Costamare Inc (CMRE) 2015 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. conference call on the second-quarter 2015 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, Wednesday, July 22, 2015. We would like to remind you that this conference contains forward-looking statements. Please take a moment to read slide number 2 of the presentation, which contains the forward-looking statements.

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

Thank you and good morning, ladies and gentlemen. During the second quarter of the year the Company continued to deliver positive results.

On our joint venture with York, we have extended the investment period for five more years starting from May of 2015. Since inception we have executed transactions worth $1.1 billion, all of which have been performing well.

Regarding the market, we have recently witnessed a softening in charter rates, especially for the smaller sizes. We have no ships laid up, while ships coming out of charter this year still provide an upside, based on today's market conditions.

And now moving to the slide presentation, on slide 3 we are providing a summary of recent developments. These include the expansion of our Framework Agreement with York; the issuance of $100 million preferred equity; the dividend on our common stock; and also dividends on all three classes of our preferred shares.

Moving to the next slide, on slide 4 we are providing a summary of the chartering agreements which took place during the quarter. As of today the Company has no ships laid up.

On slide 5 you can see the second-quarter 2015 results versus the same period of 2014. During the second quarter of this year the Company generated revenues of $123 million, EBITDA of $94 million, and net income of $40 million. For the same period of 2014 the revenues amounted to $123 million, and the EBITDA and net income to $79 million and $24 million, respectively.

Consistent with our previous press releases we feel that the EBITDA in the income figures need to be adjusted for the following non-cash and one-time items, which are the amortization of the prepaid lease rentals, which is a non-cash charge resulting from a sale and leaseback transaction; the co-charter revenues and the resulting discrepancy between revenues received and revenues accounted for based on a straight-line amortization schedule; the non-cash G&A expenses; and the gains or losses resulting from derivative instruments. Based on the above, the second-quarter adjusted EPS amounts to $0.46, and the second-quarter adjusted EBITDA amounts to $87 million.

On slide 6 we are showing the revenue contribution for our fleet. More than 95% of our contracted cash comes from MSC, Evergreen, Maersk, and Cosco. We have $2.1 billion in contracted revenues and a remaining time charter duration of about four years.

Slide 7 is comparing existing market rates versus today's market levels for the ships opening during the remainder of 2015. As you can see, if we were to recharter today those vessels at today's market rates, the revenues would be on average 23% higher. For example, the 3,500 TEU ships in our fleet are yielding today on average on average $8,800 per day versus a market today in the region of $13,000.

Based on the above, it is obvious that the Company does not face any significant rechartering risk. On the contrary, the ships coming out of charter during the year are chartered at levels that are below today's market.

Slide 8 should be compared with slide 7 and shows the timing of our secondhand acquisitions for the vessels coming out of charter during the remainder of this year. As you can see we have been trying to optimize the timing of our purchases and buy in a low asset value and charter rate environment, hence why those ships provide for an upside even in today's market.

On the last slide we are discussing the market. Charter rates have softened over the last weeks, especially for the smaller sizes. The number of idle ships has marginally come up to 1.8%. Order book remains at historical low levels at around 20%.

As a Company we are well positioned to capitalize on market movements, either by chartering ships in a higher market or by buying assets in a low asset environment. This concludes our presentation, and we can now take questions. Thank you. Operator?

(Operator Instructions) Greg Lewis, Credit Suisse.

You mentioned that the charter market still remains relatively above some of your contracts. At this point -- and I realize that they all roll off at different times. But is there the ability as we've seen sometimes to fix forward vessels maybe? That maybe you're not going to get that full amount, but is there a thought about potentially -- hey, if the market is 20% above where my rates currently are I can fix it maybe at a 10% to 15% premium to where my rates are even though my vessel might be rolling off for another three or six months?

Well, first of all as a matter of principle you can always fix on a forward basis and not like wait for the last week before the vessel is coming out of charter. However, there may be a lot of discussion with the charterers if you decide to fix forward on six months in advance for ships that are coming out of charter, let's say, beginning of 2016.

I'm not sure how much benefit someone can take. It depends on the asset size; it depends on the charterer, whether the charterer needs the vessel; it depends on the physical condition of the ship.

And it may be the case that someone today may not be willing to commit six months forward unless the charter rate is highly beneficial for the charterer, or the charterer definitely needs that vessel.

So you can fix in advance; whether you can do it six or nine months in advance, I'm not sure about it. It's all a matter of price, what's going to be a lot of discussions.

All I can tell you that from our side in a lot of our ships we have extensions. So the charterer, as long as it is the vessel and as long as the physical condition allows it, we can of course start discussing with the charterer two, three months in advance for an extension.

I think the proper thing to do is first discuss with the current charterer of the vessel whether he wants this to be extended. And if that's not the case, then we might go to a third-party charterer. But we definitely start our discussions well in advance before the expiry of the employment.

Okay, great. Then just one more for me. Clearly we've seen a little bit of softness in the smaller vessel sizes. Now, that shouldn't really have -- that should have like a nil impact on the larger vessels.

But as we -- so as we think about the larger vessels, in talking to customers and being in the market, have you -- is the amount or the potential for newbuild growth opportunities, could you characterize that as where that is today versus maybe where it was earlier this year?

I would say that regarding newbuildings, there are a lot of opportunities, a lot of projects. And there have been recently in the market numerous projects and bids by charterers who wanted to order mainly larger vessels through a sale and leaseback structure, which means through a ship-owner like us. So there have been a lot of projects in the market lately.

Now, as you rightly said, charter rates for the smaller vessels have softened. The market had picked up from the beginning of the year. We have not been surprised by the fact that the rates have come off a bit and there has been some correction.

And the reason for that is simply because the demand was not there. In order to support new trade lines or new routes initiated by charterers, especially intra-Asia, and this is what led to this surge in charter rates for the smaller vessels during the first months. The demand is not there, and so charter rates have come off, because there is definitely less demand for those vessels and the supply cannot be absorbed.

Now, going forward -- and as you know we don't enter into projections where the market will be going -- from our point of view any short or even medium-term fluctuation in charter rates and/or asset values is not something that is going to affect our business model, where we have north of four years of time charter coverage; the backbone of the fleet, the larger vessels, are chartered out for longer periods; and we have a long-term type of business model.

So any short-term fluctuations definitely create opportunities, but a softer market for the smaller vessels, which is something that we were expecting, I don't think it's affecting at all our business model. Quite the opposite, because it may create additional opportunities going forward.

Okay. Perfect Greg. Thanks for the color. Have a good rest of the summer.

Fotis Giannakoulis, Morgan Stanley.

Yes; hey, Greg. I want to start with the joint venture with York Capital. There was an extension of the investment period. Can you remind us how much equity you have invested so far and how much equity is left?

And why -- what is the rationale behind this extension? Are there any new transactions that you may be looking and negotiating? Do see more opportunities in the market? Why -- and have you changed the investment amount that you were originally planning to?

Yes, initially there was an investment period of two years. We put together this joint venture in May 2013 with a two-year investment period which expired in May 2015, a couple of months earlier. Since then we have started discussions with York, and we have extended the investment period for five more years, which is going to take us up until May 2020. And then we have four more years for harvesting those investments, so the whole JV including the harvesting period goes up to May 2024.

Up to now we've done total transactions of close to $1.1 billion. The amount of equity put is also a factor of how much leverage we're going to be getting in some of our newbuildings, so I'm not sure that I can give an accurate number now. However, I can tell you that going forward there is no limit on the amount of equity that can be employed for future business, meaning that neither York nor us have put on the side any amount that has to be used for new acquisitions.

As long as we like a transaction we will proceed. There is no limit. We are well capitalized, and from our side we have good access and also proven access to commercial bank debt, to sale and leaseback transactions.

And York from their side, I think it is a strategic decision to continue this cooperation for five more years at least. So there is no limit.

And the reason we have decided to extend, I think up to now we are both happy with the cooperation. It has been quite smooth.

We share the same mindset with York, meaning that we both first try to cover our downside and then hopefully leave some upside for our shareholders. We have the same level of conservatism, and at the same time the chemistry between the two companies is something that works.

We see a lot of opportunities going forward, so why not extend this agreement for five more years? From our side we believe that this is beneficial to our Costamare Inc. shareholders.

And let me remind you that there are no conflicts in this agreement, so all the benefit from those transactions is going to flow to the shareholders of Costamare Inc. There are no private interests or any other type of interests involved in those transactions.

Thank you, Greg. Regarding the transactions that you have already done so far, you have the five 14,000 TEU vessels that they are already contracted, and it seems they have very high financing -- if I am not mistaken, 80% to 90% financing.

What about the financing that the 11,000 TEU vessels -- what kind of financing are you looking at? And have there been any discussions about the chartering of these vessels? How many potential customers are there interested in taking these vessels?

Yes, the five 14,000 TEU ships chartered to Evergreen, those are financed and those will start being delivered from the beginning of the coming year of 2016. The five 11,000 TEU ships, we haven't financed them yet because we don't have a charter in place yet, so the financing would not be very attractive.

So up to now we've paid 50% of the contract price. For the four of them we paid 50% of the contract price; and the latest 50% of the delivery payment is upon delivery. So I think by that time one way or the other we will have arranged financing with this, which however will be also affected by the charter party we will have in place.

Regarding the chartering, which was the second part of the question, we have been in discussions with numerous charterers. There is definitely interest for those vessels. I'm afraid for obvious reasons I cannot get into more details right now, but we feel extremely comfortable with the chartering potential of those ships, which -- those 11,000 TEU vessels we feel that are in need from our customers.

Can we derive from the previous deal that the economics will be similar with other previous transactions of large vessels, getting something like 12%, even something more than 12% EBITDA yield? Is the expectation that something similar is going to be for these vessels as well?

Yes, this EBITDA yield is also a function of the tenor of the charter party. In the previous transaction we have a charter party duration of 10 years. So the charter rate, the level of the daily charter rate, will also be a function of the time charter duration.

So I wouldn't like to start comparing numbers now and discuss about our expectations, because there's also a lot of discussions regarding the duration of the charter party. From our side of course we try to optimize the return of those vessels. So unless we have a similar charter tenor, we cannot compare EBITDA yields; and at this state I am not prepared to discuss whether it's going to be a longer or a shorter charter party agreement. This is under discussion (multiple speakers)

What is the minimum that you might see and what is the maximum? What is the range of the potential duration of these charter agreements?

I'm afraid this is going to be a wide range. The charter party could be from one year to 12, 15 years, so I'm not sure I'm very helpful here.

But since we are into discussions, let me -- give us some time. And when those ships are fixed, prior to delivery, this is something that we will be more than happy to discuss in more detail.

Okay. Fair enough. Regarding the market, we saw that the rates, they went significantly higher at the beginning of the year. They increased -- they almost doubled from a year ago, and now the last few weeks they have been softening.

Can you explain to us what were the drivers of this big improvement that we saw earlier this year? And what are the -- elaborate a little bit on the reasons why we are seeing this softening right now. And what shall we expect in the future to be the drivers, either on the positive side or on the negative side?

Beginning of the year a lot of companies decided to initiate new services, also taking advantage of relatively lower fuel costs and especially intra-Asia. So this led to additional demand for smaller-size tonnage.

And since there was a lot of demand for those ships, charter rates picked up significantly. It seems, however, that this was not sustainable up to now.

The demand is not there in those trades, so there are a lot of re-deliveries. Charterers may not be willing to commit at those higher charter rate levels for a longer period, and this has naturally led to a significant decrease in charter rates.

Those lower charter rates, as of today, they are not fully reflected in our ship prices, although they are fully correlated, but there is normally a time gap between those two. And this is something that we were not surprised. I don't think that we were able to justify such an increase in charter rates for a longer period of time simply because there were no strong indicators that the demand would continue being there.

Now going forward, I'm afraid I cannot be of much help either. It's all supply and demand. Demand seems to be today rather anemic rather than strong in most trades. So we cannot protect the future.

If we know the supply today we know how many ships, especially bigger vessels will be coming into the market over the next six to nine months. This is something we can easily predict. Whether the demand will be there in order to lead to additional tonnage needs or not, especially for the smaller vessels, this remains to be seen.

One last question. You take delivery of all these newbuildings that you have in the JV, and it seems that your cash flow is going to be increasing. Can we lead ourselves to the conclusion that the dividend might be moving higher upon delivery of these vessels?

Well, you can definitely conclude that distributable cash flow will be higher. Now the dividend, this is subject to the Board's approval, so it's not my personal choice.

I think up to now we have proved that we like dividends and that we like raising the dividends. Not forget that we are public for the last five years and we have raised the dividend three times since going public. So as I've said in the past there is only one direction for the dividend, and this is up.

I can tell you that the Company's cash flows will be growing simply because of the newbuildings, excluding any new business, excluding any upside from ships coming out of charter now which are chartered at very low rates.

We like dividends; however, I cannot say more than that. Or I cannot commit to a well-defined dividend plan, how much the dividend is going to be raised and when. But this is definitely our intention.

Let me say once more that the founding family owned 65% of Costamare Inc. There are no other shipping interests outside of this entity. There are no conflicts, unlike in other companies. So -- and this dividend it is the main source of income of the founding family and for other people who work within Costamare; so from our side we have every incentive in the world to have this dividend raised.

Okay, thank you Greg.

Mark Suarez, Euro Pacific Capital.

Good morning, and thanks for taking my questions here. Just to go back on the extension of the JV here and if you think about this strategically and take a long-term view, how should we think about capital deployment? Would it be -- mostly take place within the JV in the form of additional newbuildings in the Post Panamax segment, consistent with your latest transactions? Or you think there's room for additional secondhand acquisitions outside of the JV, given your recent preferred offering here of $96.6 million I think it was, net proceeds? How should we think of that?

Look, through the JV we've done 10 buildings, which is the bulk of -- the main part of our investment; but we have also bought together with York four secondhand ships, older and a bit smaller assets which, however, today they are all in the money.

So we are going to be looking together with York and there is an exclusivity over this new -- over this extended investment period. We're going to be looking together with York both for newbuildings and secondhand vessels.

We don't have a preference, as long as the numbers make sense and as long as those are investments where we have managed to satisfy our downside concerns and we feel that there may be some upside left. So the long story short, we look at everything the same way we have been doing for Costamare.

I'm afraid I cannot say now what's going to be the next transaction. But we, both York and ourselves, feel that there are a lot of opportunities going forward, otherwise we wouldn't bother entering into this extension agreement.

Got you. You also talked about numbers. I remember when you went into this agreement you were talking -- you would like to target transactions of an ROI of -- in the teens range, if you will. I'm wondering if those benchmarks or ROI benchmarks have changed at all since extending this JV agreement? How should we think about reasonable ROIs when you are looking at transactions, whether secondhand for newbuilds?

Look, I think when we look at a transaction the first thing is: what is the risk we and our shareholders are assuming and consequently also the York investors are assuming? What is our equity value at risk?

As long as we are happy with that and there is some upside as well, we're going to proceed. But first we try to make sure that we cover our downside protection.

So I'm not prepared now to discuss in detail target levels or cash-on-cash IRR target levels, because if the transaction is not properly structured, or if we don't have a creditworthy charterer, or if the financing cannot be obtained there is greater downside risk without any meaningful upside, irrespective of what our target IRR is.

Got you. I guess similar to that question, I'm wondering, if we assume that the financing will be in place for specifically the five 11,000 TEUs, do you guys have an optimal or targeted loan-to-asset ratio, if you will? I know that in the past you've been in the 70%s and 80%s. Assuming everything goes through would that be a fair assessment of fair assumption going forward as a (multiple speakers)?

Look, the loan-to-value is one way to measure leverage. The first thing we look at is the cash flows of the project on a standalone basis. As long as the cash flows of the project can easily meet the debt service requirements, then of course we are going to go for the highest possible leverage, assuming that the charter party -- that the charterer is a creditworthy entity, in order to maximize our equity terms.

So whether it's going to be 60%, 70%, 75%, whatever, it all depends on the cash flows of the project and what buffer we have in order to meet the agreed debt service schedule. If the cash flows of the project on a standalone basis -- and even if we have a bunch of ships together in the same transaction -- they don't satisfy the cash flow needs of the debt, then of course we're not going to proceed. So the leverage is something relevant.

Okay. Fair enough. Thanks for your time as always, Greg.

Charles Rupinski, Global Hunter.

Hello, Greg. Thanks for taking my question. Most of my questions have been answered, but I'm just curious about just maybe what you're hearing from the liner companies in terms of the larger ships, the 10,000 to 14,000 TEU ships which you have on order. There are also ships coming online, vessels that are larger, 18,000, 20,000 TEU.

Can you maybe talk a bit about how these are going to be potentially deployed over the next cycle, and whether you would be open to going even larger vessels in terms of what you're looking at? Thank you.

Okay. Look, the larger vessel -- first of all container shipping, it's all about economies of scale. And if you see historically the average size of the containership vessels over the last 10 or even 15 years, you will see that they started from 2,000 TEUs and now is in the region of an average in the range of 3,800 TEUs or so. And this size has been gradually growing every single year over the last 10, 15 years.

As I said, it's all about economies of scale. It's all about the cost per slot which, assuming a minimum utilization, is decreasing.

Now, the larger vessels, I think it's evident that they are going to be used in the Far East-Europe trade. And apparently liner companies that have entered into alliances, they need those ships.

From our side, as Costamare together with York, we have been pretty flexible. We have been buying smaller secondhand ships; we have been putting an order -- for Evergreen, for instance -- for 14,000 TEU ships.

As long as the numbers work, and as long as the liner companies need those ships, and our downside risk is something with which we feel comfortable, and there is also financing for those vessels, then we are pretty flexible. Technically we can manage and operate all the large containerships as well as 25- or 30-year-old 1,000 TEU vessels. So it's all about potential returns and it's all about covering our downside risks.

Great. Thanks for the time, Greg, and congratulations on the quarter.

Shawn Collins, Bank of America.

Great, thanks. Good morning; good afternoon, Greg. How are you?

Hey, Greg, there's been some press on raising taxes on ship-owners in Greece, or a potential change to the special tax status to Greek ship-owners. I know this is not at the corporate level but instead at the level of dividends or profits to Greek ship-owners. Can you just provide some clarification, if my understanding is correct and if there's any color or update on this?

Yes. Look, as you rightly said there are taxes both on a corporate level and there are taxes from a personal level which mainly have to do with the dividends. Now on corporate level Costamare Inc., like other shipping companies managed out of Greece, we have been paying tonnage tax which is based on international standards.

And although there is no specific tax expense line in our P&L this is included in our operating expenses. So tax is being paid by Greek ship-owners along the lines of international standards.

Now, regarding taxation on dividends, I wouldn't like to enter into a discussion now since this is something recently brought up and this is something that we don't have any specific guidelines yet. But this, in any case I'm not sure how this would be affecting Costamare Inc., assuming that the tonnage tax we have been now paying and which forms part of our operating expenses remains unaffected. So let us have a bit more clear picture about the tax treatment on dividends, and then we will be more than happy to revisit and discuss with you in more detail.

Okay, great; that's helpful. I appreciate that. Then just a second question, a quick one. You raised $100 million of -- I think it was $100 million of preferred equity in May. Can you remind me of the terms and then more specifically, more importantly, why you chose the preferred rather than, say, the bank market or the bond market or some other type of structured alternative?

This preferred, it is treated as equity from an accounting point of view under US GAAP, and I think they should be treated as because it is a true perpetual, meaning that in case you don't repay after 5, 7, 10 years, whatever, there are no step-up provision.

So it's not a debt hybrid. It is a pure equity instrument.

Now we have a no-call obligation over the first five years, meaning that we cannot repay over the first five years. After year five we are at liberty to repay this $100 million at par, either partly or in total, however we decide to do.

The dividend, it is 8.75%. And as I said it is a true perpetual.

Now, this is an additional financing tool on our balance sheet, and this is there for general corporate purposes. In order to raise debt, first of all, we don't want to come close to our financial covenants regarding debt, and you need to have a specific asset in place.

This is for future transactions. This could be used for newbuildings; this could be used for secondhand ships where we don't have a long-term charter party yet in place and we can lever this asset later.

This can be used for a lot of reasons. It's very flexible, and we feel that it is a good addition in our capital structure.

We have commercial bank debt. We have done financial leases through sale-leaseback transactions.

We haven't done any corporate bonds simply because we found them to be extremely expensive compared to commercial bank debt and very restrictive compared to terms regarding financial covenants, etc., you can obtain from commercial banks today. We haven't raised equity, pure equity common, first of all because we don't need it; and secondly, it would have been dilutive to our current shareholders, to the common shareholders. So this is an additional cash injection which we feel makes sense.

Okay. That's great; that's helpful. Very comprehensive. Thank you very much, Greg. Thanks for the time and the information.

(Operator Instructions). Showing no further questions I would like to pass the floor back over to Mr. Zikos for his closing remarks.

Thank you. Thank you very much for being here with us today. We are looking forward to speaking again to you during our next quarter's call. Thank you.

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