Costamare Inc. Q4 FY2022 Earnings Call

Thank you for joining us, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call regarding the Fourth Quarter 2022 Financial Results. We are joined by Mr. Gregory Zikos, the Chief Financial Officer of the company. At this moment, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer segment. I must inform you that this conference is being recorded today, February 8th, 2023. We would also like to remind you that this conference call includes forward-looking statements. Please take a moment to review slide two of the presentation, which outlines the forward-looking statements. I will now hand it over to your speaker today, Mr. Zikos. Please proceed, sir.

Thank you and good morning, ladies and gentlemen. 2022 has been a record year for Costamare. With a fleet of 117 vessels, including 45 dry bulk ships, the company generated net income of about $520 million. As of the end of the year, liquidity stood at around $970 million. On the containership side, 2022 was a unique year with the first half drawing upon favorable market conditions with strong demand, and logistical disruptions continue to impact the sector. During the second half, charter rates and asset values normalized due to reduced cargo demand and the return of capacity previously tied up by congestion. We chartered a total of 16 secondhand containerships during the year, which added incremental contracted revenues of more than $550 million. Total contracted revenues amount to $3.2 billion with a weighted average remaining time charter duration of about 4.2 years. We are above 95% covered for 2023 and we have proactively arranged long-term employment on a forward basis for several containerships coming off charter between 2023 and 2025. At the same time, we are in the process of disposing of some older tonnage at prices fixed during a tight market environment. On the dry bulk side, the new dry bulk operating platform previously announced commenced operations during the quarter. With a negative commitment of up to $200 million, our goal is to grow the business prudently, realizing healthy returns for our shareholders. On the back of our increased liquidity and charter coverage, we are actively pursuing new investment opportunities in the shipping sector that have the potential to provide advanced returns at acceptable risk levels. Moving now to the slide presentation. On slide three, you can see our annual results. 2022 was the best year since our listing. For the year ended, net income was above $520 million or $4.3 per share, while adjusted net income was around $400 million or $3.3 per share. Our year-end liquidity is up by almost $420 million year-over-year to around $970 million. Slide four, during the previous quarter, we announced the setup of a new venture called Costamare Bulkers Inc. CBI will charter in and out dry bulk vessels, enter into COAs, and trade FFAs and bunker swaps. Until now, we have already invested $100 million with a commitment for another $100 million. Over the last months, we fixed 23 vessels and entered into numerous COAs and FFAs. On slide 5, you can see an update on our refinancing arrangements, which amounted roughly to $560 million without any material increase in leverage. Most of them were coupled with significant improvement in funding costs and extension of maturities. Our corporate leverage remains below 35% and we continue to maintain a strong balance sheet. Slide 6. We continue to charter all our dry bulk vessels in the spot market, chartering 37 ships since our last earnings release. On the container side, our revenue remains 96% fixed for 2023 and 85% for 2024, while our contracted revenues are up to $3.2 billion with the TEU-weighted remaining time charter duration of over four years. Lastly, we fixed 16 containerships with incremental contracted revenues of more than $0.5 billion. Slide 7. The containership charter market has normalized in the second half of the year, mostly due to reduced cargo demand and the return of capacity previously tied up by congestion. The dry bulk market has also weakened, and the FFA market indicates significant strategic signs, especially from Q2 2023 onwards. Finally, we continue to have a long and interactive dividend track record boosted by strong sponsor support. On slide 8, our liquidity has increased significantly year-over-year, starting at around $970 million. This liquidity gives us the ability to seek opportunities to grow the company on a healthy basis. Moving to the next slide. Here you can see a snapshot of our fourth quarter 2022 results. We had an average of 115 vessels and our adjusted ending was about $75 million or $0.61 per share. Our adjusted figures take into consideration the following items: strong charter revenues, accounting gains or losses for passive disposals, impairments, and other non-recurring or non-cash items. On the last slide, we're discussing the market. Moving to slide 10. Box rates have normalized from historically high levels. The latest conferencing pictures that have been concluded have been contracted at lower rates. The idle capacity has reached 2.6%. On slide 11, you can see the recent dry bulk market trends, where rates have been under pressure. The order book is at 7.5% of the total fleet and new ordering continues to be subdued. With that, we can conclude our presentation and we can now take questions. Thank you. Operator, we can take questions now.

And your first question comes from Chris Wetherbee from Citigroup. Please go ahead.

Yes, hi. Thanks for taking the question. Maybe we could start on the container shipping side. I was curious about your take on discussions with charterers. So I know you have a strong degree of coverage as we move through 2023. But in the instances where you've been having conversations with some of your customers, can you give us a sense of the dynamic? Obviously, we heard from Maersk earlier this morning, and I think broadly speaking, overall box rates have fallen precipitously. So I want to get a sense of how we should be thinking about charter development over the course of the next couple of quarters or maybe as we consider the next couple of years?

Okay. Thanks. Thank you for that and good morning, Chris. So a couple of things. Look, the softening in the charter market, both in charter rates and box rates, is something that was expected. At some point, the congestion has ended, and we have also seen a reduced cargo demand for many reasons, but it's got to be inflation-related or maybe due to financial targeting, etc. Now, as you said, we are pretty much close to 100% fixed for this year and 85% for next year. We don't have many ships opening, and the trend we see is that apart from the fact that charter rates have been falling, at the same time the duration of the charters has been shortening, and there are extension options that we see for two to three months charters. Now, I cannot predict how the market will go. All I can say is that, for the time being, we have not seen asset values softening at the same level, although there is definitely some correlation. But we haven't seen it yet. Regarding charter rates, first of all, we feel more than comfortable with the quality and credit standing of our charterers, also considering that they have been extremely profitable over the last couple of years. Secondly, from our side, you saw our liquidity. So in case we feel that asset values in the containership market are going to reach levels we find interesting, I can tell you that we might be there as a buyer. But for the time being, we pause, we sit and wait.

Okay. That's helpful. And then I guess, I just wanted to come back and ask a little about what your thoughts are in terms of deploying capital in the market. What might be the most attractive area in your opinion currently? Obviously, you have ample liquidity as you highlighted on slide 8. So I'm curious where you think the best use of that capital will be, or does it make sense to kind of sit back a little and see how the broader macro plays out?

Yeah. Look, part of the answer is what I just mentioned, that when we see asset values on the containership side correlating to charter rates today, we would look at it again. But this may take some time, both for the second half and also for new building. So this is one area that I guess we're going to be active in, again, should the market prices justify that. The second also applies to the dry bulk fleet. We still do not think that asset values have reached a level where they have become attractive again. But should this be the case, we will deploy capital, buying ships at prices we feel make sense, positioning ourselves at a good time. So we are looking at ship acquisitions in both dry bulk and containers. As you've seen, we have started the dry bulk trading platform where we have allocated up to now $100 million, and that is going to go up to $200 million. This is another area we have been investing. Finally, we are looking at some other initiatives which have not materialized yet. So, I cannot disclose them for two reasons: both for legal reasons and also because they're not material yet, so they're not concluded yet. But we are working on some other initiatives where we feel part of our liquidity could be deployed as well. However, if we don't see asset values coming to levels that make sense on both the containership side and the dry bulk side, simply we will sit back and we will not be buying any ships. I have to remind you that we didn't put in any new building orders at the high prices we saw in the containership market over the last couple of years, simply because we felt that asset prices were prohibitive, even if the charter rates offered were at high levels as well. So we will take our time. We are patient when we feel we should be, and we will wait.

Okay. That's helpful. I guess maybe one final question for me before I turn it over. Just in terms of the trading platform, are you going to need to maintain a higher degree of liquidity in the business in terms of capital reserves to manage the risk potentially associated with that? I'm kind of curious about how that might influence how you think about liquidity and cash balances.

Yeah. The way we see it now, our equity there is going to be up to $200 million, and that's it. Of course, if the business grows and if we see more potential, I don't think you would be surprised that we can go higher. But what we have today in mind, let's see how it goes. But what we have today in mind is that those $200 million are going to be more than enough to cover our liquidity needs in this business and manage our exposure and market risk. But as I said, if this becomes something we feel makes sense and we feel more comfortable with the whole setup and we see potential in that market, the $200 million is not a limit. It is just what we feel we should allocate today. We could easily go above that if it is justified.

Okay. That's very helpful color. Thanks for the time this morning. Appreciate it.

Sure. Thank you. Have a nice day. Thank you.

Next question comes from Omar Nokta with Jefferies. Please go ahead.

Thank you. Hi, Greg. Good afternoon. Thanks for the update.

Hi, Omar.

Hi. I just wanted to follow up on the last discussion about the dry bulk fleet and the trading operation. You've obviously moved very quickly here over the past 18 months building up the owned asset base, and now you've chartered in those 14 capes and the nine Kamsarmax, which you referred to in the release. From the perspective of risk or maybe just duration, how should we think about those vessels? Are these short-term charters? Are they longer term? How should we be thinking about those? How do they fit into your portfolio today and for how long?

Yeah, the ships targeted in the trading platform, which is asset light. First of all, not all of them have been delivered; most of them will be delivered over the next couple of quarters. The charter period could be between two to three years. However, most of them are on index. So strictly speaking, when you have a ship chartered on index, there is no real exposure because it is an index; you pay what the market is paying, and you get the COA based on market terms. However, having said that, in the future, we may have ships with a fixed rate again for a period. It's going to be a combination of both, I guess. But most of those vessels today, to answer your question, are for the period ranging up to three years, and most of them are on index-based charter rates.

That's good to know that they're based on an index. You mentioned that you have the COAs in place that allow you to capture the spread effectively.

Correct. We have two ways. And at the same time, we have started employing FFAs as well, both in order to hedge and also position ourselves. So we've done FFAs. We've done COAs, especially for the vessels that are going to be delivered now. We have 23 vessels chartered in, most of them on index. For the bank exposure, we will also be doing bunker hedging.

Okay. Thank you. And then just on the 23 ships that you are about to have in the fleet, is that the right size it needs to be, or is that maybe a starting point? Is there a certain number given the liquidity or the capital you're putting forth into that operation? What could be the size of that trading fleet?

Yes. No, this is a starting point. Those ships were committed over the next couple of months, I would say. I think sooner rather than later, we could easily reach the threshold of 50 ships being operated. And of course, subject to market conditions, we could go to 100 or 250 easily. This is why I said earlier that, if we feel it makes sense, the $200 million total equity commitment could go higher because at some stage, you need to have a meaningful size in this business as well. So it will definitely be 50 higher sooner rather than later. In the future, it could also go to 100, 150, or even beyond that.

Okay. That's very helpful. And maybe just one quick follow-up just on the reference you made to the couple of initiatives you were looking at that you can't comment on. Can we assume that those were maybe outside of dry bulk and containers?

Well, it's going to be in shipping. I cannot comment; if I say it's going to be within dry bulk and the containers I'm giving you partly an idea. If I say that, it will not be the same thing. So I'm afraid I cannot comment at all; it's going to be shipping-related. Of course, it's not going to be aviation. But this is something both for legal reasons and for the simple reason that it is not concluded yet. I cannot comment more on that.

Okay. I appreciate it, Greg. I will turn it over.

Sure. Thank you.

Your next question comes from Climent Molins with Value Investor's Edge. Please go ahead.

Good morning. Thank you for taking my question.

Good morning.

You've been clear you want to pursue additional acquisitions if attractive opportunities arise. Given your solid financial position, I was wondering how do you plan to balance this additional spending with potential shareholder returns, especially considering the significant discount to NAV shares are trading at?

Yes. It's a question about capital allocation, which comes up quite often, and this is a fair question. I cannot rule out share buybacks, and we did in the past. We also increased the dividend in the past, and we also had a one-off extra dividend payment. At the same time now, however, if we feel that the asset values make sense, as I mentioned earlier, justifying further acquisitions either in the containership segment or dry bulk vessels, this is something we would look at very, very carefully without excluding share buybacks, for example. We follow the market for timely acquisitions should circumstances change.

That makes sense. Thanks for the color. That’s all from me. Thank you.

Thank you. Thanks a lot.

This concludes today's question-and-answer session. I would now like to pass the floor to Mr. Zikos for his closing remarks.

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

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