Costamare (CMRE) Q1 2019 Earnings Call Transcript

Costamare (NYSE: CMRE)
Q1 2019 Earnings Call
April 23, 2019 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, ladies and gentlemen and welcome to the Costamare Inc. conference call on the first-quarter 2019 financial results. We have with us Mr. Gregory Zikos, chief financial officer of the company.

[Operator instructions] I must advise you that this conference is being recorded today, Tuesday, April 23, 2019. 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.

And I would now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.

Gregory Zikos -- Chief Financial Officer

Thank you, and good morning, ladies and gentlemen. During the first quarter of the year, the company delivered solid results. Larger vessels continue to benefit from strong fundamentals with low supply and strong demand. The number of idle ships has fallen across all vessel segments as liner companies launch new services.

We have been active during the quarter and we have chartered in total 10 shapes benefiting from a rising market in the larger asset classes. We have 15 Post-Panamax ships opening over the next year which positions us favorably should market momentum continue. Moving now to the slides presentation. On Slide 3, you can see the highlights.

The adjusted EPS is $0.12. Over the last months, we have targeted 10 vessels. We do maintain a strong balance sheet with approximately 45% leverage and no off-balance sheet financing. Regarding the market, larger vessels showed a remarkable increase in time charter rates.

The idle fleet has dropped to 2.1% and the fleet projected net growth for 2019 is at around 3%. On Slide 4, you can see a summary of our recent chartering activity. What is worth mentioning here is the increase of about 35% in the charter age for the larger vessels compared to last time. Over the next year, 15 Post-Panamax containerships are due for rechartering, which provides us with significant upside, should the momentum continue.

Moving on to Slide 5. On Slide 5, you can see our dividend payments as well as the sale for scrap of two older ships. On Slide 6, you can see the first-quarter 2019 results. During the first quarter of this year, the company generated revenues of $113 million and adjusted net income of $13.6 million.

Based on the above, the first-quarter adjusted EPS amounts to $0.12. Our adjusted figures take into consideration the following noncash items: the accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other noncash charges. On Slide 7, we are showing the revenue contribution for our fleet. 80% -- excuse me, 98% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Yang Ming and Hapag-Lloyd.

Today we have $2.2 billion in contracted revenues and a remaining time-chartered duration of about 3.7 years. On the last slide, we're discussing the market. Regarding charter rates, there has been a strengthening in the market during Q1, especially for the larger donuts. the idle fleet stands at the low level of 2%.

The order book remains at about 13%. As already mentioned, we are actively looking for new opportunities in this market environment. This concludes our presentation, and we can now take questions. Thank you.

Operator, we can take questions now. 

Questions and Answers:

Operator

Thank you. [Operator instructions] And the first question comes from the line of Donald McLee of Berenberg. Please go ahead.

Donald McLee -- Berenberg Capital Markets -- Analyst

Good morning, guys. Could you comment on what you're seeing in the charter market as you negotiate for some of your upcoming charter maturities? It looks like conditions have generally improved from a rate perspective since the start of the year. Do you think that shift is driven by maybe charter is getting more comfortable with the tariff overhang, or is there something else that's supporting uptick in rates?

Gregory Zikos -- Chief Financial Officer

Hi, Donald. Good morning. First of all, regarding charter rates, as mentioned what we have seen is that an increase in rate, especially for the Post-Panamax, if this is above EUR 6,500 and the fixtures we've done is more or less for a year. But -- so the -- our charter rates, which is substantially higher from last time.

Now this all has to do with supply and demand and also to remind you that at this point in time, liner companies, they are now launching new services. There are few big quality ships available. There is demand, and there is demand from charterers, and this is what brings charter rate up. So I wouldn't necessarily correlate this to the potential trade war and trade barriers in the Trans-Pacific trade.

It does supply in demand for the larger vessels which has a much tighter fundamentals, especially compared to Q3 and Q4 of 2018.

Donald McLee -- Berenberg Capital Markets -- Analyst

OK. And so what do you think has to change for there to be an increase in charter duration then?

Gregory Zikos -- Chief Financial Officer

There have been also fixtures for longer charter periods, especially, again, for the larger ships, we have seen commitments for three years or north of that recently. It's just that, in our case, if we transfer the Tainaro, we decided to go for one year at a rate to slightly below 40,000. This is 39,950 Considering that probably today, it might not be optimal to fix for two or three years. But I would say that there is market.

We've seen fixtures for two, three years or also north of that.

Donald McLee -- Berenberg Capital Markets -- Analyst

OK. That's good to know. And then just one more around your growth. Are you still considering near-term growth opportunities following the York-JV acquisition, and how would you maybe prioritize the difficult alternatives between additional JV acquisitions, second-hand purchases and new build orders?

Gregory Zikos -- Chief Financial Officer

We're looking at pretty much everything. So it could either be a new bridge or second-hand vessels and second-hand vessels with or without charter. And in the past, we have also bought the older ships. So in that respect, we are pretty much flexible now.

Our agreement with York, there is a type of exclusivity, meaning that whatever transaction we are considering at the Costamare Inc. level, we need to share it with York and then our partners have a time period within which they need to reply on whether they want to participate or not. So they may want to participate like they've done in the past. Or in certain transactions, they may decide to pass.

For instance, in the five -- 13,000 TEU new building deals that we did last year, we did it at the Costamare level and our ownership there is 100%. It depends, part of that new buildings with York. The recent investment period which closed up until 2020. This exclusivity I referred to earlier applies until that time.

But if York doesn't want to participate in some deals and we feel that those transaction make sense for us as long-term oriented shipowner, we're going to proceed by ourselves. But the bottom line is that we are pretty much flexible regarding the asset and toward the participation in the JV.

Donald McLee -- Berenberg Capital Markets -- Analyst

OK. And I guess maybe one more follow-up on the flexibility of your growth, that's still within the containership segment, I'm assuming, just kind of touching on your competitor shifting into another shipping segment, is that something you guys would consider? Or maybe do you view that as an opportunity to maybe -- to gain share among the containership owner operator group?

Gregory Zikos -- Chief Financial Officer

Yes. I cannot comment about what other people may be doing. But as far as we are concerned, our focus is in container shipping. So we have been monitoring exclusively containers since 1992.

And our focus into our growth, moving forward, is going to be only in container shipping.

Donald McLee -- Berenberg Capital Markets -- Analyst

I appreciate you taking my questions. Thanks.

Gregory Zikos -- Chief Financial Officer

Thank you.

Operator

The next question will come from Chris Wetherbee of Citigroup. Please go ahead.

Chris Wetherbee -- Citi -- Analyst

Thanks for taking the questions. Wanted to ask about blank sailing. Just wanted to get a sense of sort of reconciling the idle capacity in the market relative to what we were hearing a month or two ago about a rise in blank sailings for the liners. Just want to get a sense of maybe what the -- what do you feel sort of the real demand environment is currently.

Has it, like, materially improved over the course of the last several weeks or months? Or does it feel like we're sort of still in the same sort of a little bit of uncertainty but a bit of a balance right now?

Gregory Zikos -- Chief Financial Officer

Yes. I think that the blank sailings over the last months or so have to do with sort of liner companies managing capacity more efficiently, which has a direct effects on box rates. Now regarding the supply and demand of the vessels, which directly applies to charter rates, we've seen the launching now of new services. I would say that generally, we have also seen a slowdown in the speed of the vessels.

And there are -- and the fundamentals in the supply/demand are much tighter now. So overall -- and especially for the larger vessels, the market over the last weeks, or I would say, months since the beginning of the year, has been moving up substantially. I would love to give you an example. Just 9,500 TEU vessel in the past -- I mean in the last quarter, we have seen it close to getting for a year 12,500, 13,000.

And now the rate for those ships is like 23,000, 24,000 for a year. So the change has been substantial. I wold not correlate this 100% to blank sailings, which mainly applies to box rates.

Chris Wetherbee -- Citi -- Analyst

OK, OK. That's helpful. I appreciate that. When you think about the second half of the year, what's your estimation on the percent of the fleet that's going to be in the docks getting scrubber? How much do you think that impacts not necessarily your utilization but overall fleet utilization for the container market?

Gregory Zikos -- Chief Financial Officer

Yes. I would say that generally, based on the info we have to date, ships that will be scrubber-fit, it could be close to 10% of the global demand in containerships in terms of capacity. In terms of ships, it could be 5%, but mainly because it is the larger vessels that are fitted with scrubbers, we talk about 10%-or-so percentage. Now it is estimated that on an average ship, a ship may need like four or five weeks to be off-hire in order to retrofitted.

So of course, this -- I mean, for this month or this week, this sort of takes some supply out of the market. And it is definitely helping the supply and demand dynamics. But I will consider this to be a shortened type of effect. I don't think that we're going to be seeing this in 2021, 2022.

However, in the short term, having off-hire, a substantial amount of the fleet for a year, most probably coinciding the same like the fourth quarter of this year beginning the first quarter of next year, it would definitely help supply and demand fundamentals.

Chris Wetherbee -- Citi -- Analyst

OK. Do you get a sense of that's sort of part of the reason why you're seeing this uptick in sort of relatively short-term chartering, people want to get past this sort of potential disruption, or does that sort of not play into the discussion that you're having with your customers?

Gregory Zikos -- Chief Financial Officer

From our experience after now, it is not. Now of course, I mean the closer we get to year-end or like the third or the fourth quarter of this year, there may be some relevance. But for the time being, of course, we have started now ships 11,000 TEU for a year, the Tainaro. I'm not sure that this is like one month off-hire for the ship that will be retrofitted was like a crucial factor.

But then it depends on the circumstances of each liner separately. So some liners, they do go full for scrubbers. Others who know -- have stated publically that most probably they're going to be moving ahead with low sulfur fuel oil. So it depends also on the liner company itself.

Chris Wetherbee -- Citi -- Analyst

Yes. OK. That makes sense. And then last question for me.

Just want to get a sense, you have a bunch of more ships coming up for charter. My guess is the answer in this environment you're just going to recharter and continue on. Is there anything though that you want to do in terms of sales or divestitures of any of these vessels as they come forward? Just wanted to get a sense of sort of your short-term view on fleet development.

Gregory Zikos -- Chief Financial Officer

No. Generally -- look, normally -- I mean the ships, the larger ships we have now coming off-charter over the next 12 months. These are ships, like, ranging from 2016 to 2013 build. These are high-spec assets, and I think that there is today -- I know that today there is and in the future, there also there will be interest for those ships.

So for the larger vessels, I don't think that now we are in a position that, like, we would be disposing off those ships. Quite the opposite. If you look at the past, normally we have been disposing off all the donuts, all ships that, like, we feel moving forward, they would have a potential. Like in this quarter, we disposed off the Piraeus, a 2004, Panamax ships, Panamax vessels.

This is the low Panama ships. This is 4,900 TEUs. With bearing in mind where the market is today, what is the potential for those vessels? And the fact that the ship has to also undergo a dry docking, we felt that it was preferable to sell this for demolition. That was the thought process behind the sale.

Chris Wetherbee -- Citi -- Analyst

OK. OK. Thanks very much for your time. Appreciate it.

Gregory Zikos -- Chief Financial Officer

Thank you.

Operator

The next question will come from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Yes. Hey, Greg. Thank you. You mentioned about potential new opportunities.

I assume that these opportunities are for larger vessels. Can you give us a little bit more color of the type of transactions durations that you see, if the returns have been comparable with the previous ones where they were double-digit EBITDA yields? And also, how do you think that you can finance this potential opportunities? How much is your liquidity -- available liquidity for new acquisitions? And I see that you have also a couple of -- some vessels this, 9,000 TEU vessels that are due for refinancing. Is there ability to lever up and get any additional liquidity from these ships?

Gregory Zikos -- Chief Financial Officer

Yes. A couple of things. Now regarding opportunities moving forward, as I say, I mentioned earlier, I think we are looking both at second-hand ships with or without charter and potential new buildings depending on the circumstances, depending on where the market is. In every second transaction and those are in the new buildings, we are first trying to cover our downside.

We also look at the quality of the charter. And after that we look at, like cash flow yields, EBITDA yields, etc. So I'm not in a position now to provide any target yield figures. But in the past, the deals we did, I think, first of all, they were also -- they were with the top charters, top graded.

And also from a cash flow perspective and accretion to the shareholders, they made sense. Now for the ships that will have to be refinanced next year, this is in 2020, it's five 9,000 TEU ships, 2013 built, which are coming out of seven-year charter in 2020. I think the loan outstanding on those ships today and also at the expiry of the charter party enter the long term or next year is not high. So I don't foresee this to be a problem to have them refinanced.

Quite the opposite again. And I think the question is, as you mentioned, whether we're going to be levering up and also creating some liquidity for new business. But the refinancing itself considered what the value of those ships is today. I don't think that it is an issue at all.

And the reason is because as I'm sure, you know it very well, we are repairing our loans quite fast, and we have a very steep debt amortization profile, which means that the loan outstanding on those vessels today is at very low levels. Is something else which I didn't...

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Yes. Can you give me an estimate of the total liquidity that you have or you forecast to have after this upcoming refinancings that can be available for growth?

Gregory Zikos -- Chief Financial Officer

Yes. Look, today, also after the end of this quarter, we have cash on balance sheet of close to $155 million. This is a ballpark figure. The refinancings we discussed, I mean, it's not done yet.

So I mean I wouldn't like to speculate. However, we would seek to refinance, first of all, the low cost of debt for a longer period taking into consideration the sort of age of the vessels and also provide us also with some liquidity. I cannot give a specific numbers, but I don't think -- I mean, for us, liquidity has ever been the issue in order to enter into new transactions. We do have access to commercial bank debt at quite competitive terms.

So I don't think that this would be an issue at all.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

And in regards to your capital allocation priorities, the market is improving. You have rechartered some ships at much higher rates than we expected a few months ago, the cash flow seems that it is improving as a result of this charter rate increases. At what level would you consider, or what would you expect to see in order to increase your distribution? And also, if you would have to prioritize your goals between returning capital to shareholders between growing your fleet or delevering, how would you rank them?

Gregory Zikos -- Chief Financial Officer

I think, first of all, I'm going to make sure that we keep the same debt repayment strategy. Of course, we cover our operating expenses, we cover the debt service as it is today without buttloading it. We do have some cash on this side for our new business in order to grow, in order to renew the fleet, in order to enter into accretive acquisitions. And of course, the dividend, it is definitely something we care because we have a 56 -- close to 56% ownership in the company.

And I would say that we are the main recipients of the cash dividend generally. So it is of importance. However, it will have to come, at the same time, with long-term new contracted cash flows. And after recovering our downside and making sure that, I mean, as I mentioned, we will be always in a position to recover our obligations and have some sort of, some liquidity for the side for growth.

But I mean don't get me wrong, the dividend itself which is quite important to us because we have a company where the main shareholders' interest are fully aligned with the rest of their business.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Thank you very much, Greg. I appreciate your answer.

Gregory Zikos -- Chief Financial Officer

Thanks.

Operator

[Operator Instructions] The next question will come from Ben Nolan of Stifel. Please go ahead.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Great. Thank you, operator. And thanks, Greg, for the time. I had a couple of questions.

The first just relates to the Piraeus and getting rid of your 15-year-old ship. I know you mentioned that it was, I think, a narrow beam and so there's not as much been appetite for those as there used to be. But still, 15 years is pretty young for you guys, I would say, who've really done well operating older equipment. Well, first of all, are there other ships in the same category that are in the fleet? Looks like there are that you probably will be getting rid of at some point or...

Gregory Zikos -- Chief Financial Officer

Yes. Look, the Piraeus, I mean, it's a part of the C2 ships. We also have in New York and in Chennai. However, for those ships, we have an agreement with ZIM.

We have a put option to put the ships to ZIM on a yearly basis. So I think it would make no sense today to sell those ships for demolition. Now specifically for the Piraeus, you're right. This is a 2004-build, 15-year-old-vessel, and the thought process -- I can be specific, the thought processes is that the vessels have to go dry docking.

The market today for those ships is between $7,000, $7,500 reaching max, $8,000 per day. Of course, you can take a long-term view. But the question is where do you think that those narrow beam maxi Panamax 5,000 TEUs, what is their dry generating capacity over the next two to three years? So the calculation was this is the dry docking. If the market improves by so much over the next two to three years, do I make my money, or in case I sell today at a relatively high stock price of close to $450 and repay the debt outstanding.

And like in this case, we put -- we realized the cash payment of close to $3 million simply because the loan outstanding was very low. So take the $3 million today, also to have the dry docking continue repaying the debt and then in two or three years' time, see whether it makes sense to sell it. But you also get the risk of a lower scrap price. And more importantly, we don't believe that those maxi Panamax is like a wide beams, are the asset of the future.

Quite the opposite. It is a purpose-built vessels. And there is a reason why the market today is pricing them below the 4,000 TEU Panamax.

Ben Nolan -- Stifel Financial Corp. -- Analyst

OK. No, that's very helpful and descriptive. Along those lines, or well, or maybe similar to that, as you'd mentioned earlier, there's been a pretty strong acceleration of charter rates for the larger vessels. But while it hasn't been bad, the smaller ships certainly haven't participated as much, particularly anything below 5,000.

What specifically would you attribute that to? I mean, it would seem as though if demand is good as a function of more cargo movements, then that would have an impact across the board.

Gregory Zikos -- Chief Financial Officer

Yes. But I think that's for the smaller vessels. I agree with you that we've seen the number of idle fleet going down. And we've seen generally demand.

However, the charter rates for the smaller vessels do not correspond and do not correlate to date having an adjacent of close to 2%. I think that it's because of the, first of all, with Panamax ships that start in the middle, the classic Panamax vessels. And those were, in the past, most of the ships that have been idle, the biggest proportion of these, most of times, has been the Panamax ships, which are pushing down the rates for the rest of the smaller vessels. And for the larger ships, you had very few ships, good assets being available in the spot market.

One charter -- there's one to two charter in those ships, and this like, as I mentioned earlier for the eight and a half vessels from like $12,000, $13,000, we've seen rates at $24,000 for a year. The Tainaro, the sort of the 11,000-TEU ship, initially, when we accepted delivery, those ships, they were chartered at the rates of $17,000, $18,000 per day. And now we have this $40,000 per day. And the reason we did not hire it to charter out those vessels a couple of years ago is because we thought that there is a lot of potential for those ships.

Today, for us, those ships, they have $20,000 more or less breakeven cost. So for the smaller vessels, I think the supply and demand and the fact that most of the idle ships have been Panamax vessels and below does not help at all today. I'm not saying -- don't get me wrong, I don't make a forecast at all. I'm not saying that the market will not improve for those vessels or vice versa.

I'm just describing the situation today.

Ben Nolan -- Stifel Financial Corp. -- Analyst

OK. And then lastly, just sort of in keeping with that, even for the larger ships as you've done, the rates have improved quite a lot. But what's been interesting to me is that the actual box rates, whether that's Trans-Pacific or Asia to Europe, which do use the much larger ships have absolutely plummeted since the beginning of the year. I think they're down 37% since the beginning of the year.

So the liners are making a whole lot less money, and yet they're being a lot more aggressive in the chartering of assets. Any thinking as to what they might be up to there?

Gregory Zikos -- Chief Financial Officer

Couple of things. First of all, for the Trans-Pacific, if you compare, like, the box rates for the last, I would say, couple of months compared to very high box rates experienced in Q4 that had to do with the, sort of, time that you guys -- trade war, I think, you start from a very high base in order to do the comparison. This is the first point. Apparently, liner companies, they want to -- like, they might see demand come forward to sort of a -- they want to charter in, say, some, like, good vessels for the future because for the larger ships, we have also seen fixes for three years.

We've seen committed for three years. And also, let me remind you, in our previous quarterly results, the 5 9,000 TEU ships we have chartered to MSC, we have installed scrubbers, and we have extended the charter period for three years, starting from 2023 onwards. So liner companies must -- apparently, they want to secure in some, like, modern or high-spec donuts. But I cannot go into more detail.

Probably, this is a question that initially should be addressed to them, I would say.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Right. No, that's -- you're right. I just was curious if maybe they were communicating something to you.

Gregory Zikos -- Chief Financial Officer

If it was something, I did make sure that we have seen recently slow steaming. Average speed's -- vessel speed is going down. So I'm not sure whether this also plays into the equation of supply and demand because as you know, apparently, this is creating more supply for the same demand. So this is also another factor.

Also, to a short -- to a small extent, as mentioned earlier, the fact that some ships, close to 10% of global capacity, or part of it, may be going for retrofitting during Q3, Q4 of this year and also beginning of that -- of next year may also have this more effect there.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Yes. Interesting. That's very good point. Appreciate it.

Thanks.

Gregory Zikos -- Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Zikos for his closing remarks.

Gregory Zikos -- Chief Financial Officer

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

Operator

[Operator signoff]

Duration: 34 minutes

Call Participants:

Gregory Zikos -- Chief Financial Officer

Donald McLee -- Berenberg Capital Markets -- Analyst

Chris Wetherbee -- Citi -- Analyst

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Ben Nolan -- Stifel Financial Corp. -- Analyst

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