Costamare (CMRE) Q4 2019 Earnings Call Transcript

Costamare (NYSE: CMRE)
Q4 2019 Earnings Call
Jan 29, 2020, 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 fourth-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 call is being recorded today, Wednesday, January 29, 2020. 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 will 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 fourth quarter and the year, net income and earnings per share increased substantially, boosted by higher charter rates and the addition of new ships. As part of our fleet renewal program, we acquired during the quarter four Panamax vessels with an average age of about 11 years and disposed of an equal number of ships with an average age of 27 years. During the year, lagers vessels enjoyed the rising charter market.

And today, there is limited supply available in the Post-Panamax sizes. We have 18 post-Panamax ships coming off charter over the next 12 months, which positions us favorably should market momentum continue. Moving to the slides presentation. On Slide 3, you can see the highlights.

Net income rose by approximately 80% in Q4 '19 compared to last year. The adjusted EPS is $0.32. Over the past year, net income was close to $100 million, posting a 47% increased -- increase compared to 2018. The adjusted EPS for 2019 is $0.91.

Moving to the next slide. Over the past quarter, we sold four small-sized containerships with an average age of 27 years and replaced them with four large-sized Panamax vessels with an average age of 11 years. The four Panamax's have been acquired with the equity, and we are currently in advanced discussion with a leading European bank for their financing. Slide 5.

We do maintain a strong balance sheet with approximately 41% leverage and no balance sheet financing. We also concluded four separated financings with leading European and U.S. financial institutions for four 11,000 TEU containerships co-owned with York Capital. We raised about $265 million in total from these new financings.

Regarding operational performance, during the previous quarter, we achieved utilization rates of close to 100% and very competitive operating expenses. Moving to Slide 6. Large containerships continue to benefit from a tight supply market. Over the next year, 18 of our vessels larger than 5,000 TEUs are coming off charter, which positions us favorably should market momentum continue.

The idle fleet, adjusted for vessels undergoing scrubber retrofits, stands at a low 1.5%, while the order book has remained at levels close to 10%. We would be paying our 37th consecutive quarterly dividend in February. Insiders have been participating in the DRIP and since its inception 2016 have reinvested in total $82 million. Slide 7.

In this slide, you can see the fourth-quarter 2019 figures. During the last quarter of this year, the company generated revenues of $124 million and adjusted net income of $38 million. Based on the above, the fourth-quarter adjusted EPS nearly tripled to $0.32 from last year's fourth-quarter EPS of $0.12. Our adjusted figures take into consideration the following noncash items: accrued charter revenues; accounting gains or losses from asset disposals; prepaid lease rentals and other noncash charges.

On Slide 8, we're discussing our capital structure. As already mentioned, there are no substantial balloon payments due over the next 12 months. Our leverage is comfortably below 50%. Net debt to adjusted EBITDA for 2019 was 3.7 times.

And EBITDA over net interest at four times, when our covenants have a minimum requirement of 2.5 times coverage. On Slide 9, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Costco, Yang Ming and Hapag-Lloyd. We have today $2.2 billion in contracted revenues and the remaining time at the duration of about three and a half years.

On the last two slide, we're discussing the market. As shown on Slide 10, charter rates for larger ships have been rising faster during 2019 compared to those of smaller vessels. The order book was slightly higher than 10% is at low levels with varying delivery schedule from 2022 onwards. On the last slide, the idle fleet is showing at 6.1%, adjusted, however, for the vessels undergoing scrubber installations, it drops to 1.5%.

Box rates are rising since the end of last year. As already mentioned, we are actively looking for new transactions in this market environment. This concludes our presentation, and we can now take questions. Thank you.

Operator, we can take questions now.

Questions & Answers:

Operator

Thank you. [Operator instructions] And your first question comes from the line of Ben Nolan of Stifel. Please go ahead.

Ben Nolan -- Stifel Financial Corp.-Analyst

Thanks for taking my call. I have a couple. My first one is, and you called it out in the release in your prepared remarks there, the 10 or 11 or so vessels that are larger, 8,000 plus TEU that are coming off contract in the next few months. I'm curious with the asset plan is to put those on -- maybe on one-year contracts? Or if there is a good market for three or five-year contracts? And then specifically, within that, is there a wide gap between the contract -- a one-year contract rate versus a three or five-year contract rate in terms of the pricing?

Gregory Zikos -- Chief Financial Officer

Yes. On the first part of the question. Yes, we would also consider a longer-term as opposed to -- in one-year charter, like it could be three to four years, or even longer, five years. Assuming that the charter rate makes sense.

And also assuming that we feel comfortable with the counterparty risk. Now the second part of the question, whether there is a wide gap between the one-year time charter rate versus the three or four-year charter rate. There is a gap, but depending on the specific asset, I don't think that this is so wide. So this is something we're considering as well.

Assuming that we feel it makes sense to lock in contracted revenues for a longer period. This is definitely something we're discussing. But I mean, the gap, I don't think that this is as wide as sort of this has been in the past, leave aside the fact that some years ago, there was no three to five-year market for larger vessels. Now, we have also seen a precedence of deals where liners have been committing for a three to five-year deal for like more than a tonnage.

Ben Nolan -- Stifel Financial Corp.-Analyst

Right. OK. That's helpful. And then my next question relates to four vessels that you acquired.

First of all, could you maybe -- I didn't see it, let us know how much you paid for this. But also, I thought it was interesting that it looks like there -- all four of them are narrow beam Panamax's, which I think been pretty widely discriminated against. I'm curious what your thinking is with respect to that specific asset class? And especially as it relates maybe to selling much smaller ships. You think these are going to fill the place of those smaller ships in terms of their market position?

Gregory Zikos -- Chief Financial Officer

Yes. For like for confidentiality reasons, it's difficult for me to sort of reveal now the sort of exact acquisition price. All the ships were sort of bought together and block in one deal. Now those four ships.

These are the 4,250 TEU containerships, built two of them in 2009, and two of them in 2010. The market for those ships today is between, I would say, $13,500 to $15,000 or so -- and for a year. So -- and we do consider that the market rate -- today's market rate, together with the potential carrying capacity of those vessels. Compared to the purchase price, it definitely makes sense.

And we shouldn't forget that those assets, they have a 30-year useful life. And as Costamare, we do have a lot of experience. And I think this is one of our strengths in operating all the tonnage. So I mean, we do take a long-term view regarding the capacity of those vessels and the sort of earnings potential.

In the past for similar prices, for similar acquisition prices those ships a couple of years ago that we're getting between $10,000 to $11,000 per day. So it's definitely a better charter market for those vessels. At prices, which have not moved a lot compared to levels we saw a couple of years ago.

Ben Nolan -- Stifel Financial Corp.-Analyst

OK. And with respect to sort of replacing them with the older tonnage. Is that sort of the idea? Do you think that they'll -- they're sort of being slotted into the same market position or?

Gregory Zikos -- Chief Financial Officer

No. I mean, look, we generally renew our fleet. We sold four vessels. On average, they have an age of 26.5 years.

So those ships they have sort of earned their money a couple of times already. So I mean, there were -- I think the right candidates for scrapping, also taking into consideration today's scrap prices, which on a relative basis, they are sort of high, close to $400 or plus per ton. We would have bought those four Panamax ships, in any case, whether we scrap those for like older vessels or not. But it coincided, time-wise, so there could be a difference of a couple of quarters.

It coincided. But generally, we are renewing our fleet and the sort of equity released from the sale of those vessels, of the older ships. Together with new debt, which we have -- I agreed for the four Panamax vessels. I think it makes sense because without a huge equity cash outflow, we are renewing the fleet with like ships 17 years younger on average and larger vessels as well.

Ben Nolan -- Stifel Financial Corp.-Analyst

Right. OK. And then lastly for me, and I'll turn it over. Is it just as it sort of relates to your customer demand for scrubbers.

I know, obviously, it's -- you've sort of taken the approach that if the customers will compensate you for it and that you would do it. But are customers now -- is there been any increased sort of renewal of customers saying, OK, well, let's go ahead and do it? Or is that not really a discussion that you are having?

Gregory Zikos -- Chief Financial Officer

So we're discussing with liners. We are in constant discussions with them. We have up to now agreed to install scrubbers in 15 of our vessels. These are the five new buildings, which are currently under the construction phase, charter to Yang Ming for 10 years.

And we have already agreed to install scrubbers in four ship charters -- in five ships charters or MSC and five ships charters to Evergreen these are -- those 10 ships are already in the quarter. We are in discussions with liners, regarding installation of scrubbers, which is going to be a package together with a charter agreement. Is this something that materializes -- of course, we're going to be announcing it. But yes, there is a lot of interest from liner companies regarding the scrubber installation to date.

Ben Nolan -- Stifel Financial Corp.-Analyst

I'll turn it over. Thank you.

Operator

Our next question today comes from Omar Nokta of Clarksons Platou Securities. Please go ahead.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yes. Thank you. Hey, guys. Maybe just to -- Greg, just maybe to one of Ben's questions regarding the purchases of the Panamax vessels.

It's -- we've been continuing a trend or a theme of selling your sub 3,000 TEU ships for getting wide beam or narrow beam. Is this simply you're looking to exit sort of that sub 3,000 segment and just going larger? Or is it just simply you're selling them as a function of their age, as you said, they were 27 years old?

Gregory Zikos -- Chief Financial Officer

No. For those four particular vessels we disposed off. They have an age of 27 years old. So we disposed off them in today's like scrubber prices and the ships, as I said, they have already turn their money or sort of the sort of equity investment, a lot of ties.

So it just that -- I think there were the right candidates for scrapping. It doesn't mean that we are exiting this sort of a feeder vessel or like the smaller sizes. In the past, depending on -- in the future, the -- depending on prices, we're looking at pretty much everything as long as it is a containership vessel. Now we tend to have another -- I mean, our sort of average ship size today is above 7,000 TEUs.

So we tend to prefer audit on a bigger tonnage. But generally, if it's something that makes sense. And even if it is a smaller feeder ship, we're going to look at it. So it's not that we are exiting this segment as those four specific vessels.

I think they have reached an age that scrapping, it made sense from a commercial point of view.

Omar Nokta -- Clarksons Platou Securities -- Analyst

OK. Thanks. Thanks for that color. And then also just wanted to talk about, obviously, you put in the release, the $265 million refinancing on the four 11,000 TEU ships.

First flush, that seems very attractive. You probably have your own valuations, but it seems at least to be above a 70% loan to value, which I think is quite compelling, considering the ships aren't on long-term contracts. Maybe could you perhaps just give -- explain a little bit about how you're able to achieve that type of financing, especially without the long-term contract.

Gregory Zikos -- Chief Financial Officer

Yes. Look, those are four ships 2017 build. And we have refinanced them with new facilities, we've done four bilateral deals actually. So it's not a syndicate.

With a tenure of five years for each facility, and the terms are sort of pretty much similar. Now based on our calculation, the leverage is not 70% or like the 75%. But it is lower based on the valuations we received. And based on the valuation also bank from their own sources have obtained.

So -- and in some reasons, we had -- we agreed loan amount to be drawn of $65 million without the need to provide a valuation a couple of days before drawing. So it was a pre added amount. But generally, I would say that the leverage, it's definitely below 70% for those type of vessels today. These are high-spec ships 2017 build.

And I think it is -- there sort of a value is higher than like what, I guess, you have in mind for a 70% to 75% leverage.

Omar Nokta -- Clarksons Platou Securities -- Analyst

OK. Thank you. And then maybe just -- you sort of touched on this also in your remarks and also with Ben's question. As those four ships, in particular, they're -- like you said, they're high spec.

What the charter appetite look like for those? Are those vessels you think you could secured through your contracts in today's market?

Gregory Zikos -- Chief Financial Officer

Yes. First of all, those ships today, two of them, the ones that had chartered with the specific charter. They're getting today close to $43,000 per day. So just judging from that, I think the value for -- of those assets -- it is quite substantial.

Now the second part of the question, yes, we think that we could definitely charter those ship today for a period of three to five years or even longer. Of course, subject to terms. But I think there is definitely a lot of returns today for like a medium or long-term charter contract for those specific five assets. It's five ships, actually.

We have refinanced the 4, and we are currently looking into the 5th one. So it is five ships vessels. All those ships are opening, as we mentioned within 2020. So -- and we definitely believe that the time of opening of those vessels.

It's something that makes sense from our point of view, it is quite beneficial.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yes. OK. Very good. Greg, thanks so much for the color.

That's it for me.

Operator

Your next question today comes from Chris Wetherbee of Citi. Please go ahead.

James Yoon -- Citi -- Analyst

Morning. James Yoon for Chris. Wanted to touch on scrubber capacity in Chinese New Year, given Chinese new years under way. How much a reduction of scrubber installation capacity have you seen is as -- have any ships essentially entered the market? Trying to understand essentially, if there were charters that decided to have a scrubber installation? What's the level of capacity to essentially have it installed within -- before the end of the year?

Gregory Zikos -- Chief Financial Officer

OK. Because the level is not very clear. So the question is whether there's capacity today for new scrubber installation or also whether there are delays? I mean, what was the question?

James Yoon -- Citi -- Analyst

Just near term, near term, how much of a reduction in scrubber installation capacity? Have you seen from Chinese New Year and then longer now, how much?

Gregory Zikos -- Chief Financial Officer

We haven't seen anything today. Look, generally, it has been reported that there have been delays in the shipyard for the scrubber retrofit process. So -- which, on average, now could take between, I would say, 55 to 60 days. Or something, although initially, people had hoped for a much shorter period.

So I mean, there are some experienced from like a lot of ship owners and liner companies. Leaving that aside, which is something that we know. We have not seen any specific delay or sort of any specific capacity reduction because of the Chinese New Year festivities, which is something that we sort of already knew. And sort of -- and it was accounted for.

Now, the fact that the Chinese New Year festivities may be extended for one more week as it has been reported. And what's going to be the effect of that. It remains to be seen. I cannot make any comment now.

This is a bit EBITDA premature. But up to now, is the sort of this week, it has been already factored in the calculations regarding the scrubber capacity, nothing has changed.

James Yoon -- Citi -- Analyst

Then longer term, understanding that there have been delays. Is there any possibility of actually being able to place in order for scrubber retrofit, and have it completing this year if you actually ordered today?

Gregory Zikos -- Chief Financial Officer

Yes. I think if you made an order today, its two things. First of all, you need to make the order of the equipment. And then secondly, you need to arrange for the retrofitting process with the shipyard.

So if you put an order today, I think, and depending on the shipyard you're going to choose. I think, yes, there is a capacity in order to have the scraps installed within this year. Now it depends on the specific vessel, asset size and shipyard, and also the cost that may be sort of incurred. But I would say that for 2020 installation within this year.

I would say that, yes, there is capacity. We haven't seen something to the contrary.

James Yoon -- Citi -- Analyst

Got it. And then in your slide, you had called out slow steaming. I wanted to understand if you've actually seen any slowdown in your fleet, particularly?

Gregory Zikos -- Chief Financial Officer

Any slowdown, sorry, in what?

James Yoon -- Citi -- Analyst

In your fleet?

Gregory Zikos -- Chief Financial Officer

No. It's -- I think we are progressing. We have -- OK, the five new buildings where the scrubbers are to be installed, they are progressing normally. And for the rest 10 of the vessels, there may be some slight delays, but nothing that is going to change dramatically the scrubber economics, I would say.

So there could be some delays of like weeks or so, but it's not it's going to be like delays of like a quarter or so or something like that.

James Yoon -- Citi -- Analyst

Got it. And then I think I just want to touch on slow steam levels or slow steaming you're seeing in the market? Have you -- you've actually seen a reduction in speeds on your vessel?

Gregory Zikos -- Chief Financial Officer

Yes. There have been reports that generally slow steaming. It's something that has been taking place. I cannot quantify exactly because it depends on the vessels, on the trade routes and also on the particularities of its charterer.

But generally, the slow steaming can -- if someone takes a view over the last year or 18 months. This is something that we have been witnessing, which generally, especially for the larger vessels. It is something that does help the supply and demand economics, for sure. I cannot forecast whether the slow steaming is going to continue at what levels.

However, assuming that the -- knowing that the fuel expenses they have been heading north. I think as slow steaming, it is something that definitely makes sense.

James Yoon -- Citi -- Analyst

Got it. Thank you.

Operator

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Zikos for any final remarks.

Gregory Zikos -- Chief Financial Officer

Thank you for being here with us today and for dialing in -- in the conference call. We are looking forward to speaking with you again in the next quarterly results. Thank you.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Gregory Zikos -- Chief Financial Officer

Ben Nolan -- Stifel Financial Corp.-Analyst

Omar Nokta -- Clarksons Platou Securities -- Analyst

James Yoon -- Citi -- Analyst

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