Capital Product Partners L.P.

Thank you for standing by and welcome to the Capital Products Partners Third Quarter 2021 Financial Results Conference Call. We have with us Mr. Charik Alohiratos, Chief Executive Officer of the company. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone. I must advise you this conference is being recorded today, November 5th, 2021. The statements in today's conference call are not historical facts, including our expectations regarding cash generation, equity returns, 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 expectation regarding market fundamentals and the employment of our vessels, including re-delivery 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 the 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 statements about the performance of our common units. I would now like to hand over to your speaker today, Mr. Kaloyeta. Please go ahead.

Thank you, Valerie, 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. We are very excited that during the past few months we have managed to put together two strategic and highly transformative transactions for the partnership as we have agreed to acquire in total six latest generation LNG carriers with long-term employment in place exceeding 1.2 billion in value. The first two LNG carriers joined our fleet in early September and we expect the remaining four to be delivered within the fourth quarter of 2021. Underpinning this transaction, and in particular the acquisition of three additional RNG carriers to those announced earlier this year, was the highly successful issuance of €150 million, or approximately $173 million, senior unsecured bond on the Athens Exchange with a fixed coupon of 2.65% and a five-year tenor. On the earnings front, we are pleased to see the continued strong financial performance of the partnership during the third quarter of 2021 compared to the same period last year, as the partnership's net income for the third quarter of 2021 was $11.9 million compared with a net income of $7.8 million for the third quarter of 2020. Our Board of Directors has declared a cash distribution of $0.10 per common unit for the third quarter, which will be paid on November 12th, to common unit holders of record on November 5th. The partnership's operating surplus for the third quarter was 25.8 million or 11.3 million after the quarterly allocation to the Capital Reserve. Separately, since the launching of the unit repurchase plan on February 19th and as of September 30th, we repurchased 379,660 common units at an average cost of 11.73 cents per unit. Finally, the partnership's charter coverage for 2022, including the LNG fleet, stands at 93%, while the remaining charter duration corresponds to 5.1 years. Turning to slide 3, revenues for the quarter were 43.1 million compared to 35.5 million during the third quarter of 2020. The increase in revenue was primarily attributable to the net increase in the size of our fleet following the acquisition of two LNG carriers in early September and three Panamax containers in February, and a decrease in the net amortization of time charges acquired together with certain of our vessels, partly offset by the sale of one of our container vessels in May. Total expenses for the quarter were $27.8 million compared to $23.8 million the third quarter of 2020. Voyage expenses for the quarter increased to $3 million compared to $1.9 million the third quarter of 2020, due to the increase in the number of days during which one of our vessels in our fleet was employed under voyage charters compared to the respective period last year. Total vessel operating expenses during the third quarter of 2021 amounted to 11.3 million compared to 9.5 million during the third quarter of 2020. The increase was mainly due to the net increase in the size of our fleet. Total expenses for the third quarter of 2021 also included vessel depreciation and amortization of 11 million compared to 10.6 in the third quarter of 2020. The increase in depreciation and amortization during the third quarter was mainly attributable to the amortization of deferred dry docking costs incurred during the fourth quarter of last year and the net increase in the size of our fleet, partly offset by the classification of the vessel ADONIS as vessel held for sale. G&A for the third quarter amounted to 2.6 billion as compared to 1.8 million third quarter of last year. The increase in general administrative expenses was mainly attributable to fees and expenses incurred in connection to the acquisition of the three LNG carriers we announced in August 2021. Interest expense and finance costs increased marginally by 0.1 million to 3.6 million for the third quarter of 2021, as the increase in the partnership's total outstanding indebtedness offset the decrease in the LIBOR-weighted average interest rate compared to the third quarter of 2020. The partnership recorded net income of 11.9 million for the third quarter, compared with a net income of 7.8 million for the third quarter of 2020. On slide 4, You can see the details of our operating surplus calculations that determine the distributions to our unit holders 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 25.8 million in cash from operations for the quarter before accounting for the capital reserve. We allocated 15.5 million to the capital reserve, an increase of 6.2 million compared to the previous quarter, due to the increased debt amortization resulting from the acquisition of two LNG carriers in September 2021. After adjusting for the capital reserve, the adjusted operating surplus amounted to 11.3 million. On slide five, you can see the details of our balance sheet. As of the end of the third quarter, the partners' capital amounted to 487 million, an increase of 64.8 million compared to 422.1 million as of year-end 2020. The increase reflects net income for the nine months ended September 30th, 15.3 million representing the fair value of the common units issued as part of the consideration paid for the acquisition of the LNGs Aristos I and Aristarchos on September 3rd, and the amortization associated with the equity incentive plan, partly offset by distributions declared unpaid during the period, and the repurchase of the partnership's common units. Total debt increased by $271 million to $650.7 million compared to $379.7 million as of year-end 2020. The increase is attributable to the assumption of $304.4 million of total indebtedness in the form of sale and leaseback financing and $10 million in the form of seller's financing in connection with the acquisition of the two LNGs and an additional 36 million of debt in connection with the acquisition of the three Panamax container vessels back in February. The increase was partly offset by the sale of one of our container vessels in May and the respective debt repayment, a total amount of 49.6 million, and scheduled principal payments of 29.8 million during the quarter. Total cash as of the end of the quarter amounted to 65.6 million, including restricted cash of 9 million which represents the minimum liquidity requirement under our financing arrangements. Turning to slide 6, as announced in late August, we agreed to acquire three two-stroke XDF Mark III Flex LNG carriers with partial reliquifaction capacity and a high specification, including an air lubrication system, which, among other energy-saving devices, increases the energy efficiency of the vessel. On September 3rd, We took delivery of two out of the three vessels, namely the Aristos I and the Aristarchus, while the Aristides I is expected to be delivered within the fourth quarter of 2021, and once we deliver the container vessel Adonis to its new owner. The vessels are under long-term time charters with BP and CNIR, with average remaining charter duration of 5.4 years and an average day rate of approximately 68,150 per day. Moving to slide 7, as previously reported, the partnership successfully placed on October 20th, through its own subsidiary CPLP Shipping Holdings PLC, €150 million of senior unsecured bonds on the Athens Exchange. The bonds, which are guaranteed by the partnership, will mature in October 2026 and have a coupon of 2.65%. The coupon is payable semi-annually. The placement of the bond was highly successful as it was issued at the low end of the yield range based on exceptionally high demand as it was oversubscribed 5.3 times with a book exceeding 800 million euros. The use of proceeds from the bond has been identified for the acquisition of the additional three LNG carriers we secured as an option when we agreed to acquire the first three vessels. Hence, the bond issuance not only further diversifies the company's sources of financing but it also allows us to execute our business plan with an attractive overall cost of capital, and importantly, without raising any equity capital. On slide 8, you can see the key terms of the bond. Of note, the financial covenants are in line with the covenants under our current financing arrangements, as the net debt-to-market value adjusted for total assets ratio should be less or equal to 75%, while the adjusted EBITDA to net interest expense ratio should be no less than two times. Turning to slide 9, we are pleased to announce that we have exercised the option to acquire the three additional XDF LNG sister vessels granted in connection with the acquisition of the original three LNG carriers announced on August 31st. All three vessels have been delivered from the CPIARD in 2021 and are built to the same height specification like the first three vessels. The three LNGs are expected to be acquired at an average price of 207.7 million per vessel, with aggregate contracted revenues of approximately 429 million and an average daily rate of approximately 71,650 per day. Charters are BP, CNIR, and ENGIE, respectively, and the remaining charter duration is 6.2 years, which includes, in the case of the BP time charter, the first two optional periods. Moving to slide 10, we are delighted that through these strategic and highly transformative transactions, we are expanding our fleet with six brand-new, high-specification, latest-generation two-stroke LNG carriers with medium- to long-term employment in place that are expected to have a transformative impact on CPLP across all metrics. In particular, on the last 12 months' pro forma basis for the acquisition of the six ships, we expect the partnerships revenue to increase by 93% to $300.8 million compared to $156.2 million generated from our existing fleet, while EBITDA is expected to increase by $116.9 million to $221.4 million, representing a 112% increase. Please note that the impact has been estimated using the average charter rate over the remaining duration of the charters and not simply that of the next 12 months, as the BP charters have a structure whereby the initial period is at a much higher rate compared to the first two set of options. In other words, the impact is expected to be higher than illustrated here over the next two to three years, and lower thereafter. Operating surplus after reserves, which can be used as a proxy to distributable cash flow, is expected to increase on a pro forma basis by 87% to $97.5 million, or $2.3 per unit. that is after taking into account the debt service cost, including that of the newly issued bond. Again, I would like to stress that these estimates use average rates and average amortization figures, and are based on pro forma numbers for the original fleet. You'll find a detailed disclosure in the footnote. Hence, actual results may differ materially from these numbers, but we wanted to highlight the magnitude of the impact of these acquisitions, as we believe that will result in a step change to the partnership's valuation going forward. On slide 11, the book value of our fleet is expected to double. Importantly, the average age of the fleet will be reduced to 7.8 years from 10.8 as of September 30th, and will be five years younger than the industry average. This brings us closer to accomplishing our goal of controlling an increasingly modern and energy-efficient fleet in view of the new regulatory framework with regard to greenhouse emissions. I should also note here that LNG carriers typically have a longer use for life compared to other vessel types, and as a result, we depreciate their book value over 35 years compared to 25 years for our container and dry bulk vessels. Turning to slide 12, the partnership's remaining charter duration increases by approximately a year and a half to 5.1 years on the back of the six vessel acquisition, thus giving our unit holders increased cash flow visibility. The LNG carrier fleet addition also provides us with incremental contracted revenue from 2024 onwards, when many of our container vessels start coming off charter in what could be a more challenging container market to what we are experiencing today. Overall, our contracted revenue will surge to approximately 1.3 billion, an increase of 177% compared to our existing fleet. On slide 13, you can see a breakdown of our contracted revenue on a per year basis, as well as the contracted revenue contribution from each of our charters. Importantly, with the addition of the six LNGs, we have secured significant contracted revenue of close to 290 million for 2022 and 2023, while contracted revenue remains high at approximately 165 million for 2025, when certain of our container vessels are expected to roll off their charters. We are also pleased that our charter portfolio now consists of seven high-quality charters, having diversified our customer base with the addition of three investment-grade counterparties, namely BP, Chenier, and Engie. Importantly, BP now represents our largest customer and accounts for about 40% of our contracted revenues. Last but not least, and turning to slide 14, we are very pleased that we are able to execute against our plan of reducing the partnership's environmental footprint with the acquisition of these six latest-generation energy-efficient LNG carriers in a very short time. The vessels are already compliant with IMO 2030 requirements, while they provide the lowest environmental footprint in LNG transportation. In terms of carbon dioxide emissions, natural gas as propulsion fuel delivers at least a 23% reduction, while it does not contain sulfur, so there are no sulfur oxide emissions. Low-pressure engines like the XDF engines that drive these six vessels reduce nitrous oxide or NOx emissions by 85%, while particular matter emissions fall by 95% to 100% compared to conventional fuel. Overall, we estimate that the average efficiency ratio, or AER, of these six vessels to be about 23% lower compared to the average of the CPLP fleet, and with the addition of these vessels, our average fleet AER is expected to drop by 8%. Now, turning to slide 16 and the LNG charter market, during the third quarter of 2021, we saw a continuation of the trend that started during the second quarter, with gas majors and energy companies securing shipping and remedium to long-term contracts. The high LNG prices, as well as the relative pricing between different geographical regions, has been increasingly favorable for LNG shipping. With Europe Far East arbitrage being sporadically open during the third quarter, most cargoes float primarily to the European market. As LNG price in the Far East increase, we expect LNG shipping demand to increase further as more cargoes are transported across longer distances. Currently, the one-year charter for 174,000 cubic two-stroke LNG carriers is above $120,000 per day, increasing the spread with the previous generation of TFT vessels to almost 40,000 per day. Coming winter, we expect only a handful of vessels to remain available for spot trading, with charters competing to secure their requirements, which could be further exacerbated by heavy winter. Turning to slide 17 and the LNG period market, 21 modern vessels equipped with two-stroke engines were secured into multi-year charters over the last few months, reducing substantially the number of available modern tonnage for the next year to less than 10 ships. The increased demand for period coverage has led also to an increase in the tender of the charters compared to last year, as well as an increase in the charter rates for long-term business. The LNG fleet order book stands at 127 vessels, or 22% of the current fleet, but with sea building prices now close to $210 million, For 2025 deliveries, we expect only limited ordering and speculation. It is worth noting that out of the 30 new orders placed year-to-date, 25 are against firm long-term commitments. Overall, large new liquefaction projects and new SPAs are continuing to cause new ordering, as for example with Qatar Energy placing the first vessels ordered to Hudong shipyards, while shipyards have now only limited capacity mainly from 2025 onwards. The current new building upward price momentum very much supports our decision to enter the LNG market earlier this summer, as our average acquisition price across all six vessels of less than $204 million compares very favorably with the implied delivery price of a new building, which is currently estimated in the $215 to $220 million range. On slide 19, we review the container market. Momentum remained strong during the third quarter, with charter rates reaching all-time highs across all segments. The limited supply of container tonnage is driving charters' interest for long-term charters and vessel acquisitions at record high levels, as demand remains robust and supply chain issues remain unresolved. During the quarter, we saw vessels of around 4,250 TEU fixing short voyages up to $200,000 per day, while the SCFI index reached a new record level on October 21st. Significant port congestion has continued to cause widespread disruption, while seaborne box trade has remained very strong, supported by pent-up demand, stimulus, and improving global economic conditions. Against the very positive developments in the container market, the container vessel order book has continued to increase, standing at 23%, up from 20% in the previous quarter. Orders continue to come for small to very large vessels, including speculative ordering from Trump owners. On the other hand, as of quarter end, slippage in TU terms decreased to 13%, including cancellations down from 22% in the previous quarter, demolition year-to-date at 15 units of 10,000 TU versus 79 units of 190,000 TU in 2020 and 93 units of 180,000 TU in 2019. Overall, analysts expect container vessel demand to grow by 6.2% and 3.9% in 2021 and 2022 respectively, while supply growth for 2021 is estimated at 4.5% and is expected to decrease to 3.4% in the next year. Turning to slide 21, I would like to remind you that we have obtained, as part of the negotiation for the acquisition of the LNG carriers, a right of first offer from our sponsor, Capital Maritime, on a number of additional vessels, including three 13,000 EU container vessels with delivery at the end of 2022 and early 2023, which have a 10-year charter in place with Hapag-Lloyd, including options, as well as three additional LNG carriers with delivery in 2023. The right of first offer vessels amount to a total market value of approximately €1 billion, thus giving us further growth potential beyond the vessels we have agreed to acquire. Finally, I would like to highlight that over the last few months, we put a lot of effort in funding the acquisition of the optional three LNG vessels without tapping the common equity market, taking into account the valuation dislocation of our equity. We believe that in view of the positive long-term fundamentals of the LNG market and the upward pressure in values and charter rates, it was a unique opportunity to grow in this segment in scale, with great assets and good charters. The successful placement of the bond covered most of the funding gap required, and we intend to fund the rest with cash at hand. This means that in the short term and until the transaction is concluded, we have a limited amount of additional cash we can return to shareholders on top of our existing common unit distribution. However, as this first growth phase for the partnership comes to an end towards the end of the year, with the delivery of all six LNG carriers, our board intends to review again the capital allocation policy before our next quarterly earnings call in January, if not earlier. Given the strong free cash flow generation we expect to have from our combined fleet of containers and LNG carriers, I believe that common unit distribution is due for an upward revision while we endeavor at the same time to balance any increases in the distribution with common unit buybacks and a further growth down the line. And with that, I'm happy to answer any questions you may have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for the automated message advising your line is open. Please state your first, last name and company name before you ask your question. If you wish to cancel your request, please press star 2. Once again, please press star 1 if you wish to ask a question and star 2 to cancel that request. And we will now take our first question. Please go ahead. Your line is open.