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Capital Product Partners LP (NASDAQ:CPLP)
Q3 2020 Earnings Call
Nov 2, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Capital Product Partners' Third Quarter 2020 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company. [Operator Instructions] I must advise you that this conference is being recorded today November 2, 2020.

The statements in today's conference call that are not historical facts, including our expectations regarding cash generation and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation as well as our expectations regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates may be forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended.

These forward-looking statements involve risks and uncertainties that could cause stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units.

I'd now hand the conference over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

Jerry Kalogiratos -- Chief Executive Officer and Director

Thank you, Heidi and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. As previously announced, we concluded on March 27, 2019, the spin-off of the partnership's tanker fleet and subsequent merger with DSS Holdings, the forming Diamond S Shipping. Accordingly, we present our financial results for the comparative periods on a continuing operations basis, except where references made to discontinued operations.

The partnership's net income for the third quarter was $7.8 million compared with net income of $3.4 million for the third quarter of 2019. Our Board of Directors has declared a cash distribution of $0.10 per common unit for the third quarter of 2020. The third quarter cash distribution will be paid on November 10 to common unit holders of record on November 2. The partnership's operating surplus for the third quarter was $21 million or $11.7 million after the quarterly allocation to the capital reserve. We are pleased that during the quarter, we secured employment for the container vessel Adonis with Zim for a period of 12 months to 14 months.

As a result, the partnership's charter coverage for the remainder of 2020 and for 2021 stands at 91% and 86% respectively. Correspondingly, the partnership's remaining charter durations stood at the end of the third quarter at 4.5 years. During the quarter, CPLP's sponsor Capital Maritime Trading Corp., purchased approximately 234,000 common units in the open market, demonstrating our sponsors continuous commitment to the partnership.

Now turning to Slide 3, revenues for the quarter were $35.5 million compared to $26.4 million during the third quarter of 2019. The increase in revenue was primarily attributable to the increase in the size of our fleet following the acquisition of three 10,000 TEU containers in January, partly set off by the decrease in the daily charter rate and on average by our vessels. It is important to note here that are sold dry bulk vessel, the Cape Agamemnon completed its 10-year charter with Cosco in July 2020. It has since traded in the spot market, but had to incur 15 off-hire days due to the unfortunate passing of its first engineer from natural causes and the associated formalities. unfortunate [Indecipherable] his family.

Total expenses for the quarter were $23.8 million compared to $19.3 million in the third quarter of 2019. Voyage expenses for the quarter increased $1.9 million, up from $0.7 million in the third quarter of '19, mostly due to the Cape Agamemnon being employed under voyage charter during the quarter. Total vessel operating expenses during the third quarter amounted to $9.5 million versus $9.8 million during the third quarter of '19. The decrease in operating expenses was mainly due to expenses incurred during the third quarter of 2019 in connection with the passing of the special survey of the container vessel Agamemnon, partly offset by the increase in the size of our fleet following the acquisition of the three 10,000 TEU container vessels earlier this year.

Total expense for the third quarter of 2020 also include vessel depreciation and amortization of $10.6 million compared to $7.3 million in the third quarter of 2019. The increase in depreciation and amortization is mainly attributable to the increase in the size of our fleet, the completion of the special surveys of eight of our vessels and the installation of scrubber systems on seven of our vessels. General and administrative expense for the third quarter amounted to $1.8 million as compared to $1.5 million in the third quarter of '19. The partnership recorded net income from continuing operations of $7.8 million compared with net income from continuing operations of $3.4 million for the third quarter of '19.

On Slide 4, you can see the details of our operating surplus calculations that determine distributions of unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately $21 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $9.3 million to the capital reserve in line with the previous quarter. After adjusting for the capital reserve, the adjusted operating surplus amounted to $11.7 million.

On Slide 5, you can see the details of our balance sheet. As of the end of the third quarter, the partner's capital amounted to $416.2 million, an increase of $9.5 million compared to $406.7 million as of year end 2019. The increase reflects net income for the nine months ended September 30, and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the first nine months of 2020, the total amount of $15.2 million.

Total debt increased by $126.6 million to $389 million compared to $262.4 million as of the end of 2019. The increase is attributable to the term loan entered with Hamburg Commercial Bank, and the sale and leaseback transaction entered with CMB Financial Leasing in connection with the acquisition of three 10,000 TEU containers in January 2020, and the refinancing of three 9,000 TEU container vessels, which was completed in May 2020, partially offset by scheduled principal payments during the period.

Total cash as of the end of the quarter amounted $47.7 million, including restricted cash of $14.9 million in total representing the $7 million minimum liquidity requirement under financial arrangements and the $7.9 million pledged to ICBC Leasing. The release of the pledged amount is expected within the fourth quarter, as a release condition has been fulfilled with the container vessel Akadimos entering into a new long-term charter.

Turning to Slide 6. We're delighted that our strategy of fixing the container vessel Akadimos for the shortest period possible once it came up first for charter renewal in May has worked out well. As a new employment with ONE for 20 months to 24 months is almost double the rate on offer at the time. In addition, we have secured employment for the Adonis with ZIM for 12 months to 14 months at 33,500 gross per day, both charters commenced in late September 2020. This recent fixtures have further diversified our customer base with the addition of ZIM and ONE to our roster and their standard expirations over 2021 and 2022, help mitigate and rechartering risk going forward.

As a result of the aforementioned deployment, developments, and turning to Slide 7. The partnership's charter coverage for the remainder of 2020 and for 2021 stands at 91% and 86% respectively, while the remaining 4.5 years. We now have one container vessel that we need to recharter [Phonetic] early in the first quarter of 2021, namely CMA CGM Magdalena, which will see its five-year charter with CMA expire in February 2021. Currently, one to two year market for this type of vessel is in the mid to high '30s, but we will of course need to be closer to the expiration date in order to have better visibility of what is feasible in our vessels. The Cape Agamemnon, our sole dry bulk Capesize vessel has continued to trade in the spot market until the end of October and is now scheduled to pass it special survey in early November. As previously discussed, we will continue to be opportunistic with regard to this vessel, both in terms of period versus spot employment as well as in terms of a potential divestment.

On Slide 8, we review the container market. Following the sharp decline in charter rates during the second quarter of 2020, the charter market experienced a strong rebound across all sizes during the third quarter. For example, the charter rate for the 12 months period for a standard 8,500 TEU container has increased from around $17,000 [Phonetic] per day, early in the previous quarter to $30,000 [Phonetic] per day to day. The improvement in the market is attributable to rebound in consumer demand and the operator stringent capacity management, which coupled with lower bunker prices have lifted liner profitability at or close to historical highs.

As a result, available tonnage in the market has been picked up by liner companies at increasing rates, with the container idle fleet decreasing from around 11% in May to less than 4% by the end of the third quarter 2020, including vessels in dry docks and retrofitting scrubbers. Currently, the base case forecast for container trade for 2020 has been revised to minus 4.1% compared to minus 10.7% projected in May. For 2021, overall demand growth is expected to rebound to 5.7% compared to the previous projection of 6.8% in the second quarter and 9.3% in the first quarter.

On the other hand supply growth forecast for full year 2020 stands at 1.8%, a drastic decline from 3.1% expectation at the end of 2019, a slippage including cancellations of new building container vessels stood at 29% in terms of TEU as of quarter end compared to none a year ago. Also importantly, the container order book is estimated to be at historical lows and now stands at 303 units of 7.9 million TEU, which represents 8% of the total worldwide container fleet. The improved charter market and record high freight rates bode well for the container market ahead. However, we believe that the right attitude here is to be cautiously optimistic as there remains a high degree of uncertainty that could swing the pendulum the other way.

Already the second and in some cases, like the US, a third wave of the pandemic has caught many nations by surprise. We're now seeing many European countries measures that resemble the lockdown we experienced in May and both economies across the globe to a halt. A prolonged closure of economies in the Western world will eventually adversely impact consumer demand and this in turn might affect demand for containerized goods.However, we expect CPLP to be a winner under any foreseeable scenario, if the global economy recovery stalls, amid COVID-19 uncertainty, extended lockdowns and geopolitical tensions, the partnership is well fortified to deal with increased volatility going forward and potentially pick up distressed assets.

If on the other hand, we see a mostly steady recovery followed by increasing volumes in global seaborne trade. CPLP with its [Indecipherable] will be able to grow its asset base with the aim of increasing its long-term favourable cash flow and create long-term value for its unitholders.

And with that, I'm happy to answer any questions you may have.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We will now take our first question. Please go ahead. Your line is now open.

Ben Nolan -- Stifel -- Analyst

Hey. Good morning, Jerry. This is Ben at Stifel.

Jerry Kalogiratos -- Chief Executive Officer and Director

Hi, Ben.

Ben Nolan -- Stifel -- Analyst

Hi, and good morning, or afternoon, I guess. I want to start a little bit with a few things, from a capital allocation perspective. You had mentioned that the sponsor have been buying shares of the partnership since the acquisitions in the first of the year, and really the partnership hasn't acquired anything else, but it is, especially with the lower distributions in, liquidity is improving and so forth, but units are trading, I don't know 5 times EBITDA, so pretty, pretty cheap, which I can guess is why this sponsor is buying. How do you think about what is the highest and best use of your cash that continues to build from here and over the course, let's say the next six months to 12 months?

Jerry Kalogiratos -- Chief Executive Officer and Director

Well, until now, as we discussed last quarter, we have been retaining liquidity to make sure that we have maximum flexibility, I guess in view of the uncertainty surrounding COVID-19. The next few months ahead of us remain critical and I think we will better understand how these second wave of the pandemic is going to affect the global economy and containerized trade. And we also have our final 9,000 TEU container vessel coming up for charter renewal that's in a couple of months.

As these next few critical months go by, I think we will have more visibility and we can endeavor to deploy our increased liquidity to grow our asset base, because as we discussed, I think it's important for our business to replenish its fleet. We have assets with finite life, but I think also, our Board will seek to balance these with returning capital to unitholders and I do think that either increased distributions or unit buybacks would be a good way to do that depending on our equity valuation.

Just to be clear, I don't think any decision has been made. And as I said, I think there is still a lot of uncertainty around how things are going to fare in the next few months, but you cannot ignore the fact that we have had a very strong rebound, the container market, I don't think anybody was expecting that. And right now, when you look at the demand supply balance, it looks pretty good, but we do live in a very fluid environment. So we have -- I think we will hold off taking any major decisions with regard to capital allocation at least a couple of months.

Ben Nolan -- Stifel -- Analyst

Okay. No. That's helpful and clear. As it relates to recontracting with Magdalena and I assume other ships at the sponsor level, you mentioned in the conversation there that or in your prepared remarks that rates are at one to two year contracts or for one to two years. Is that sort of the tenure that you're looking at or is there a market for something longer? I mean we're getting pretty close. February is not that far away. So do you think there is potential for five years or something little bit longer?

Jerry Kalogiratos -- Chief Executive Officer and Director

That's a great question. As a whole -- the whole reason why a liner companies were able to get where they are today was because unlike 10 years ago, they had portfolio of Chartered Internets on flexible periods or shorter tenures than they had in the past. So at the moment that COVID hit, they redelivered vessels as much as they could, streamlined their operations and then they were disciplined enough to take advantage of the hike in consumer demand, as well as of course, the lower bunker prices that helped. So I think, at the same time, liners obviously, they are enjoying a fantastic market in terms of profitability and many have announced results that are record highs.

But at the same time, they are also facing the same uncertainty. So I think they were -- at the beginning, at least, increasing unwilling to lock in longer charter rates, but given where rates have moved today and I think we are probably seeing in terms of charter rates 10 to 12-year high, they -- owners, first of all, feel that these are good rates to lock in for a longer period. And secondly, there is not enough tonnage out there for liners to get their hands on. So increasingly, and this is, let's say, over the last two to four weeks, we see owners pricing for longer periods and increasingly charters willing to offer longer period, just to get their hands on Adonis [Phonetic].

Then you look at the situation for post Panamax vessels especially 9,000 TEU vessels with high reefer capacity like ours and we don't expect anything to open up until our vessel is up in January or February. So we should have a fairly good -- we should have fairly good leverage as to what we can achieve in terms of rate and duration, if this market persists. You will probably have noticed that we have target charter expirations of our previous two 9,000 TEU ships, so we have one vessel coming up now in October 2021, another one in 2022. So if you ask me I think potentially at the rates that we're seeing today and to the extent that we can achieve it will probably try to go for longer than two years. But there is always this display between duration and rate. So I don't think we want necessarily to kill the rate just in order to get to the tenure, but if you can achieve a good balance, we will probably go for a longer tenure.

Ben Nolan -- Stifel -- Analyst

Okay. That's helpful as always. And then lastly for me and I'll turn it over, especially and I appreciate that you're probably not doing anything from a capital allocation perspective in the next few months, but now that you're building cash and it seems like there is perhaps the liners beginning again to look at ordering new vessels perhaps and you now without paying out everything is distribution [Technical Issues] and maybe some of these new builds contracts rather than letting the sponsor do it and buy after delivery. Is that a door that you could envision going down? Or do you think that you'll continue to do as you traditionally and wait until the vessel is actually operating and generating cash flow for doing something?

Jerry Kalogiratos -- Chief Executive Officer and Director

I definitely think we have more flexibility than before. So it was much more difficult for CPLP, for example to look at builds in the past and commit equity given the much higher distribution. I don't think, we have spent though a lot of time thinking about new buildings as of late. The focus has been mostly on second hand ships and especially, the post Panamax segment. The market moves so fast that there wasn't enough of -- enough vessels out there or let's say, enough sellers that were willing to part vessels at a decent price because charter rates moved. And today there is very little that you can get your hands on in terms of post Panamaxes.

In terms of smaller ships, Panamaxes is below, there is much more activity, especially over the last month, 45 days that we have seen a lot of transactions taking place at substantially increased prices compared to, let's say, three, four months ago in certain cases more than 30% increases compared to, let's say, where you could get though your those ships in June. Our sponsor has picked up or rather an affiliate of our sponsor has picked up three vessels in that segment. It's a segment that our CPLP would typically -- probably avoid because it's more volatile, there is more residual risk, I mean the Panamax segment. But if there was a long-term charter like the one that our sponsor is trying to put together for those ships, then that would be also something that we can look at. So if you were able to get a good equity return and mitigate substantially the residual risk, we might look also at smaller sizes. But I think in terms of new builds, it's something that we haven't thought about much.

Ben Nolan -- Stifel -- Analyst

Okay. That's helpful. Thanks, Jerry.

Jerry Kalogiratos -- Chief Executive Officer and Director

Thank you, Ben.

Operator

Thank you. We will now take our next question. Please go ahead. Your line is now open.

Liam Burke -- B. Riley -- Analyst

Liam Burke. Hi, Jerry.

Jerry Kalogiratos -- Chief Executive Officer and Director

Hi, Liam. How are you?

Liam Burke -- B. Riley -- Analyst

I'm fine. Thank you. Yourself?

Jerry Kalogiratos -- Chief Executive Officer and Director

Very good.

Liam Burke -- B. Riley -- Analyst

Good. Let's for a moment think about tighter capacity and how it runs past this period of uncertainty and obviously, there is a lag between new builds. With tighter capacity second-hand market stays pretty rich, you can tend to continue to just allocate capital toward strengthening the balance sheet and buying back shares or potentially increase in the payout?

Jerry Kalogiratos -- Chief Executive Officer and Director

I think that even in a market like the one we're seeing today, there are opportunities, if you could, especially as liners, are there to offer longer term charters then even if you pay a slightly higher price on an asset, but you have the visibility and your already return for the next three, five years, then there are transactions that are attractive today still many of those -- many of those ships, vessel prices are still lagging below historical averages. So it's not that we are necessarily at the peak of the market to date. But we are going to be selective, customer visibility, accretion all that is going to be very important. And I don't think you want to be allocating all your capital today, given the prospects, as well as the uncertainty. And as I said, over the next few months, depending on the kind of visibility that we can attain, we can also think about other ways of deploying our liquidity and returning capital to unitholders.

Liam Burke -- B. Riley -- Analyst

Great. And then on the sponsor side, the drop down pipeline is there anything potentially that is there or just price is just too high?

Jerry Kalogiratos -- Chief Executive Officer and Director

No. Well, I just mentioned these three Panamax vessels, these are three 2008 Panamax vessels, the sponsor has -- is in the process actually of acquiring those vessels, so the acquisition has not been completed. They need to install ballast water treatment systems, pass special surveys. And then, if a longer charter is put in place like -- and right now this is under very much under discussion. Then that's something that we can look at depending on the accretiveness of the deal. And as I said earlier on, as to how we treat the residual because the Panamax segment has been very volatile over the last few years and you want to make sure that you have adequate visibility.

Liam Burke -- B. Riley -- Analyst

Great. Thank you, Jerry.

Jerry Kalogiratos -- Chief Executive Officer and Director

Thank you, Liam.

Operator

Thank you. We will now take our next question. Please go ahead. Your line is now open.

Randy Giveans -- Jefferies -- Analyst

Jerry, it's Randy Giveans at Jefferies. How is it going?

Jerry Kalogiratos -- Chief Executive Officer and Director

Hi, Randy. I'm well. And you?

Randy Giveans -- Jefferies -- Analyst

Good. All right. So, you mentioned the Magdalena is on charter until February, when is the earliest you would be able to lock in terms for this new charters? Is that something we expect before year-end?

Jerry Kalogiratos -- Chief Executive Officer and Director

Yeah, probably, if I had to guess, it will be some time before year-end. Again, as the market is changing, so is the appetite of liners, when the market is bad, you have to wait until the very last minute and liners are not willing to commit forward positions. Now obviously given the dearth of available tonnage, there is -- it's much easier to fix forward positions even with dry-docks and much wider [Indecipherable]. So I think if I had to guess and given the strength of the market, we should know before year end.

Randy Giveans -- Jefferies -- Analyst

Got it. Okay. And then final question for the Cape Agamemnon following the dry-docking, do you expect to put that on time charter or do the opposite and kind of sell that vessel? How would you handicap it?

Jerry Kalogiratos -- Chief Executive Officer and Director

I think we are going to be very, very opportunistic, so if market picks up and we see a very good period on offer. It's not that day you can fix those vessels for much longer than it will be. I guess, typically 12 months to 24 months. We might look at it. Asset prices on the dry bulk side have been kind of subdued even when Capesize spot rates were showing above 30,000. We didn't see much of the movement. So we thought that it's not worth looking at divesting of the asset. So we will continue to play by year. Again, as for example, we decided to continue trading the vessel to spot market because of the better rates, instead of putting the vessel into dry-dock. The same way, I think we will decide depending on market developments. I know that doesn't help much, but given the volatility of the market, I think we should retain flexibility.

Randy Giveans -- Jefferies -- Analyst

Okay. No. That's fair. Good deal. Well, thanks again. That's it for me.

Jerry Kalogiratos -- Chief Executive Officer and Director

Thank you, Randy.

Operator

There are no further questions. I would now like to hand the conference back.

Jerry Kalogiratos -- Chief Executive Officer and Director

Great. Thank you, Heidi. Thank you all for joining us today.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Jerry Kalogiratos -- Chief Executive Officer and Director

Ben Nolan -- Stifel -- Analyst

Liam Burke -- B. Riley -- Analyst

Randy Giveans -- Jefferies -- Analyst

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