Costamare Inc. Q1 FY2023 Earnings Call

Thank you for standing by ladies and gentlemen and welcome to the Costamare Inc. Conference Call on the First Quarter 2023 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. I must advise you that this conference is being recorded today Monday, May 15, 2023. 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.

Thank you and good morning ladies and gentlemen. During the first quarter of the year, the company generated net income of $142 million. As of the quarter end, liquidity was about $1 billion. In the containership market, charter rates are on a rising trend with high demand across the board, while fixture periods are increasing in duration. The order book, however, remains the principal threat to the market. We have covered nearly 100% of our containership open days for 2023 and we have proactively arranged long-term employment on a forward basis for a number of containerships coming off charter between 2023 and 2025, having secured for our fleet contracted revenues of $3.1 billion and a TEU weighted duration of four years. On the dry bulk side, our owned dry bulk vessels continue to trade in the spot market while the trading platform has been growing with a fleet of about 50 ships already fixed under period charters. Having agreed to invest up to $200 million, our goal is to grow the dry bulk operating platform business on a prudent basis and thus realize healthy returns for our shareholders. Finally, during the quarter, we became the leading investor in Neptune Maritime Leasing, a growth-oriented maritime leasing platform, having agreed to invest up to $200 million. Considering current asset values, we believe the Neptune Leasing investment is a favorable employment of the company’s increased liquidity. This new venture is synergistic to the existing ship owning platform and is expected to further enhance the strong relationships built over the last decades with shipowners and commercial lenders in the ship financing sector. Moving now to the slide presentation. On Slide 3, you can see our first quarter results. Net income for the quarter was roughly $142 million or $1.60 per share. Adjusted net income was $46.5 million or $0.38 per share. Our liquidity is up over $400 million year-over-year to more than $1 billion. Slide 4, the first quarter of 2023 was the first full operational quarter of CBI. We have fixed 51 period vessels, with a majority of the fleet being on index linked charter-in agreements. 39 of the period vessels have been already delivered and are running. Slide 5, we have become the leading investor in Neptune Maritime Leasing, having agreed to invest up to $200 million. Neptune is a favorable opportunity for the deployment of the company's excess capital. In this slide, you can also see an update on our financing arrangements, which amounted to roughly $95 million without any material increase in leverage. Those deals have been structured with extension of maturities and improvement of our funding cost. Slide 6, we continue to charter all our dry bulk vessels in the spot market, having entered into more than 60 chartering agreements since our last earnings release. On the containership side, our revenue days are essentially 100% fixed for 2023 and 86% fixed for 2024, while our contracted revenues are roughly $3.1 billion with TEU-weighted remaining duration of 4.1 years. Turning to Slide 7, during the first quarter of 2023, the estimated combined net capital from SAP activity stood at approximately $85 million gain. We sold and have agreed to sell a total of two containerships and three dry bulk vessels. Following the conclusion of the transactions with your capital, the company will own 100% of one vessel versus initial combined ownership of 98% on two vessels. Turning to Slide 8, the charter market has shown an upward trend with high demand across the board, while fixed periods are increasing in duration. The dry bulk market remains volatile, while for the remainder of 2023, the FFA market indicates strengthening in the segments where we own vessels. Finally, we continue to have a long uninterrupted dividend track record boosted by strong sponsor support. Slide 9. Our liquidity has increased significantly year-over-year, starting at about $1 billion. This liquidity gives us the ability to look for opportunity to grow the company on a healthy basis. Slide 10. The charter of the containerships is on a rising trend with high demand across the board. The latest containership fixtures have been for longer periods. The idle capacity is at a level of 1.4%. Slide 11, which is the final slide, highlights the recent dry bulk market trends in the spot and forward market. The order book starts at 6.9% of the total fleet, and new ordering continues to remain subdued. With that, we can conclude our presentation and we can now take questions. Thank you. Operator, we can take questions now.

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

Hey. Hey, thanks. Good morning guys. I wanted to touch base on the leasing activity that you guys have undertaken in the platform there. So maybe you could help us a little bit with sort of how to think about what the revenue profile of this business might look like over the course of the year. Just give us some help with sort of how that might play out in terms of how you want to expand it and what maybe the vessel exposure might look like as you grow through the rest of the year?

Yes, definitely. This is an important topic. We have a leading platform that had already been established with some transactions ongoing, although on a smaller scale. We are committed to investing up to $200 million of our equity, subject to approvals, and this will depend on the deals we identify in the pipeline where we see a good fit for investment. So far, we have invested about $21 million with the aim of achieving a healthy return. This could include investments in containerships, dry bulk vessels, tankers, offshore, or any shipping-related assets. We are not limited to just containerships. We plan to fund through the leasing platform at levels that make sense for us, potentially at ownership levels of 60% to 80%, depending on the asset. Our objective is to ensure a steady, relatively secure, and healthy return on our investment moving forward. Additionally, we have the infrastructure in place to manage our 140 current investors and a trading platform. Should it become necessary, we can handle the technical or commercial management of those vessels in the future, although that is not our main goal. Initially, we want to achieve a steady and healthy return in a sector where we feel confident.

Okay. And then just maybe a little bit more help in terms of how to think about, as we're thinking about modeling this business and whether we want to think about on EBITDA or some form of profitability. Are there certain targets that you have that you'd like to be able to hit either on a margin basis or absolute dollars, whether it be this year or maybe on a run rate once you get capital fully deployed?

Yes, I mean, first of all, in order to have the full $200 million deployed, I'm not saying that it's going to take long, but most probably it's going to take more than a couple of quarters, right? Until we find the deal, until we negotiate, we agree, we document, and then we sort of draw and deploy the funds. So it's not going to be the next quarter, although it would be growing. The way we look at it, we don't look at it from terms of like EBITDA or EPS accretion. We look at it in terms of cash and cash return. So there we would try to maximize our sort of equity investment cash and cash return, which is according to what leasing platforms have been yielding. Now, I cannot give you an exact figure right now. We started with two transactions, but if you assume a share return normally achieved by shipping leasing platforms, I think you're going to be close to that, of course, as we progress over the next quarters and then we have more deals so we can be more specific and also show EBITDA, revenues, and profitability on a segment basis, also including the leasing business. Is this okay with you?

Yes, yes, no, that's helpful. I appreciate the color. Thanks very much.

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

Thank you. Hey Greg, good afternoon. Thanks for the update. Yes, I just wanted to check in on the dry bulk trading platform. Obviously you've built it up very aggressively to 50 plus ships. You've taken delivery, I think you said 39 thus far, but yes, how much bigger are you envisioning this getting to in terms of fleet size? And then, do you feel, or, well, what risk management protocols do you have in place given the trading nature of the business?

Yes, a couple of points to mention. First, it started with 51 vessels, and we've delivered 39 so far. Given that this began a few months ago, I would say the growth has been quite rapid up to this point. However, we manage this business with a focus on risk. We prioritize our liquidity since it is a cash-intensive operation and assess our risk exposure from multiple fronts. One area of exposure is derivatives because we need to use FFAs, which are essential. Additionally, we have exposure from ships we may charter in for short durations at fixed rates, and with fixed-rate charters, we pay a predetermined price while charging a floating rate. Generally, we don't face significant market risk for ships chartered based on index rates, and as mentioned, most of our vessels are chartered on an index-linked basis, which helps minimize commercial market risk. We assess our exposure in both the physical and paper markets, including FFAs, run various sensitivities, and monitor our liquidity today and how it might change in the coming quarters. We also consider operational aspects of the business, along with risks related to banking when we engage with financial institutions, and we maintain banker share lines. This business has considerable potential to grow and generate returns because of its inherent volatility, which is necessary for those returns. I also agree that a robust risk management structure is essential, and I believe we’ve successfully implemented that up to now.

Okay, thank you. And then maybe, it seems that the trading platform is a bit more top heavy with a lot of Cape exposure, and your own platform is more mid-size, dry bulk assets. How are those two businesses related? Are those functioning together? Are they separate? Any kind of synergies that can be realized between both?

At the same time, of course, there are synergies. Those people talk to each other. We have a full view of the whole market. We have our internal research, which is utilized within the whole company. So there are a lot of synergies. However, it's two different teams of people managing each business, and I think this is how it should be. The trading platform has a lot of Capes, which as a ship owner, we don't own. Initially, we didn’t buy Capes because we didn't like this volatility. However, in the trading platform, Capes have to be there because they are by default a more volatile asset.

Got it. Makes sense. I'll turn it over. Thanks, Greg.

Okay, thank you.

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

Thanks. Hey, Greg. I wanted to, well, I'll touch on both the leasing and the dry bulk platform, but maybe starting with the dry bulk platform. It seems like in the near term here, it has been a cost to the company. I mean, your earnings would have been twice as high had it not been there. Is it part of the ramp-up process? I know even on a rate basis, it was substantially lower than market level. So is this just part of the ramp-up process, and on a go-forward fully built platform, how should we think about what you expect the profitability of that business to look like?

Now regarding the dry bulk owned vessels, which I think you are referring to, in that case, the result was affected because we did a lot of repositioning in the first quarter due to market conditions. So this is not something that I think in general it is something that we would expect to take place in the next quarters, although I can never predict the market, but normally we don't sort of assess during the same quarter. So normally this is not something that should happen over the next quarter, something that happened in the quarters before. So I would normally treat it as a one-off item, those repositioning costs. Now in our adjusted EPS, we didn't adjust for it. We have treated it from an accounting and presentation perspective as something that is not extraordinary, but practically, I wouldn't expect this to be a recurring item over the next quarters because the dry bulk owned vessels are trading on spot. So we follow the spot market and of course we try to be as efficient and as profitable as possible.

Okay. And, and with respect to the leasing platform, I mean, I sort of understand the rationale behind it, but I think through the capital allocation, you guys haven't been buying back shares, although the share price has been under some pressure here. Can you maybe talk through the capital deployment strategy from a return basis? I mean, it would seem to me that the shares would be a pretty compelling investment opportunity, maybe relative to the leasing platform?

Yes. Look, it's a couple of things regarding capital allocation. This point has been discussed internally and will also be discussed internally soon. You see that we have got a balance sheet of around $1 billion. We definitely have the means to buy back shares. We have a share buyback program in place with $90 million share value still available. At the same time, we could also gradually increase the dividend on a quarterly basis or even have one-off big dividend payments or both. This is something that the dividend policy puts part of the capital allocation. It is being discussed internally. We still have the ability to do it irrespective of the trading platform and also of the capital assigned to the leasing business. The leasing business is up to $200 million gradually over the following quarters and they do provide, or they are expected to provide, and this is our goal to have a healthy return which in shipping compared to other sectors can be quite competitive, and that's our goal. So the one does not exclude the other. It's not that our capital allocation ability to pay more dividends or to buy back shares is in any way restricted by either the leasing business or some other banking thing. I want to make this clear. We just feel that we normally deploy our capital in either dry bulk ships or containerships. Now are too expensive still. We didn't put any new building orders because we felt the market was too high. The same applies to the dry bulk second-hand ships today. It's not at levels that we feel would be interesting for us. So Costamare marketing and Neptune Maritime Leasing are alternative methods to deploy capital, which we think it's going to be on an accretive basis. Buying back shares and dividend increases potentially is something that is discussed separately, and we are discussing this at the board level, but the one does not exclude the other.

Okay. All right. I appreciate it. Thanks, Greg.

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

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