Costamare Inc. Q3 FY2022 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Incorporated conference call on the third quarter 2022 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, at which time if you wish to ask a question, please press star then one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today, Wednesday, November 2, 2022. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide No. 2 of the presentation, which contains the forward-looking statements. I will now pass the floor to your speaker today. Mr. Zikos, please go ahead.

Thank you and good morning ladies and gentlemen. During the third quarter, revenues reached approximately $290 million and adjusted net income reached $107 million compared to $216 million and $82 million for the same period last year. As of quarter end, cash balances and short term investments stood at around $745 million and total liquidity, including interim credit lines, was about $890 million. Focusing on increasing visibility into our contracted cash flow base, we have recently chartered with a leading liner company a total of 11 containerships with existing charters recently expanding into 2023 and 2025. Seven of those vessels were chartered for a period ranging from four to five years starting from 2025 onwards, and the remaining ships were chartered for a period ranging from two to three years with initial starts in 2023 and 2024. The new charters increase our contracted revenues by about $420 million and result in incremental charter covers of about 4.5 years. Regarding the container market, cargo volumes have been softening across several trade lanes with energy costs and inflation impacting consumer spending. Fixing activity has been at low levels and the majority of new fixtures are for short-term employment. Charter rates have been under pressure, although they do remain at profitable levels. On the dry bulk market, rates for our vessel sizes remain profitable, especially for owners who entered the market the year before. We feel comfortable with the long-term supply and demand dynamics of this sector and we view any potential shortening of asset values as a compelling buying opportunity. On the back of our increased liquidity and container charter coverage, we are focused on new investment opportunities in the shipping sector that have the potential to provide enhanced returns at acceptable risk levels. Moving now to the slide presentation, on Slide 3 you can see our third quarter results, which was the best Q3 since our listing. For the quarter, net income was $180 million or $0.89 per share. Adjusted net income was $0.88 per share and our liquidity is up by almost $340 million year-over-year to roughly $900 million. Slide 4, as already mentioned, during the quarter we forward fixed 11 containerships for an incremental average period of 4.6 years, which adds approximately $420 million in contracted revenues. The new charters begin between 2023 and 2025 at the latest. Our revenue days are 100% fixed for '22, over 96% fixed for '23, and 84% fixed for '24. We continue to charter all our dry bulk vessels in the spot market, having chartered 24 ships since our last earnings release. On Slide 5, you can see an update on our refinancing arrangements. We refinanced two 26-year-old vessels during Q3 for four years through a $46 million facility. Our corporate leverage remains below 30% and we continue to maintain a strong balance sheet. Finally, in October we concluded the sale of three containerships for a combined capital gain of around $106 million expected to be realized in Q4 of this year. Slide 6, the container market has been under pressure over the past months. The dry bulk market has also weakened but remains at healthy levels, especially for smaller size vessels which we operate. The order book is at historically low levels. Finally, we continue to have a long uninterrupted dividend track record boosted by strong sponsor support. Slide 7, our liquidity has increased significantly both year-over-year and quarter-over-quarter. This liquidity gives us the ability to look for opportunities to grow without risking our balance sheet and provides us with a strong cushion. Moving to the next slide, Slide 8, you can see our containership fleet has a current backlog of $3.4 billion with a duration of 4.4 years. As already mentioned, we are fully fixed for '22 and we are more than 96% and 84% fixed for 2023 and 2024 respectively. These fixed revenues come from a diversified list of first-class charterers such as Maersk, MSC, Evergreen, Zim, Cosco, Yang Ming and Hapag-Lloyd. Slide 9, you can see the third quarter 2022 snapshot. We had an average of 117 vessels and our adjusted net income was $107 million or $0.88 per share. The adjusted figures take into consideration the following items: accrued charter revenues, accounting gains and losses from asset disposals, and other non-recurring or non-cash items. Moving to Slide 10, over the past few months there have been a limited number of fixtures, and the ones that have been completed were for shorter periods at lower rates; however, charter rates remain firm in historical context. The commercial containership fleet remains essentially employed with a very low idle capacity of about 1.8%, while vessel availability remains low. Moving to the last slide, Slide 11, you can see the recent dry bulk market trends where rates have been volatile but do remain at profitable levels, especially for owners like us who entered the market last year. The order book is around 7%, a historically low figure which translates to modest growth. With that, we complete our presentation and we can now take questions. Thank you. Operator, we can take questions now.

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

Hey thanks, good morning. This is Eli on for Chris. Guys, maybe we could just start with the bulk market and try to get a better understanding of what the rate environment looks like specifically there. You don’t have a lot of replacement grain, you have more storage on the ships so that would theoretically be putting pressure downwards on the TCE rates that you guys are able to get, so it looks like that remained a little stronger than we thought. Maybe you can just help us understand what that could look going into 4Q and then through the winter, and how that would change in 2023.

Sorry, I didn’t hear you properly. The question had to do with the debt levels, or was it the charter rates? I completely missed it.

It was about the charter rates on the bulk side, yes, so how should we be thinking about that. It looked a little stronger than we thought.

Recently, we have observed a contraction in the market, resulting in volatility for the bulk carriers. Currently, they are trading at approximately $15,000 to $16,000 per day for the Handys and Supermaxes. This reflects the market situation we are experiencing. All our ships are operating on a spot market basis. While this strategy may evolve in the future based on our outlook, our current low cash breakeven levels and generally positive view on the dry bulk sector lead us to maintain this approach for now. Although I cannot predict where the market will go in the next quarter or even next year, I can share that our perspective remains optimistic given the low order book and our bullish outlook on the dry bulk sector as it stands today.

When you look at the macro environment maybe more specifically, understanding I’m not looking for a forecast on the rate side, but what are some of the pressures coming in 4Q that could impact the rate side? You have a little replacement grain coming out of Russia and just lower demand in some of the other places, like in China for soybeans - the imports are down, so just curious what some of those puts and takes are there.

Yes well, it’s a couple of things. You’re right to point out Russia, it is China, which is the biggest player in dry bulk. It is COVID disruptions, it is inflation which internally does not help, and also congestion easing does not help either. In the past, I have to tell you that part of the upside in the Handys had to do with the elevated levels of no and little availability in the containers, and congestion was a determining factor there. However, at the same time, as I already mentioned, we have a very low order book and we do feel that in that sector compared to the containers, for instance, the supply and demand dynamics are overall more positive. Now to conclude, it is Russia, as you mentioned, it is China, it is congestion easing, it is also inflation. At the same time, if there is some stimulus package or some growth, for instance in the construction industry in China, this is going to be a huge boost for the dry bulk vessels, and this could also be the case, so it’s a lot of factors. It’s not only one or two, I’m afraid.

Understood, thank you.

Sure.

The next question comes from Omar Nokta with Jefferies. Please go ahead.

Thank you. Hi Greg. I just wanted to continue on that topic on dry bulk and wanted to ask, how are you thinking about deploying capital right now? You guys were obviously very aggressive last year expanding into dry bulk, it looked like it was well timed. We have seen dry bulk values easing here over the past several months but also containers are coming down pretty aggressively. What do you think about the S&P market here, and do you look to buy containerships after having taken a step back after the past couple of years, or do you still look to commit more into the dry bulk market?

Yes, regarding the containers, we have observed a softening market for charter and box rates. However, we believe that asset values for new buildings and second-hand vessels have not reached a level where investing today would be wise. Future opportunities may arise in the container segment, but we do not see them at present, and it may take some time for box and charter rates to align with asset values. As for dry bulk vessels, our acquisition timing last year appears to have been appropriate. Those acquisitions were sensible as they were made with low leverage and low cash breakeven levels, making them profitable since purchase. Currently, we have not seen asset values in dry bulk return to the levels observed during our acquisitions last summer, leading us to the conclusion that it is prudent to wait. We do not need to grow at this moment, especially since we operate close to 120 vessels. Any future acquisitions will be based on their merits rather than merely for growth purposes, and presently, we view asset values in the dry bulk sector as relatively high, with nothing appealing to pursue. This waiting strategy also applies to containers; we have refrained from ordering new buildings over the last couple of years due to extremely high new building prices, which would have placed us at the market peak—a situation we aim to avoid. Therefore, all our vessels, both containers and dry bulk, remain profitable. We aim to fix as many containers as possible and are benefitting from the yield on the dry bulk vessels we acquired, which I believe were well-timed given the current market conditions.

Yes, thanks Greg for that insight. Regarding the new buildings, prices have been very high. In discussions with the shipyards, do you have any indication that values might begin to decline now that steel prices have been adjusting, or are they still holding firm at these elevated levels?

For now, we have observed that prices remain high and new building orders are still being placed, particularly by liners. In this context, while there may be exceptions and opportunities, historically, we are in a very high asset value environment, which leads us to avoid placing any orders. Regardless of whether we have charters or not, we prefer not to order at peak prices or near peak prices.

Yes, okay. Got it. Then just final one, and you get this question every quarter basically, and it is how do you think about the company going forward? You’ve got good dry bulk, you’ve got the containers together. Do you like that diversity within the same platform, or do you also think about just a split at some point down the line?

Currently, there are no immediate plans to spin off or create a separate company for the dry bulk and containership platforms. The containers provide us with contracted cash flows close to $3.5 billion, and we have strong charter coverage for the coming years. The dry bulk vessels are more opportunistic, but we started with a low cost base, so we don’t see any reason to pursue a spinoff at this time. While future circumstances could change that perspective, there are no current plans to separate the dry bulk vessels into a different entity.

Okay, got it. Thanks Greg, I’ll hand it over.

Sure, thanks.

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

Hi, good morning. This is Macalla Rogers on for Ben today. Thank you for taking our questions.

Sure.

Our first one, we just kind of wanted to get some color on how you’re thinking about maintenance capex for vessels moving forward. You know, with the container market softening, would you expect to maybe retire assets once they come off contract, or any insight into how you’re thinking about the future?

Yes, look, today we don’t have any scrap candidates. We have some older ships in our fleet. We have some ships 1996 builds, but as we mentioned, those ships have a medium to long-term charter and we have recently refinanced them. Although they are 26 years old, we have refinanced them for four years forward, so those are not scrap candidates because they do have charters. Nothing we are targeting to scrap today. In the future, of course, it’s a matter of timing and of market conditions. We wouldn’t have a problem to scrap a vessel if you can use this equity in order to renew the fleet, or the funds released from the scrapping, they could be used in some accretive investments, but today there are no plans for scrapping based on our fleet portfolio, both for the containers and obviously for the bulkers as well.

Thank you, that’s very helpful. Just one quick one, given some of the preferreds are trading below or close to par, would you consider using some liquidity to call in the future, or any color around what you guys are thinking there?

It's primarily about our overall approach to capital allocation. We have an $850 million buyback program in place for preferred shares that we have not yet utilized. We have used some of our buyback program for common shares, and certain preferred shares can be called since five years have passed since their issuance. So, we're evaluating how to allocate our excess liquidity, whether to buy back stock, including common and some preferred shares, or to make other investments. These options are discussed at the board level. While we have various alternatives, I can't provide specific details on what will happen at this moment. We're aware of the preferred shares and the stock buyback, and considering that the stock is currently trading below NAV, we’re keeping our options open, but nothing has been decided yet.

Thank you very much. Appreciate the time.

Thank you.

As a reminder, if you have a question, please press star then one to join the queue. The next question comes from Climent Molins with Value Investor's Edge. Please go ahead.

Good morning, thank you for taking my questions.

Good morning.

Looking at share repurchases alongside Q2 results, you disclosed you had repurchased $60 million worth of shares, but no additional buybacks have been pursued since then. Was there a driver behind this decision, and looking ahead, how should we feel about your appetite for additional share repurchases given the discount to NAV you’re trading at?

We repurchased $60 million of common stock and have a total program of $150 million for common stock, leaving us with $90 million more available. We also have a program for preferred shares. I can't specify what our future actions will be since we are still discussing this internally. We do have the option to buy back more shares, especially given the current trading price of the stock and its recent performance. We are also considering options for preferred shares. However, I can't confirm any decisions regarding the amount of common or preferred stock we might repurchase at this price or under these conditions in the next quarter. This is something that requires board discussion, and I don’t have further details to share on this topic at the moment.

I understand, thanks for the color. That’s all for me. Thanks for taking my questions.

Okay, thank you.

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 today and for your interest in Costamare. We look forward to speaking with you again in our next quarterly results call. Thank you.

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