Costamare Inc. Q2 FY2022 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the Second Quarter 2022 financial results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. I must advise you that this conference is being recorded today, Thursday, July 28, 2022. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide #2 of the presentation, which contains the forward-looking statements. And I will now pass the floor to your speaker today, Mr. Zikos.

Thank you, and good morning, ladies and gentlemen. During the second quarter, revenues reached approximately $290 million, and adjusted net income more than doubled to $119 million compared to $58 million for the same period last year. As of quarter end, cash balances stood at around $700 million, and total liquidity, including undrawn credit lines, was above $850 million. Over the last months, we executed on our previously announced share buyback program, buying $60 million worth of common shares. At the same time, we concluded a 5-year syndicated loan facility of $500 million, proactively refinancing the indebtedness of 16 vessels and significantly reducing our cost of funding on competitive terms. Regarding the market, congestion and pressured supply chains remain challenging as we enter the second half of the year. On the container market, asset values and charter rates remain at healthy and historically high levels, as also evidenced by our latest fixtures. On the dry bulk market, rates have recently been under pressure but still remain at profitable levels, especially for owners who entered the market the year before. We view any potential softening of asset values as a compelling buying opportunity as we feel comfortable with the long-term supply and demand dynamics of the sector. On the back of our increased liquidity, we are actively evaluating new investment opportunities in the shipping sector that have the potential to provide enhanced returns at acceptable risk levels. Turning now to the slide presentation. On Slide 3, you can see our second quarter results, which were the best Q2 on record since our listing. For the quarter, net income was $114 million or $0.92 per share. Adjusted net income was around $119 million or $0.95 per share, and our liquidity is up almost $300 million year-over-year to $854 million. On Slide 4, you can see an update on our financing arrangements. We closed a $0.5 billion facility refinancing 17 vessels with 12 U.S., European, and Asian financing institutions. The new facility increased our liquidity by $200 million, reduced our cost of funding significantly, and extended the maturity of almost all the refinanced vessels, while maintaining our corporate leverage at a very low 24%. We also repurchased 4.8 million shares for around $60 million. Slide 5. Our revenue days are 100% fixed for 2022 and over 95% fixed for 2023. We also forward fixed 2 container vessels at $58,500 per day per vessel for a period of 3 years, starting in the first half of 2023. We continue to fixture our dry bulk vessels in the spot market, fixing 27 vessels since our last release. Finally, we sold one dry bulk vessel, The Thunder, for a capital gain of around $3.5 million. Slide 6. The containership charter market remains at very strong levels. The dry bulk market is still at healthy levels, and the order book remains low as current rates are well above the historical average. Finally, we continue to have a long, uninterrupted dividend track record, boosted by strong sponsor support. Looking at our leverage and liquidity, our liquidity has increased significantly, while our leverage continues to trend down. This liquidity gives us the ability to look for opportunities to grow the company without restricting our balance sheet. Slide 8. You can see that our containership fleet has a current backlog of $3.3 billion with a duration of 4 years. We are fully fixed for 2022, 95% fixed for 2023, and 84% for 2024. Revenues come from a diversified list of first-class charter vessels like Maersk, MSC, Evergreen, ZIM, COSCO, Yang Ming, and Hapag-Lloyd. On Slide 9, you can see the second quarter 2022 snapshot. We had an average of 118 vessels during Q2, up 65% year-over-year. Our adjusted net income was $119 million, or $0.95 per share. The adjusted figures take into consideration non-cash items like accrued charter revenues, accounting gains from asset disposals, and other nonrecurring items. Turning to Slide 10 and the containership market overview. Rates for vessels above 2,500 TEU continue to remain at historically high levels. The commercial containership fleet also remains fully employed. Slide 11. Here, we're discussing the dry bulk market where rates have come off slightly from the seasonally strong first quarter but do remain well above cash breakeven levels. Finally, the dry bulk order book is 7.2%, a very low figure historically, which translates into modest growth for at least the next 2 years. With that, we conclude our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

Your first question today comes from Omar Nokta with Jefferies.

I just wanted to ask about the containership market and how things have been developing there recently. Maybe just first off, just on the newbuildings that you had that were canceled earlier this month, those 6 ships. Can you give a bit of color as to what happened causing you guys to go ahead and terminate those contracts altogether?

Okay. We talked about 8 containerships. This is what we discussed that we had ordered 4 13,000 TEUs and 4 15,000 TEUs that had charter coverage upon delivery of the vessels. We did cancel them. For legal reasons, I cannot say anything more than what we mentioned in our 6-K filings. We did terminate the contracts because the shipyard has been in default, but apart from that, I cannot say anything more at this stage.

Okay. That's fair. And I guess those ships were secured, right, with some long-term charters on their delivery?

Yes, yes, those ships, each one of them upon delivery had a 15-year charter cover with major liners.

Okay. Do you think there's an opportunity or a chance to replace those? Have you had those discussions with the customer? Is that something you'd like to do to find a different way to...?

No, no, this second question. This is something we would consider. For the time being, where asset values are for the newbuildings, this is something we would think twice. Normally, we don't like ordering at the peak of the market. We don't like overordering and bringing the market up. So where today newbuilding prices are, in today's environment, I think this is something that doesn't make sense for us at least. In the future, if there is some softening in the market, in newbuilding prices, this is something we would consider, again on the back of a time charter that is good enough in order to amortize our investment.

Yes. So definitely. No speculative ordering only against the...

But even if a newbuilding project today, not on a speculative basis but on the back of long-term charter, where asset values are. This is something we wouldn't do today because even if you have a 7-, 10-, or 15-year charter, you are still ordering at the peak of the market, and we try to be countercyclical. So this is the reason we have not ordered newbuildings at this point.

Okay. And maybe just one final one just on the dry bulk investment. It's clearly proven beneficial and profitable. Any updated thoughts on where the dry bulk fleet sits long-term? Do you see any thoughts that you can give us on maybe a spin-off potentially or a gradual sell-down of that fleet? Or do you think that becomes a permanent part of Costamare going forward?

I think, look, those ships, they were bought last year at prices that are much lower compared to today's market, as you rightly pointed out. It's around 46 vessels. We sold one for a capital gain of $3.5 million. From a strategic point of view, this is a long-term investment in dry bulk ships, and I think those complement quite well the containerships that we have. Starting from the point at the peak of the market, that's an inflated market level. We didn't want to continue investing in containers. The dry bulk investment last year proved to be quite the right call. We're here to stay in the dry bulk business, and depending on market conditions, this is something we would examine to grow the dry bulk business further.

The next question comes from Ben Nolan with Stifel.

I have a couple of questions regarding capital allocation. It seems like you were quite active with share buybacks this quarter, purchasing over 3 million shares, which is significant. However, I noticed that the share count hasn't changed much. Did you acquire all the shares towards the end of the quarter, or is there another reason for the lack of change in the share count?

Yes. I think most of them were bought at the quarter end. As per accounting standards, we take the average shares during the quarter. But what we can do is that we can send you the sort of share count schedule so you can see exactly how we come up with this share count figure right now.

Okay. Do you have just any quick number as to how we should model it for Q3?

For Q3, yes, I mean in total, look, we have bought, I think, 3.8% in total of shares outstanding. I think we haven't bought the last couple of weeks. So for Q3, it should be the share count as of June 30. But let us get back to you with a very detailed schedule.

Okay. That's helpful. I appreciate it. And then as it relates to the capital, obviously, you're buying back shares. You don't, at this point, have any CapEx. You're generating lots of cash flow and leverage is pretty reasonable. You did pay a special dividend a little bit earlier this year, a year ago. You increased the dividend a little bit. Are you thinking about the sort of normalized run rate differently? Or do you think that the company can permanently support a higher dividend payout than where we're currently at?

Look, from a pure cash perspective, we can support a higher dividend. You saw that we have a cash balance of $700 million, right? And contracted cash flows of north of $3 billion for the dry bulk—at least from the containers and all the dry bulk vessels. In today's environment, they are all highly profitable because they have low cash breakeven; we bought them last year at a much better price. So from a cash perspective, we are more than capable of distributing higher dividends. Now, as you mentioned, we paid a one-off special dividend. We did raise the dividend prior to that. We have bought back shares. Whether we're going to buy more shares back, we have a program of $150 million, and we've used $60 million worth for the time being. The program is still there. We'll see. This has to do with where we will find acquisition opportunities or new projects in the market. Our main goal is to continue investing our excessive cash from operations in new business, which in turns, are going to be producing more dividends in the future. It remains to be seen what we find in the market. As I mentioned in my commentary, we are quite actively looking at a lot of opportunities. So first, let's see what happens there, and then this is something to consider as well. I think that we have already increased the dividend, we paid the one-off dividend, and we've bought back shares; we've done quite a part of it. Let's see how we continue investing accretively the cash from operations.

Okay. That's helpful. And then that leads sort of to my last question. You said that you would be opportunistic with respect to adding to the dry bulk fleet if prices were better. That said, lately, in the last, I don't know, 3 quarters or so, you have sold a number of the containerships, even sold one of the dry bulk ships. Any— and I'm sure that you have gains in all of those dry bulk ships at the moment and all the containerships. Any thoughts of continuing to do that? Or are you pretty much done with what you wanted to do on the sales side?

For the containers, we're pretty much done. We sold what made sense to sell. For instance, we sold ships built in 2000, 6,500 TEUs, and we sold them at prices like $75 million or more each. So I think in that respect, we are pretty much done. Of course, subject to market conditions, you can never predict the market. But based on what we know today, I think on the containership fleet, we are pretty much done with the disposals. On the dry bulk, we sold one vessel for a capital gain, but I think for the dry bulk we're here to stay. It was not like a one-off investment we are going to dispose of soon. Actually, should we see some softening in the market in terms of asset values, and if we feel that it makes sense from a capital allocation perspective, we will be more than willing to expand our footprint in the dry bulk business. It's all subject to market conditions, but disposal of vessels—I think for the time being, also in the dry bulk, there may be a couple of exceptions, a couple of smaller vessels we may decide to sell for profit or something. Generally, in dry bulk, it is here to stay, and subject to market conditions, our wish would be to expand it further rather than to shrink it.

The next question comes from Climent Molins with Value Investor's Edge.

You have started to use the share repurchase authorization, buying back around 3.8% of the outstanding, which seems like an optimal capital allocation call given the discount your shares are trading at. Is there any interest to initiate the tender to take large blocks?

No. For the time being, we have a share repurchase program of up to $150 million. We haven't used half of it yet. So, I mean, we'll see. I think should we decide to buy back more shares, this is something we would go to the program, I guess, for the time being. Now of course, if down the road, we think we wish to continue with our share buyback and there are some more efficient ways to do it, we will consider them. But for the time being, we did it on a plain vanilla basis through this authorized by the Board program.

That's helpful. Your preferred shares have been trading above par. I was wondering if there is any appetite to call any of those shares. How do you view the preferred on your present capital structure?

So the preferred shares, if I understood your question correctly. In our capital structure today, in our balance sheet, they are being treated as equity because they are truly preferred shares without any step-ups, and we can redeem them anytime we want, partly or in total after a noncall 5-year period. So they are treated as equity, if that's the question. Now they are trading all above par, above the $25. We have authorized a preferred share buyback program of up to $150 million, which obviously where they are trading today. We have not utilized it. In the past, we bought back a small amount of preferred shares. Today, where they're trading, it doesn't make sense to buy them back.

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

Thank you for dialing in and for being with us today. We look forward to speaking with you again during our Q3 results call. Thank you.

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