Costamare Inc.

Thank you for standing by, ladies and gentlemen, and welcome to the Costa Mary conference call on the fourth quarter 2021 financial results. Pardon me, it's the first quarter. We have with us Mr. Gregory Zico, 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, June 1st, 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 like to pass the call over to your speaker, Mr. Tsikos. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen. We are pleased to announce the results of another profitable quarter. The market rebound that began in the second half of last year has continued, drawing strength from favorable supply and demand dynamics. Strong demand for goods, restocking of inventories, and the balanced container vessel market have all helped the charter market reach levels that we have not seen for a decade. Since the beginning of the year, we have agreed to acquire in total 15 second-hand vessels, and we have taken delivery of our last two new buildings, which have commenced their 10-year charters. Employment already secured for the new acquisitions, together with the new buildings delivered, is expected to provide incremental contracted revenues of more than $830 million. Since our previous quarterly earnings release, we charted out a total of 17 second-hand ships at increasingly high levels of hire. We have a total of 23 ships coming off charter over the next 18 months, which is a favorable position should the current market conditions continue. Finally, on the financing side, we have recently concluded the issuance and listing of the first shipping unsecured bond on the Athens Exchange for 100 million euros. Based on an exceptionally high demand, the bond was priced at the low end of the yield range with a 2.7% coupon for a five-year period. Based on these business developments and our increasing long-term cash flows and liquidity, management is pleased to recommend to the Board of Directors to increase our second quarter 2021 dividend by 15%. Our balance sheet, together with cash flows from operations and liquidity position, provides us with the ability to increase the dividend without any impact on our growth plans. Moving now to the slide presentation. On slide three, you can see a company snapshot. More than 47 years in the shipping industry, uninterrupted dividend payments is going public, strong sponsor support, never had to restructure our debt, smooth debt repayment profile, fully aligned interest, steady management and ownership, and high growth potential with no legacy debt restrictions. On the next slide, slide four, here you can see the resilience of our business model. Steady revenues and net income in a highly volatile shipping environment. On slide five, you can see the highlights. Management will recommend to the board a 15% increase in the quarterly common dividend effect from Q2 2021. Adjusted net income for the quarter is 38 million, and the adjusted TPS, 31 cents. In the previous week, we concluded the issuance of the first unsecured bond on the ATHAS exchange. The ten was five years, and due to the exceptionally high demand, it was priced at the low end of the rate of 2.7 percent. The bond diversifies our farming sources at highly competitive pricing levels. Moving to the next slide. We have been quite active on the SAP market. In total, we have acquired 17 vessels worth north of $760 million. These incremental contracted revenues from the acquisitions amount to approximately $830 million. We have also agreed to sell three of our vessels. Sales are expected to be concluded within 2021. On slide seven, you can see our new financing arrangements in the beginning of the year. In total, we have concluded financing agreements of about $430 million. The new financing commitments amount to $237 million. All VESAs acquired in 2021 have either been financed or have binding commitments for their financing. We do maintain a strong balance sheet with liquidity of about $240 million, book levers of 60%, market value-based levers at around 40%, and no meaningful debt maturities until 2025. On slide 8, we have charted in total 12 vessels in 2021 at higher levels than the previously agreed ones. On top of all, these five second-hand vessels whose delivery is expected to occur within 2021 are our long-term charters. As already mentioned, we have a total of 23 ships coming off charter over the next 18 months, which positions us favorably should current market conditions continue. On the market, the charter market has continued to rise on the back of forced supply and demand fundamentals. Time charter rates have further increased in 2021. The idle fleet remains at levels close to 1%. We have paid our 42nd consecutive quarterly dividend in April. Insiders have been participating in the drip and since inception in 2016 have reinvested north of $100 million. On the next slide, you can see the first quarter 2021 results. During the first quarter of the year, the company generated revenues of 127 million and adjusted NTCAM of 38 million. The first quarter adjusted EPS, as already mentioned, is 31 cents. Our adjusted figures take into consideration the following non-cash items, accrued charter revenues, accounting gains or losses from massive disposals, prepaid lease rentals, and changes in the fair value of equity securities. Moving to the next slide. On slide 11, we are discussing our capital structure. Our leverage is comfortably at around 40%. EBITDA over net interest is at 5.8 times when our cabinets have a minimum requirements of 2.5 times coverage. On slide 12, we are showing the revenue contribution for our fleet. Ninety-six percent of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Costco, Yang Ming, and Hapag Lloyd. Today, we have $3 billion in contracted revenues, and the remaining times are the duration of about 4.2 years. On the last two slides, we're discussing the market. Charter rates have continued to improve. Since the second half of 2020, rates have increased on average by 300%. Box rates have also a positive trend due to favorable supply and demand dynamics. On the last slide, slide 14, the idle fleet is at 1% from a high of 12% the same period one year ago. The order book has risen to circa 18%. It should be noted, however, that it takes close to two years to build a new ship, and new buildings now ordered will be delivered from 2023 onwards. 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 would 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 question, please press star then 2. That's star 1 to ask a question. Our first question today comes from Chris Weatherby with Citigroup. Please go ahead.

Hey, thanks. Good afternoon, guys. Hi, good morning. Hey, maybe I could start on leverage. And I wanted to get a sense of kind of where you are in your comfort zone in terms of, you know, whether it's debt to EBITDA or however you want to look at certain leverage metrics. How much more capacity do you have, do you think, to take on some incremental debt to reinvest and potentially grow the fleet?

Yeah, the leverage today based on the financial governance as agreed with our lenders, and this is leverage based on market values of the vessel, is, as mentioned, below 40%. This is also due to the fact that we have long-term contracts. And the cash flows from those ships are factored in the levers calculation, so we take a charter-inclusive valuation, which is, I think, the right thing to do in container shipping. So based on that, and based that we are at the below 40% levers today, I think we do have a lot of capacity to grow. The thing is that asset values are at very high levels. And we normally don't like buying at the peak of the market, and now charter rates and also asset values are at historically high levels. So this is something to consider. But from a leverage perspective and from a capacity perspective, whether it is cash on balance sheet, access to commercial bank debt, and the ability to lever up, I think we have more than enough capacity. Okay.

Okay. That's helpful. I appreciate that. I mean, maybe just a question about the general sort of fleet development and the order books. You have a helpful slide on our chart on slide 14 that shows that the order book has risen as a percent of the total fleet. I know it takes time to get these shifts, but when do we start worrying about that number? Is that something that we do need to consider as we go out? If we see a significant amount of incremental ordering, what do you think sort of the right number is? And maybe how long could we see this cycle play out if we sort of maintain a more rational approach to adding capacity into the market and new ships into the order book?

Yeah, first of all, the order book today at around 18%, although it's come up. I have to remind you that pro-Lehman, the period 2007-2008, the container ship order book, it was at around 60%. So it may be considered that it's come up significantly from the 9%, 10%, 11% we had last year, However, we do feel that it's still manageable and looking at it from a historical perspective, it's definitely not at the peak levels. Now, as you mentioned, it takes two or like three years to, you know, have a vessel delivered. Most ships that have been ordered or sort of a substantial number of ships that have been ordered, they are on long-term charters. But it remains to be seen what the demand and supply dynamics will be in three years' time. We never forgot the market. This is our principle, and the company is being run based on our task capacity and liquidity. However, I have to say that historically, an 18% order book, I don't think it is at the prohibitive levels, considering what we've seen in the past. And for the next couple of years, we know what the supply will be, the supply that, you know, will come to the market. And definitely the consensus of analysts is that we will have very favorable supply and demand dynamics over the next year or over the next couple of years.

Okay. Last question, really quick. If you put an order into the order book now, when are you receiving your vessel? How long does it take to get one?

It depends on the vessel and on the shipyard, but I think now, most probably, like 2021, the most probable delivery would be 2024. But, I mean, it's not black and white. It's got to do with the shipyard. It's got to do with the characteristics of the vessel. But I would say generally that the deliveries now would be 2024 going forward.

Okay. That's helpful. Thanks for the time. I appreciate it. Thank you.

The next question comes from Ben Nolan with Stiefel. Please go ahead.

Hey, Greg. I have a couple. I wanted to start on the bond.

First of all, congratulations. It's a historic bond. offering, but the rates were fantastic, frankly. And so I wanted to dig in a little bit on that. I was curious if you have any color on how much of how much of it was placed with traditional institutional investors, or were there sort of maybe perhaps some more private capital that was investing in it? I'm really curious if this is something that can be replicated either by you or others, or if you think of this as maybe just sort of available just to you, maybe just in this instance. Yeah.

Sure. First of all, the allocation, it was close to 70% retail investors, and the rest was institutional investors. The bond was 6.6 times oversubscribed. And the initial yield range, it was between 2.7% and 3.1%. And based on the book we had, Obviously, we price at the low end of the range at 2.7%. This is a fully unsecured bond. It's a pretty typical structure for shipping bonds, and it has a five-year maturity. We started with a low value, so 100 million euros, which is 120 million dollars, because it was the first pure shipping bond issued in the Greek market. People were not that familiar with shipping or, you know, more particularly with Costa with container shipping, so we were a bit reluctant and cautious. But finally, I think that the result speaks for itself. However, the main point here is, apart from the low coupon, which is historically low and I think it is extremely competitive however you look at it, is that we have been able to diversify our financing sources. This is definitely something that in the future we can replicate and hopefully at even better terms. Considering that it was fully subscribed within the first 24 hours and we had the book of north of 650 million euros within the three days of marketing. Right. That's helpful.

If I could shift gears a little bit, as I was going through the filings and I recalled as I was reading that you guys had been given some equity as part of the FIM restructuring a number of years ago. And then also they're doing a secondary offering today. I was curious if you guys still have an equity position in that. And I wasn't able to find sort of what that is, but was curious if that is a meaningful number at all.

You talk about Zim, sorry, I couldn't hear you clearly. Yes, I mean, we do have 1.2 million shares, and if you look at our adjustments to the P&L, We have adjusted. Now that ZIM is public, at the end of the first quarter, we had to write a gain, sort of some income in our P&L because of the valuation of those shares. And this is something we sort of have adjusted. And the adjustment was slightly below 26 million. Right.

How do you think about that position longer term?

I don't know. I mean, this value of $26 million, this reflects the stock price as of the end of the first quarter where the stock was trading at around $20. Now the stock is trading double or more than double, so it's come up. But, I mean, we are patient. So we are in no hurry to sell. So we will see what we're going to do with that asset. But as I said, we're patient. We don't need more liquidity now. So, I mean, generally we're not sellers. We will take our time and consider when is the optimal time based on our thoughts to see what we're going to do with that asset. However, in the 31 cents of adjusted EPS, this is stripped out. If we had it there, the adjusted EPS would be much higher. But we thought that it is fair because this is a non-operating item. It is an asset that sits on our balance sheet for some years now. We felt that it is fair to have an adjustment and have a different sense of PPS based on pure operational performance.

Right. Okay. That's helpful. And then lastly for me, obviously, you guys were buying and selling assets even recently, basically doing both, though. And it may – even with the high asset prices, I think you can look at the time charter rates and see that you're generating substantially more than what you're paying for the assets and less than – three years in many cases, and so the math works pretty well on that basis. But I'm curious where you stand right now. Like are you a better buyer or seller or both, or are you getting close to being at a point where you might just be on the sidelines for a little bit, any color there?

Yeah, look, the acquisitions we did, I mean, most of them, or like if not all of them, were concluded during the first months of the year. After that, the asset values and charter rates, they are at sort of extremely high levels. So sort of after that we stopped. Now we are, you know, much more cautious. It would be difficult for us to sort of replicate the same acquisitions we did in January, February, March of 2021 where now asset values are. So now we take our time in that that level of environment in terms of asset values and charter rates, we're going to be much more cautious. So we take our time. We do have a lot of liquidity. We know that we have to invest it generally and generate returns. But where now asset values are, even with very high rates, those deals now, by default, they are becoming more levered, operationally and financially. Also, financially, because we attach the same percentage of leverage, 60%, 70%, whatever that is, it doesn't matter, to a much higher asset value, which we don't like. Now, we're going to take our time and consider and think what is the best way in order to invest our liquidity. based on the charter rates you've seen, and without any new business, liquidity and the cash balance is going to be climbing up every single quarter going forward. So this is something to think about.

All right, perfect. I appreciate the color there, Greg. Okay, thank you.

This concludes our question and answer session. I would now like to turn the conference back over to Mr. Greg Zekos, for any closing remarks.

Thank you very much for being here with us today. We're looking forward to speaking to you again during our next quarterly results. Thank you.

Thank you. This does conclude our conference for today. Thank you for all participating.