Costamare Inc. Q4 FY2023 Earnings Call

Thank you for standing by ladies and gentlemen and welcome to the Costamare Inc. Conference Call on the Fourth 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 Wednesday, February 7, 2024. 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 pass the floor to your speaker, Mr. Zikos. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen. 2023 has been a growth year for Costamare. The company had revenues of $1.5 billion and generated net income of about $660 million. Liquidity stood at around $1 billion as of year-end. Following our strategic decision in 2021 to enter into the dry bulk segment at an opportune time in the cycle, we have grown during 2023 our newly established trading platform to an operator managing a fleet of 61 dry bulk vessels. Having invested $200 million in the new venture, we have a long-term commitment to the sector whose fundamentals we view positively. Regarding Neptune Maritime Leasing, the platform has been steadily growing on a prudent basis throughout 2023, having now concluded leasing transactions for 23 ships with a total value of about $250 million. We are committed to rapidly growing the leasing business on the back of a healthy pipeline extending over the coming quarters. On the owned dry bulk fleet side, we are executing our strategy to renew the dry bulk fleet and increase its average size. During the year, we decided to dispose of 12 smaller size vessels and have agreed to acquire three capesize and two ultramax vessels. Subject to market conditions, our goal is to continue our expansion in the dry market. In the containership market, recent events have been contributing positively to the supply and demand dynamics, pushing up box and charter rates. These recent developments are mitigating the effects of oversupply in the containership market as tonnage is expected to remain tight at least until the Chinese New Year. We have, however, proactively secured employment for 95% and 78% of our open days for 2024 and 2025 respectively, putting our contracted revenues for the containership vessels at $2.5 billion with a remaining time charter duration of about 3.6 years. Moving now to the slide presentation. On Slide 3 you can see our annual results. Net income was about $350 million or $2.95 per share. Adjusted net income was around $250 million or $2.07 per share. Our year-end liquidity stands at roughly $1 billion. Slide 4, regarding CBI, we have chartered in the periods 51 vessels, with a majority of the fleet being on index-linked agreements. On our leasing platform, we have already invested around $120 million. Since inception, NML has financed 23 assets through sale and leaseback transactions and has a very healthy pipeline going forward. Slide 5. We have now acquired York’s equity interest in a fleet of containerships and have now agreed to acquire one capesize dry bulk vessel. In parallel, we have concluded the sale of two supramax and three handysize ships while we have agreed to sell three more handysize and two supramax dry bulk ships. Slide 6. During the fourth quarter, we financed the acquisition of one dry bulk vessel through a new hunting license facility while we have roughly $132 million available for financing of further vessel acquisitions. We continue to charter all our dry bulk vessels in the spot market, having entered into more than 40 chartering agreements since our last earnings release. On the containership side, as already mentioned, our revenue days are fixed 95% for 2024 and 78% for 2025, while our contracted revenues are $2.5 billion with a TEU weighted average remaining duration of 3.6 years. Moving to Slide 7. During 2023, we purchased approximately $6.3 million of common shares for a total consideration of $60 million. In addition, we continue to have a long uninterrupted dividend track record boosted by strong sponsor support. Slide 8. As mentioned already, our liquidity stands at roughly $1 billion. This liquidity gives us the ability to look for opportunities to grow the company on a healthy basis. Moving to Slide 9. Charter rates in the containership markets have been rising daily across all segments, having benefited from the Red Sea prices. The idle capacity remains at low levels at 0.8%. And moving to the last slide, on Slide 10, you can see the recent dry bulk market trends in the spot and port markets. Charter rates remain volatile, having deteriorated from the highs of Q4 2023. Today’s order book is up 8.5% of the total fleets. With that, we can conclude our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

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

Hey. Good morning. This is Matt on for Chris. Thanks for taking the question.

Hi, good morning, Matt.

Good morning, yeah. Just wanted to touch a little bit more on CBI. Last quarter you mentioned having a fixed fleet of 59 dry bulk vessels on period charters, but this quarter 51. So we are just wondering if you could provide a little bit more detail and sort of what drives that variability on the platform from quarter to quarter? And how that can affect profitability levels as well as a magnitude of potential shifts in that process? And I think that would be great to start.

Yeah. Thanks for the question. First of all, you are right, it was close to 59 ships chartered in the previous quarter. We mentioned 92 now; it has nothing to do with our intention to further grow the company. It is a transaction during the third quarter specifically. So there were some issues that coincided altogether, and we are currently in the process of chartering in additional vessels. Now, at the same time, I need to remind you that we also employ FFA, so instead of chartering in a vessel at some point, if you cannot find an asset in the market, you come back to some type of pay days for capes or for panamaxes. So the smaller amount of ships chartered in has absolutely no bearing, and this should not be construed as our unwillingness to streamline the business; rather the opposite. This is a long-term strategic decision and we are committed to the dry bulk sector both through CBI and also through our own dry bulk ships. So, it is a market hope that deliveries have coincided where the market is. We may be buying FFAs instead of chartering in ships. And in this business, we need to be opportunistic. More ships will be chartered when we find the right assets also at the right price.

Okay. Interesting. Okay. Thank you for the further granularity. And just as a follow-up, wanted to touch a little bit more too on the topic of share repurchases. You’ve been holding off on buying back your stock over the last few months and just given the current plan that you guys have outstanding in terms of $30 million for common shares and $150 million for preferred, what was your plan moving forward with that and sort of how do you think about how share count can move moving forward?

Yeah. First of all, the share repurchases, like the common stock dividends, this is a Board decision. And these are subject to part of the Board discussion every quarter. But leaving that aside for the time being, we are the majority of voters for the founding 5 million of 60%. So both dividends and share repurchases at a healthy stock price, we are all aligned. At the same time, regarding the optimal capital allocation, we need to tap into new opportunities. So we bought back common stock worth $60 million during the year since June last year and we are looking at some parts of this in the past seven years ago. I am not saying that we are excluding this from Board decision, but I am not ready to tell you that we are going to be buying more stock over the next quarter or in two quarters' time. This is all subject to market conditions and the view we take regarding the optimal capital allocation of the company. So I cannot be more specific on that, simply because this is an ongoing discussion and for the time being we feel that this is something that could happen in the next quarter or the quarter after or during ‘24. But I am not in a position to give you an exact timing. It depends on market conditions.

Got it. Got it. Understood. So it would be fair to assume that for the foreseeable future, at elevated stock prices, it’s unlikely that repurchases are going to be executed. Correct?

No, I didn’t say that because I believe that the stock is up to five to ten. If you look at some NAV calculations, you would see that the stock prices are also considering the value of the containerships and the dry bulk vessels and the contracted revenues for the containerships and the net debt. I think on an NAV basis, the stock is worth much more than ten or eleven dollars. So the fact that we are not buying back shares is not because we don’t believe that the stock is undervalued. We definitely believe that the stock is undervalued. However, we may find it optimal to use that cash to buy ships or to boost the CBI or Neptune Maritime Leasing. But it doesn’t mean that we will exclude buying back shares. We don’t feel that the stock is undervalued, rather the opposite. The stock has been undervalued for quite some time now. As is in most of the cases, this is what’s happening with shipping stocks. So we definitely believe that it is below NAV.

Understood. Thank you very much for all of the further color. I’ll turn it over on that.

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

Good morning, Greg. Hi, I had a couple. But I wanted to start with the asset sales that you guys did. I know that you – in a relationship at after debt repayment. But could you get the gross proceeds from the asset sales?

I can tell you that for the ships we sold, after debt repayment, the net cash in total for 2023 is close to $80 million, more or less $79 million.

Okay. I guess my question is how much debt we should expect to be repaid?

Yes, sorry. This debt for those ships has been repaid. So, I mean, we sold the ships. We paid back the debt and the net equity proceeds were around $80 million for all the ships. Now, the new ships we bought in total or have agreed to buy is four capes and you can assume that those are going to be funded with leverage of close to 60% on the asset value.

Okay. All right. My next question had to do with the Neptune Leasing program. You still have more to go under your original commitment, but obviously it’s growing. How do you see that longer term? Is this something where once you reach your commitment level, that amount would grow or do you think in time your relative position shrinks because there is capital coming in from other sources that means your effective position is a little bit diluted or how are you thinking about the business?

Look, up to now, this business has grown. I mean, when we started consolidating that the business and we bought the ship was in the interest in March of ‘23. So we talk about three quarters of operation and over those three quarters, the business has funded one to two basis, we are like 23 today funded and have a very strong pipeline going forward. So our goal is to further grow the business and in order to boost our returns. As you can imagine, we are also focusing on back leveraging our equity. So, boosting our returns while being able to participate in more transactions with our equity shareholding. Now when we reach the 250, we back leverage the 250; it could be total deals of depending on the assets and on the level between $800 million, $900 million or whatever the back level will be. I think it’s going to be a meaningful size. At this point in time, we are going to see how we want to grow the business further, whether we want to have other people joining, and what the alternatives in leases are. A lot of things, I am not going to talk about this. I mean, the fact that we have options is good. The fact that it is growing is good as well, and I have to say that it’s not growing for the sake of growth; it’s growing based on deals that we view from a credit perspective and from a returns perspective including the back levels make sense. So, this is a sort of growing business which complements the rest of our assets. We don’t expect to have the volatility of the returns you have with the dry bulk vessels also for the CBI. But it is, I would say, a steady return which does make sense, and there are a lot of options at the moment. We are not going to be reaching the $1 billion of deals or $800 million, whatever that is depending on the back level. So we are quite positive on that line of business.

Okay. And then, I guess my last question relates to the container business. Obviously, your existing book is well covered. The asset values have fallen from the peak. Are we getting to a place where maybe deals and returns in the container market are getting close to something that you look to maybe come back to and invest in that space again, or in your view is there still some room to go?

I think there is still some room to go. You can never predict that market. But we would take it one by one. If you look at new buildings, new building prices for containerships still remain at very high levels. So, I mean, that is the first thing. Then the second thing, also second-hand prices are still at levels which have come off and they may come off even more. But where they are today, buying at levels that would make sense if you want to have it; the residual value is with some potential upside. I think that we still have some way to go. Of course, as like the new buildings will continue to kick in, whether the asset prices make sense in a short time or like in six months or two years. I cannot say, but for the time being, I think we need to be patient. If we want to have attractive transactions with manageable downside and also we have residual upside.

Great. Okay. I appreciate it. Thank you, Greg.

Sure. Thank you. Thank you, Ben.

The next question comes from Climent Molins with Value Investors Edge. Please go ahead.

Hello.

Climent, your line is now live.

Sorry. Sorry about that. Good morning. Thank you for taking my questions. I wanted to follow-up on the question on CBI. Could you provide some commentary on how the segment fared during the quarter? And secondly, has recent turmoil in the Red Sea had an effect on the trades you were engaged in, specifically on CBI?

Okay, regarding CBI, we don’t provide a press release with segment information, neither for CBI nor like for this Voyage side bulk-owned vessels or like with the containers or for Neptune Maritime Leasing. There will be some information in our 6-K filings. But for the time being, I am right this is not part of our press release presentation. So we will provide the number of assets CBI chartered sort of in vessels with that net description about the transactions that most of the ships are chartered at index-linked charter rates. So, this was CBI. Now, regarding the Red Sea events in the CBI business, I cannot say that we had a huge effect on our Voyage side charters or for the profitability. For the capesize, it stands that C3 or C5 may not be affected by that area. So I cannot say that we saw something that made that market much more volatile. For capes, for instance, for Q4, we saw increased volatility because of adverse weather conditions in China. But this was not linked to the sort of Red Sea disruptions. So, concluding, I cannot say that we saw any major effects in the CBI business.

Makes sense. Thank you. I also wanted to follow up on Ben’s question on Neptune Leasing. As I understand it, it is fully consolidated in your financial statements. You mentioned potentially having leverage to free up capital, but I am also wondering if there is any debt outstanding on Neptune as of year-end?

There is, because Neptune is capitalized by our equity and the transactions we conclude as Neptune. Neptune gets back leverage. So it gets debt from third party providers for every transaction it is entering into. So there is also leverage at the Neptune level. Now, generally, the leverage of Neptune is at low levels in the region of 35% to 45% depending on the transactions. But again, to have solid returns on our equity investments in Neptune, we need to have some back leverage as well, however at lower levels.

Makes sense. Thanks for the color. That’s all from me. Thank you for taking my questions.

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

Thank you all for dialing in and for your interest in Costamare. We are looking forward to speaking with you again during the next quarterly results. Thank you very much. Bye.

Conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.