Costamare Inc.

Thank you for standing by, ladies and gentlemen, and welcome to the Costa Mare Inc. conference call on the fourth quarter 2020 financial results. We have with us Mr. Gregory Zekos, Chief Financial Officer of the company. At this time, all participants are in a 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, please press star then 1 on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday, February 2nd, 2021. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read slide number two of the presentation, which contains the forward-looking statements. And I will now pass the floor to your speaker today, Mr. Zekos. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. During the fourth quarter, the company continued its profitability. On the back of a rising market, we charted a total of 22,000 investors during the quarter for periods of up to 10 years, substantially enhancing both our contracted revenues and charter coverage. The new charters contribute north of $440 million in incremental revenues and have a weighted average duration of about five years. On the market, the idle contingency fleet continued to shrink and now stands at about 1%. Supported by healthy demand and the chronic shortage of vessels, charter rates have been on the rise. We have 10 ships coming off charter over the next six months, which positions favorably should current market dynamics persist. With liquidity of above $200 million, a streamlined debt repayment schedule and minimal capex commitments, We are well positioned for a healthy expansion in a volatile market environment. Turning now to the slide presentation. On slide three, you can see a company snapshot. More than 46 years in the shipping industry. Uninterrupted dividend payments since going public. Strong sponsor support. Never had to restructure our debt. A smooth debt repayment profile. Fully aligned interests. No related party acquisitions. Steady management and ownership. and high growth potential with no legacy debt restrictions. Moving to the next slide, here you can see the resilience of our business model, steady revenues and income in a highly volatile shipping environment. On slide five you can see the highlights. Adjusted net income for the quarter is $32.5 million and the adjusted EPS is 27 cents. Our adjusted net income for 2020 is $124 million and the EPS is $1.02. We do maintain a strong balance sheet with liquidity of about $210 million, book leverage of 55%, market value-based leverage of 37%, and no meaningful debt maturities until 2024. Moving to the next slide, we have charted in total 20 vessels during the quarter. The new charters represent an increase of $440 million in contracted revenues and have a weighted average duration of about five years. As you can see, we have chartered four ships on a forward basis for a 10-year period at a rate of $33,000 per day per vessel and a 1996-built vessel for two years at a rate of $31,000. Slide 7. The charter market has continued to rise on the back of positive supply and demand fundamentals. Time charter rates increased substantially over the last six months. The idle fleet is 1%. and the order book stands at 10% of the existing fleet, which is a historically low number. As part of our fleet renewal program, we continue the sale of all the tonnage. Over the past quarter, we sold a 21-year-old container ship and have bought three younger vessels. The two 2004-built 7,000 TU ships are expected to be delivered this month, and upon delivery will be chartered to a leading liner company for a period of two years. Slide eight. We will pay our 41st consecutive quarterly dividend in February. Insiders have been participating in the DRIP instituted in June 2016, and these exceptions have reinvested in total $95 million. Slide 9. During the fourth quarter, the company generated revenues of $119 million and adjusted net income of $33 million. Based on the above, the fourth quarter adjusted TPS is $0.27. The adjusted figures take into consideration the following non-cast items, accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals, and other non-cast charges. On slide 10, you can see a summary of our capital structure. Our leverage is comfortably below 40%. Net debt to 12-month trailing EBITDA is 3.4 times, and EBITDA over net interest expense is at 5.1 times, when our companies have a minimum requirement of about 2.5 times coverage. On slide 11, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from first-class charters like Maersk, MSC, Evergreen, Costco, Yang Ming, and Hapagloid. We have today 2.4 billion in contracted revenues, and the remaining times are the duration of about 4.4 years. On the last two slides, we're discussing the market. As already mentioned, charter rates have significantly improved, especially in the second half of 2020. Box rates have increased by more than 170% on a yearly basis. Slide 13. The idle fleet has been reduced to 1% from a high of 11.6% in May 2020. The order book stands at 10%. As mentioned, we are well positioned to capitalize on opportunities in this market environment. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

Thank you. As a reminder, if you'd like to ask a question, please press star then 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star then 2. Press star then 1 to ask a question. And your first question comes from the line of Chris Weatherby with Citi. Please go ahead.

Hi, this is Liam on for Chris. Thank you for taking my question. So first I just wanted to ask a little bit about your charter strategy. So it seems that most of the vessels you rechartered during the quarter were for about one to three-year periods, but there were also four vessels that were put away on 10-year charters. So I just wanted to ask a little bit, get a sense from you guys on what your appetite is for longer-term charters and and if you're going to be focusing on those as opposed to more of the shorter-term charters that have been kind of making up a little bit, a decent size of your book lately.

Yeah. First of all, it also has got to do with the time charter rate. But in today's environment and considering where the rates are, I think from a shipowner's perspective, it would make sense to lock in contracted revenues especially for first-class and vulnerable charterers for a longer period as opposed to chartering a ship for one year. For instance, as you can see, we chartered the three 9,500 EU vessels for a period of three years at around 40,000 per day. We could go for a shorter period, but we felt that the 40,000 for the three-year period for those vessels would make sense. Also, now specifically for those four 11,000 EU ships, these are 2016 and 2017 still. So the 10-year charter, which is on a forward basis, so the vessels will be delivered to the new charterer close to mid of 2021, so you have a time charter coverage until mid of 2031. The 33,000 for those is for a 10-year period. I think it is something that, you know, makes sense. So the long story short, in today's market, of course, assuming that the charter rates offered by the charters will make sense, which in most cases do, we would also go for a longer period and have incremental contracted revenues rather than go for a shorter period even if the charter could be marginally higher.

Got it. So just also so I understand, on the 10-year charters, because I did see that the rates are obviously a little bit lower than what they were previously contracted at. And is that kind of just because you're playing the market a little bit because you have to – like they're not going to be delivered until 2021, and then you guys want to just kind of lock it in at a fairly high rate, even if it's a little bit lower than what your previous rate was?

Yeah, the previous rate – It was in the region of 40,000 plus, but it was for a year and a half. At this point in time, a year or a year and a half ago, we decided that there was no disavailability of the five or ten-year charters. We decided to go for a shorter period at the highest rate available. Now that the market fundamentals are such so that you can find ten-year charters for those vessels, we decided to go longer. for 10 years at $33,000 per day. When those ships were fixed in the past, a year and a half ago, the market was not there for a five or for a 10-year charter. Market fundamentals have improved, especially after the second half of 2020.

Got it. And just one additional question. So I know your leverage ratios have gone a little bit lower on a historical basis. So I just wanted to ask a little bit about your priorities in terms of your capital allocation and how you might leverage your balance sheet. So when you guys think about that, what would your plans be or thoughts be around more aggressively pursuing secondhand vessel acquisitions or maybe even new builds and then how you kind of compare that to Your thoughts about maybe raising the dividend or any other sort of capital allocation priorities?

Yeah. The leverage we have today on a book basis, leaving aside adjustments and market-based valuations, is 55%. If we take the market-adjusted value of the assets on a charter-inclusive basis, as per broker valuations, we have to for our financial covenants, the leverage goes down to 37%. So I think that no one would disagree that this is a low leverage level. On top of that, we have a cash of close to 210 million and a very streamlined debt repayment schedule with no meaningful maturities up until 2024. So starting from that basis and to an allocation question, I think that generally we have been active. We are looking both for secondhand vessels with or without charter, younger or older vessels. We don't have a problem with older vessels as long as the returns justify the acquisitions and as long as the fiscal condition of the vessel justifies this as well, or also new buildings. Now, the dividend, and this is a question we have been receiving quite often. I think that the dividend, I mean, first of all, we own close to 65% of the company, so you have fully aligned interest between the sponsors and the rest of the shareholders. We like dividends. Our goal would be to raise the dividend. However, we wouldn't have it. First of all, the dividend we have today, it is definitely sustainable. And secondly, increased dividends should come with increased contracted cash flows going forward, coming from like credit-worthy charters. So we are not against the dividends, but it's a matter of deciding whether we're going to be seeing any new incremental transactions coming in, and what's going to be the chartering in the next couple of quarters, and whether we're going to be able to secure similar long-term charters.

All right, great. Thank you very much for taking my questions.

Thank you. Hey, the next question today comes from Ben Nolan. It's people. Please go ahead.

Hey, good morning, Greg. I've got a handful of them here. One just for record-keeping purposes, modeling purposes. Last quarter you talked about the acquisition of a 5,600-year TU container ship 2006. I didn't see it anywhere in the fleet list. Could you just update me on the status of that?

Yeah, this is a vessel that has been bought and that will be delivered over the next month. So either upon its delivery or the latest, I hope, during the next quarterly result, it should appear on our fleet list. You're right, this 5,600 TU vessel, 2006 built, it has been bought. It is a matter of the delivery taking place within Q1 of this year.

Okay, perfect. That's helpful. And then with respect to the two 6,500 TU ships that you acquired, any color on the price? Or maybe a better question is, you have a handful of, new vessel deliveries coming? How much capex is collectively on the schedule for, you know, over the next six months or, you know, for 2020 effectively?

Yeah, those vessels, the vessels that we're going to be buying, we're going to lever them. So, I mean, and sort of assuming that a leverage between 60% to 70%, not higher than that, I think the sort of equity that will be required, it's going to be minimal. You talk about some millions of dollars, nothing special. And plus the new buildings that we still have to accept delivery of, the 2,000 to 3,000 to Yang Ming that will be delivered within the first half of this year. The CAPEX commitment there, I mean, our sort of equity commitment, because these are fully funded, it should be in the region of 12 million or so, 12 to 13 million. So in total, together with the second hardships, I think we wouldn't be north of like 25, 30 million max.

Okay. That's helpful. Right.

And then... Yes.

Yeah, and then including the debt gets you to sort of what the all-in CapEx is. And lastly, sort of circling back to a question that you talked a little bit about, you know, the possibility of acquiring ships and looking at secondhand ships, and obviously you've done a few of those in the last quarter, but asset prices have really come up a lot, as you would expect with longer contracts and higher charter rates. At what point do you start to, you know, prefer to simply bank the cash as opposed to, you know, potentially taking an increased level of residual risk with asset values if the market should soften at some point in the next couple of years?

Yeah, normally when we buy a business, it's a go-hand shape. we have a pretty good understanding of its chartering arrangements. And considering that today, for a second-hand ship, you can get a two or three or four or five-year charter commitment, we would buy them on the back of a commitment for a minimum period so that we would make sure that today's acquisition price combined with the charter commitment for a minimum fixed rate, would make sense. Otherwise, buying something at a price which you can argue that it's high or it's higher than compared to what it used to be a year ago, without a good understanding of the chartering arrangements that you can put in place, this is something we wouldn't do. So whatever we buy, we have a pretty good understanding of how much we can charter it and for how long. And we make sure that we feel comfortable with the residual value risk for this second-hand vessel acquisition.

Right. Well, and maybe the inverse of that question is, you know, obviously quite a number of the big miners have been actually buying ships themselves as opposed to locking in charter commitments and paying – premium values for those ships. Are you in the market to potentially sort of sell maybe some of your assets in order to take advantage of the higher prices and further strengthen the balance sheet and position yourself to be counter-cyclical acquirers of assets possibly?

Yeah, we sold one vessel this quarter. I think it's the Halifax Express.

This is something we mentioned earlier. in the press release. So we are doing this as well. And of course in the future we may decide to dispose of more vessels. And as you may recall from the press releases of the previous years, we normally don't sell a lot of ships. We normally tend to buy them and hoard them and manage them for a period. But this ship, because of market conditions, we decided to sell it and the equity released to be put in other vessels. So, I mean, we would definitely consider selling additional ships. It would take the view that the cash received can be accretive or more accretive in other acquisitions or if it could be used in order to renew the fleet, yes.

Okay, perfect. And then last for me, as you mentioned, obviously cash flow is a lot better. Some of those preferreds are callable. I suspect that that's still a pretty valuable part of your capital structure. But any thoughts about potentially calling back any of the preferreds?

Yeah, we did buy some preferreds. I mean, the most we could last year when the preferreds were trading at much below par. Due to a lot of legal restrictions, we couldn't buy more than what we did. I know that these preferreds, they have a yield which is on the high side. We pay for that because these are truly preferred instruments with no step-up options and truly perpetual. This is something to consider as well regarding... our capital allocation. It could be the preferred or most probably it could be acquisitions. If we don't find any, then of course it is the preferred, it's the dividends, it's buybacks. It's a lot of things that we can do, but the preferred is definitely one of the options. I have to say, however, that all these are board decisions. and these are not the issues that have been, I mean, the dividend raising or the preferred by package is not something that was discussed in the latest board meeting, but generally these are thoughts that have to do with how we use our cash going forward in order we don't find any new transactions. But today I would say As you can see from our press release, we are generally active, and we think that the transactions we do together with the time charters we attach to those vessels do make sense.

Okay. All right, perfect. I appreciate it. Thanks, Ray.

And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press stars and one. We'll pause momentarily and assemble our roster. And ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to Mr. Zico for any final remarks.

Thank you for dialing in today and for your interest in Costa Mare. We are looking forward to speaking with you again at our next quarterly results call. Thank you.

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