steady revenues and net income in a highly volatile shipping environment. On Slide 5, you can see the highlights. Management will recommend to the Board a 15% increase in the quarterly common dividend effective from Q2 2021. Adjusted net income for the quarter is $38 million and the adjusted EPS is $0.031. In the previous week, we concluded the issuance of the first unsecured bond on the Athens Exchange. The term is five years, and due to the exceptionally high demand, it was priced at the lower end of the yield range of 2.7%. The bond further diversifies our planning sources at highly competitive pricing levels. Moving to the next slide, we have been quite active in the SAP market. In total, we have acquired 17 vessels, worth north of $760 million. This incremental contracted revenue from the acquisitions amounts to approximately $830 million. We have also agreed to sell three of our vessels. Sales are expected to be concluded within 2021. On Slide 6, you can see our new financing arrangements since the beginning of the year. In total, we have concluded financing agreements of about $430 million. New financing commitments amount to $237 million. All vessels acquired in 2021 have either been financed or combined the commitments for their financing. We maintain a strong balance sheet with liquidity of about $240 million, book leverage of 60%, market value-based leverage at around 40%, and no meaningful debt maturities until 2025. On Slide 8, we have chartered a total of 12 vessels in 2021 at higher levels than the previously agreed ones. On top of all, these five sets of vessels where delivery is expected to occur within 2021 are long-term charters. As mentioned, we have a total of 23 ships coming off charter over the next 18 months, which presents us favorably should current market conditions continue. For the market, the charter market has continued to rise on the back of positive supply and demand fundamentals. Time charter rates probably increased in 2021. The idle fleet remains at levels close to 1%. We have paid out for the second consecutive quarterly dividend in April. Insiders have been participating in the DRIP, and since inception in 2016 have reinvested more than $100 million. On the next slide, you can see the first quarter 2021 results. During the first quarter of the year, the company generated revenues of $127 million and adjusted net income of $38 million. The first quarter adjusted EPS, as mentioned, is $0.31. Our adjusted figures take into consideration the following non-cash items: accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and changes in fair value of equity securities. Moving to the next slide, on Slide 11, we discuss our capital structure. Our leverage is comfortably around 40%. EBITDA over net interest is at 5.8 times, when our covenants have a minimum requirement of 2.5 times coverage. On Slide 12, we are showing the revenue contribution for our fleet. 96% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Cosco, Yang Ming, and Hapag-Lloyd. Today, we have $3 billion in contracted revenues and the remaining time charter duration of about 4.2 years. On the last two slides, we're discussing the market. Charter rates have continued to improve. Since the second half of 2020, rates have increased on average by 300%. Box rates also show a positive trend due to favorable supply and demand dynamics. On the left slide, Slide 14, the idle fleet stands at 1% from a high of 12% the same period one year ago. The order book has risen to around 18%. It should be noted, however, that it takes close to two years to build a new ship and new buildings now ordered will be delivered from 2023 onwards. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now.

Our first question today comes from Chris Wetherbee with Citigroup. Please go ahead.

Yes. Thanks. Good afternoon, guys.

Hi, good morning.

Maybe I could start on leverage and I wanted to get a sense of kind of where you are in your comfort zone in terms of whether it's debt-to-EBITDA or however you want to look at sort of your leverage metrics? How much more capacity do you think you have to take on some incremental debts or reinvest and potentially grow the fleet?

Yeah, the leverage today based on the financial covenants as agreed with our lenders, and this is leverage based on market values of the vessel, is as mentioned below 40%. This is also due to the fact that we have long-term contracts and the cash flows from those ships are factored into the leverage calculation. So we take a comprehensive valuation of which is I think the right thing to do in container shipping. Based on that, and considering that we're below 40% leverage today, I think we do have a lot of capacity to grow. The thing is that the asset values are at very high levels. And we normally don't like buying at the peak of the market, but now charter rates and those other values are at historical high levels. So this is something to consider, but from a leverage perspective and from a capacity perspective, whether discussing balances, access to commercial bank debt and the ability to leverage up, I think we have more than enough capacity.

Okay. That's helpful. I appreciate that. And then maybe just a question about the general sort of fleet development and the order books. You have a helpful slide on a chart on Slide 14 that shows that the order book has risen as a percent of the total fleet. I know it takes time to get these ships, but when do we start worrying about those numbers? That's something that we do need to consider as we go out, if we see a significant amount of incremental ordering, what do you think sort of the right number is? And maybe how long could we see this cycle play out if we sort of maintain a more rational approach to adding capacity into the market in new ships, into the order book?

Yeah, it's first of all, the level – the order book today around 18%, although it's come up, I have to remind you that pro-Lehman, the period 2007-2008, the containership order book was at around 60%. So it may be considered that it's come up significantly from the 9%, 10%, 11% we had last year. However, we do feel that it's still manageable, and looking at information from a historical perspective, it's definitely not at the peak levels. Now, as you mentioned, it takes two or like three years to have a vessel delivered. Most ships have been ordered as long-term charters, but it remains to be seen what the demand and supply dynamics will be in three years’ time. We never forecast the market; this is our principle, and the company is grounded based on our cash capacity and liquidity. However, I have to say that historically, an 18% order book, I don't think it is at prohibitive levels, considering what we've seen in the past. For the next couple of years, we know what the supply will be, as you know, the supply will come to the market, and definitely the consensus of analysts is that we will have very favorable supply and demand dynamics over the next year or over the next couple of years.

Okay. Last question really quick, if you put an order into the order book now, when you are receiving your vessel, how long does it take to get one?

It depends on the vessel and from the shipyard, but I think now most probably like 2021 the most probable delivery would be 2024. But I mean, it's not black and white. It's got to do with the shipyard. It's got to do with the characteristics of the vessel, but I would say generally that the deliveries now would be 2024 going forward.

Okay. That's helpful. Thanks for the time. I appreciate it.

Thank you.

The next question comes from Ben Nolan with Stifel. Please go ahead.

Hey Greg, I have a couple. I wanted to start on the bond. First of all, congratulations on the historic offering, but the breaks were fantastic frankly. And so I wanted to dig in a little bit on that. I was curious if you have any color on how much of it was placed with traditional institutional investors or whether there were perhaps some more private capital that was investing in it. Something really curious if this is something that can be replicated either by you or others or if you think of this as something that is maybe available just to you in this instance.

Yeah. Sure. First of all the allocation, it was close to 70% retail investors and the rest was institutional investors. The bond was 6.6 times oversubscribed. And the initial yield range was between 2.7% and 3.1%. Based on the book we had, obviously we priced at the low end of the range at 2.7%. This is a fully unsecured bond which is a pretty typical structure for shipping bonds, and it has a five-year maturity. We started with the low value, so €100 million which is $120 million because it was the first pure shipping bond issued in the Greek market. People were not that familiar with shipping or more particularly with Costamare or with container shipping, so we were a bit reluctant and cautious. But finally, I think that the result speaks for itself. However, the main point here is apart from the low coupon, which is historically low and I think it is extremely competitive. However, you look at it, is that we have been able to diversify our financing sources. This is definitely something that in the future we can replicate and hopefully at even better terms, considering that it was fully subscribed within the first 24 hours, and we had a book of north of €650 million within the three days of marketing.

Great. That's helpful. If I could shift gears a little bit, as I was going through the filings and I recalled as I was reading that you guys had been given some equity as part of the same restructuring a number of years ago. And then also doing a secondary offering today, I was curious if you guys still have an equity position in that, and I wasn't able to find sort of what that is, but was curious if that is a meaningful number at all?

You’re talking about ZIM, sorry, I couldn't hear you clearly. You are talking about ZIM?

Yes.

Yes. I mean we do have 1.2 million shares, and then if you look at our adjustments to the P&L, we have adjusted a bit. Now that ZIM is public, at the end of the first quarter, we had to write a gain, sort of some income in our P&L because of the valuation of those shares. And this is something we sort of have adjusted, and the adjustment was slightly below $26 million.

Right. How do you think about that position longer term?

I don’t know. I mean, this value of $26 million reflects the stock price as of the end of the first quarter where the stock was trading at around $20. Now the stock is trading double or more than double, so it's come up, but I mean, we are patient. So we are in no hurry to sell. So we will see what we're going to do with that asset. But as I said, we are patient; there is no need for more liquidity now. So, I mean, generally, we're not sellers. We will take our time and consider when is the optimal time based on our thoughts to see what we're going to do with that asset. However, in the $0.31 of adjusted EPS, sorry, of adjusted EBITDA, this is stripped out. However, the adjusted EPS would be much higher, but we thought that it is fair because this is a non-operating item. It is an asset that is on our balance sheet for some years now. We felt that it is fair to have an adjustment and have a $0.31 of EPS based on pure operational performance.

Right. Okay. That's helpful. And then lastly, for me, obviously you guys were buying and selling assets even recently basically doing both though. And it may even with the high asset prices, I think you can look at the time charter rates and see that you're generating substantially more than what you're paying for the assets in less than three years in many cases, and so the math works pretty well on that basis. But I am curious where you stand right now; are you a better buyer or seller or both, or are you getting close to being at a point where you might just be on the sidelines for a little bit? Any color there?

Yes. Look the acquisitions we did, I mean, most of them, if not all of them, were concluded during the first month of the year. After that, the asset values and charter rates, they are sort of extremely at the high level. So after that we stopped, and now we are much more cautious. It would be difficult for us to replicate the same acquisition we did in January, February, March of 2021, when asset values are. So now we take our time in that level of environment in terms of asset values and charter rate. We're going to be much, much more cautious. So we will take our time. We do have a lot of liquidity. We know that we have to invest internally and generate returns, but now asset values are even with very high rates; those deals are now by default, becoming more leveraged operationally and financially. Also, financially, because we are at that level, let’s say the same percentage of leverage, 60%, 70%, whatever that is—this doesn't matter to a much higher asset value, which we don't like. So now we're going to take our time and consider and think about what is the best way to invest our liquidity, because based on the charter rates you've seen and without any new business liquidity, the cost balance is going to be climbing up every single quarter going forward, so this is something to think about.

All right, perfect timing. I appreciate the color there, Greg.

Okay. Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Greg Zikos for any closing remarks.

Thank you very much for being here with us today. We're looking forward to speaking to you again during our next quarterly results. Thank you.

Thank you. This does conclude our conference for today. Thank you for all participating. You may now disconnect.