Costamare Inc.

Thank you for standing by, ladies and gentlemen, and welcome to the Costa Mare, Inc. conference call on the second quarter 2021 financial results. We have with us Mr. Gregory Zicos, 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 one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today, Wednesday, July 28, 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 statement. And I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. The container market rebound that has begun in the second half of last year has continued into the first half of this year, drawing strength from favorable supply and demand dynamics. Strong consumer demand, low inventory levels, and supply chain constraints have all contributed to record charter rates and longer charter durations. All our contingency charter during the quarter have been fixed at increasingly high levels of height. On the dry bark side, we are pleased to report the acquisition of 21 additional vessels since we first announced our entry into the sector. Our dry bark fleet comprises of 37 vessels in total, between 32,000 and 85,000 deadweight, with an average age of 10 years. Up to now, 14 ships have been delivered, with the rest of the fleet expected to be delivered by year-end. The dry bulk acquisitions result from our decision to invest in this liquid sector, where supply is limited by a low order book and demand is being driven by increased infrastructure spending and commodity consumption. Supported by a contracted revenue of $3.3 billion and an average time-traded duration of more than four years from our contingency fleet, We have 15 containers coming off-charter over the next 18 months and 37 dry-buck versions operating in the spot market, favorably positioning our company should the currently strong market conditions continue. Moving now to the slide presentation. On slide three, you can see the highlights. Net income for the quarter is 82.8 million and the EPS is 67 cents. Adopted net income is 58.3 million, up 84% compared to the second quarter of last year, and adapted EPS is 47 cents, increased 81% relative to the year-ago period. We have decided to expand into the dry bag sector by assigning commitments for 37 dry bag vessels, and we have already accepted delivery of 14 ships. 23 ships are expected to be delivered between now and the end of the year. Moving to the next slide. We have taken delivery of three more container ships during the quarter, and we expect to take delivery of two more vessels between now and the end of the year. Incremental revenues from these vessels are around $200 million. We have also concluded the sale of one vessel and expect the sale of two other ships to be concluded within 2021, with a total estimated capital gain of around $22 million. On slide five, you can see our new financing arrangements since our last earnings release. In total, we have concluded financing of about $650 million, and we have a new financing commitment subject to documentation of $150 million. All our container ship and drive-by passengers that have not yet been delivered have funding in place. We do maintain a strong balance sheet with liquidity of about $600 million, market value-based leverage of 31%, and no meaningful debt maturities until 2025. On slide six, you can see our new chartering arrangements. We have entered into new or extended the charters of seven vessels at much higher levels. On average, the new charters were fixed at the rate of 2.1 times higher with a longer average duration. Our most recent fixtures, the COSCO Guam II and the COSCO Ningbo, were done at $72,700 per day per vessel for three years, more than 2.4 times higher than the current rate. In addition, we have a total of 15 containerships coming off charter over the next 18 months. Moving to the next slide. On slide 7, you can see the chartering of our dry vessels. We have chartered in total seven ships at very healthy rates. On top of this, we have also fixed four vessels whose delivery is expected to be delivered to – is expected to occur within 2021. Slide eight. The contingency charter market has continued to rise on the back of policy supply and demand fundamentals. The island fleet reached 0.7 percent in July, indicating a fully employed market. The drive-out market has also reached levels not seen since 2010. as demand for commodities is surging. We have also paid our 42nd dividend in April, and we will pay our 43rd dividend in the coming August. Slide 9. On this slide, you can see the second quarter 2021 results. The company generated revenues of $167 million and adjustment income of $58 million. Based on the above, the second quarter adjusted EPS is 47 cents, up 81% year-over-year. Our adjusted figures take into consideration the following non-cash items, accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other non-cash charges, as well as changes in the fair value of equity securities. On slide 10, you can see our capital structure. Our leverage is comfortably at about 31% based on current market values. EBITDA over net interest is at 6.2 times when our governance have a minimum requirement of 2.5 times coverage. On slide 11, you can see distribution for our contingency fleet. Our revenue comes from like MERS, MSC, Evergreen, Costco, and Hapagloid. We have 3.3 billion in contracted revenues, and the remaining times are the duration of about 4.3 years. On the next two slides, we discuss the contingency market. Charter rates have significantly improved since Q2 2020 across all vessel sizes. Box rates have increased by approximately 300% on a yearly basis. Slide 13. The idle fleet is at 0.7% from a high of 20% one year ago. The order book has risen to 21% as new ordering has accelerated over the past quarters. It should be noted, however, that it takes close to two years to build a new vessel, and the majority of new building vessels that have been ordered will not be delivered until 2023 onwards. In the last two slides, we discussed the drive-by market. As shown on slide 14, charter aids have significantly improved since Q3 2020. Although asset values have been trending upwards since late 20s, they have lacked the increase in charter aids. On the last slide, you can see that the bounty consumer spending combined with government stimulus has created positive momentum in the seaporn commodities trade. At the same time, the order book for the dry grasses remains at historical low levels, especially for the sizes that we have invested in, and fruit growth is expected to decline over the next several years. 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 request, please press star then 2. That's star 1 to ask a question. And our first question today comes from Chris Weatherby with Citi.

Hey, guys. James on for Chris. First question I wanted to ask was around the bulk fleet and what your ultimate plan for it might be. Is it something where you see customers evolving to having exposure to both markets? Do you see a possible split? And if you do see a possible split, what size or scale would you want to target? Just some color around how you're thinking about that would be great.

Yeah, look, for the dry bulk buses, as you've seen, we have invested – in those 37 vessels up to now. It's mainly smaller vessels up to cancer marks, and this type of asset is something we feel that it does make sense for the future. Now, we cannot predict, and I'm not in a position to predict now whether we're going to continue our purchases in the dry bulk versus. This depends on market conditions. Now, the second part of the question, I mean, what's going to be happening in the future, whether this fleet is going to be split or not, I mean, again, there are a lot of options. Nothing has been decided yet. And we have bought those ships over the last couple of months. Only 14 ships have been delivered. The rest are going to be delivered. The remaining 23 will be delivered until year end. So I think it is a bit premature and there is no decision taken. One thing that I need to add, however, is that we have secured the debt funding for all the dry bag vessels based on facilities we have already in place with European financial institutions. Regarding the delivery of the remaining 23 dry ships, the date has already been in place and it is committed.

Got it. Just as a follow-up to that, how do you actually see yourself balancing the investment between the two? Will you actually be balancing them fairly evenly, or do you actually see sort of more incremental investment going to bulk at this point, just trying to understand sort of like where the incremental capital dollar will go?

Look, I think this is a question of pure capital allocation. We have bought those ships recently because we believe that the economics make sense. but this is a market and in shipping you need to adapt. So I don't know how markets will be over the next quarters or over the next year. All I can tell you is that we are flexible. We can be efficient in executing. We have equity and we also have access to commercial bank debt. So having all those those ingredients in place. I think it's just a question of where we feel that it's better use for our capital. I cannot tell you from now that we're going to be investing so much in this sector and so much in the other sector. It's all subject to market conditions going forward.

Got it. Speaking of markets evolving one way and another. Can you talk about sort of the current discussions you're having with your customers around charter terms? Are you seeing it evolve towards even higher rates? Are you seeing lengths pushed out? Like what are the terms which are sort of most sort of in play and which direction are they going? Any color on that would also be great, and that's it for me.

Yeah. Look, for the conternships, We've seen that if you look at the latest pictures for the sector, you will see that there is a clear trend obviously for higher rates and also for longer periods. If you look at our latest pictures, as an example, I will take the two post-progressives which have been chartered to now a third chartered, a new chartered on a forward basis. And those ships will be getting $72,700 per day per vessel compared to slightly below $31,000 that they were getting or sort of they're getting now. And this is for a three-year charter starting from next year. So charterers are willing to fix for longer periods. also for higher rates, and also on a forward basis, meaning for ships that will be available for delivery Q1, Q2 2022, or even later. This is what we see today. And from our side, in order to optimize our cash flows, we seek to charter for the longest period available at charter rates that make sense. Also, if you look at the latest chartering of our Panamax vessel, this has been chartered for $39,000 per day. This is a classic Panamax, a 2011 build, $39,000 per day for close to five years. So this is what we see today. Now, where the market is going to be in two, three, four quarters, we'll never predict the market. But I can tell you that every time in different market situation, what we're going to be doing. And for the time being, we are fixing for a longer period at the highest possible rate. And also on a forward basis, practically. Thank you. Sure. Thank you. Thanks a lot.

Our next question comes from Jen Nolan with Staples.

Hey, good morning, Greg. So I wanted to just make sure that I have all my numbers right. Can you maybe give how much CapEx is remaining for the dry bulk fleet in the back half of the year based on what you've spent so far for the 37 years?

Yes. Yes, for the 23 vessels to be delivered, for the trifal vessels 23 to be delivered, the debt has already been committed. So our equity CAPEX requirement is going to be in the region of 100 million, 100 to 120 million depending on the leverage. We can go 50, 55% leverage, we'll see. But I think the 100 to 120 million equity capex commitment for the remaining of the dry-bark vessels, this is the right estimate. Now, for the container ship vessels that sort of we have a couple to be delivered, there is no incremental equity capex commitment. So, for the whole fleet, it's only this 120 million, which is going to be covering all the 37 dry-bark ships.

Okay. And that's very helpful. But what's the total, like I'm trying to get a sense of how much you've spent in total for all 37?

Look, we haven't given a total number. But, I mean, if you see that sort of on average, these are 10-year-old ships close to, I would say, 50,000 dead. you can sort of get the picture, I mean, how much it's going to be. But, I mean, we don't give a full number. It's definitely more than half a billion but, I mean, we don't give the exact number.

Okay. That's fine. I mean, we'll see in time, right, with the filings. To that end, though, it sounds like you're still very much in the market to continue to build on that fleet. So 37 is not sort of the terminal number here yet, by any means. Is that a fair assumption?

Look, this is market conditions. So as I mentioned earlier, we cannot predict how the market is going to be over the next quarter. It's also a question of capital allocation. Because, of course, we are looking at but at the same time, we have also been actively looking in the container ship sector. Let's not forget that. And during the last quarters, we also from the beginning of the year, we did acquire a substantial number of container ships and accepted delivery of a substantial number of vessels as well. For instance, I can mention the five, 11,000 We bought the shareholding of York out of those vessels, plus some other acquisitions. So, it's all subject to market conditions. We are flexible. We have the cash. We have equity. As I mentioned, we have access to commercial bank debt. All those things have been fully funded from a debt perspective for those 37 vessels. So, as long as we have that integrity in place and we can be flexible and efficient in executing, I think it's all upside. But I cannot tell you from now how many ships. It depends.

Okay. Now switching gears a little bit over to the container side of the business, obviously you've been pretty busy there. There have been, as you highlighted, a bunch of new vessel orders. really to me is almost shockingly number of new vessels. But, you know, obviously the liners have still been very much in the market to do that and find people to own the ships for them. Where do you stand on that? I mean, are you guys interested in having those conversations or the economics, you know, at all in a place that would get you to be active there?

Do you refer to new buildings or to new buildings? Yes, we look at new buildings and traditionally we have been doing a lot of new building transactions over the last years or even decades. Yes, we look at new buildings but we need to make sure that first of all there's going to be charter coverage in place and the numbers need to make sense from a return perspective. So, of course, there have been a lot of deals. But, I mean, we need to make sure that the returns are such so that the transaction is going to be justified. But, yes, we do look at new buildings like we have always done. If there is something, of course, we will let you know. But it has always been an area of interest. The thing is that the transactions we've seen up to now, I think that the returns that from our side we saw didn't justify sort of entering into those contracts.

Right. And that was really my question is so far relative to, you know, let's say other – other opportunities, the economics on a new building transaction right now or here before haven't been the best use of your capital? Is that sort of how you've looked at it?

Look, we believe in, first of all, we will continue looking at the new buildings. This is for sure. And sort of depending on the deals we see, we will decide whether we proceed or not. At the same time, the drive-by buses we have bought, as you've seen, of course, it is in the spot market, but those ships today, they are getting $25,000, $28,000 per day, and they have a very low break even. So, I mean, we definitely think that these are deals that do make sense from a pure returns perspective. And also, I need to highlight here that We have the dry fleet of the 37 vessels and, you know, we can be opportunistic there based on, like, where we feel the market will be heading. At the same time, let's not forget that we have the buffer of the 3.3 billion of contracted revenues from Costa Mare, from the container ships, with a time charted duration of north of four years. And we have been charting on a forward basis ships at very high rates which definitely provide a buffer and also a downside protection. So the downside protection, it is there. And at the same time, opportunistically, we try to enhance our equity returns also with a drive-by fleet.

Yeah, for sure. All right. Well, one last one. I mean, you talked to sort of the order book on new buildings. starting to creep up but but it doesn't really take effect until 2023 is he but as you do look out to 2023 and the order book being over 20% now is is it getting to a level where you're starting to be a little bit more cautious or think that maybe a correction is possible at some point.

Look, I cannot predict the market now the 20% order book today Of course, compared to the 5% or 7% we had a couple of years ago, it looks a high number. Compared to the 60% order book we had in 2008, it's low. It's all supply and demand. We cannot predict. If it is a new building transactions with a charter cover that we feel makes sense, we will definitely consider them.

Okay.

All right. Thanks, Greg. Thank you. Thanks.

Our next question comes from Omar Nocta with Clarkson.

Thank you. Hi, Greg. Hi, Omar. Good morning. Good morning. Yeah, just wanted to ask maybe a little bit more about the dry bulkers, and I know you've talked about it with the last two questions. But just so you know, you mentioned basically acquisitions going forward are going to be based on market conditions. I guess if we kind of think about conditions as they are today and if they were to stay, is there sort of a critical map that you want to achieve in the dry bulk business? Are you comfortable with 37 being the number? Or have you had internal discussions about a certain target number that you'd like to get to feel like you've got a very good base of operations to work with?

No, we don't have a specific target number. We just look at asset values. If you have a predetermined target, let's say 50, 70, 100 versus whatever that is, then in order to achieve that, at some point you are not going to be looking at the transaction economics. You're going to be just looking at ways to meet your target. So if it's something that makes sense, we might continue. If not, then we don't have to grow. The same thing we did for containers. We did a lot of acquisitions the last quarter of last year and the first couple of quarters of this year, and then we stopped because we felt that from a capital allocation perspective, it made more sense to invest in the dry bulk fleet. But we don't have any predetermined growth rate, neither for the containers nor for the dry bulk, and there is no minimum growth rate target also for the whole fleet, for the whole company.

Okay. No, that's fair, and I understand that. And then what do we think then about the back to the container business? You've sold a handful of older, smaller ships. How should we continue to think about those sub-2000 TE vessels? Are those, do you think, going to be monetized here in this market?

Look, if we – If the ships, especially the smaller ships or the aides, if they continue to be chartered at healthy rates that make sense, we may not dispose of them. It depends. If we feel that the equity released from those disposals is going to be accretive compared to holding on to those assets and continue trading them, We may sell them. It's all, I mean, a question whether the equity released, it's going to provide us with returns higher than sort of keeping the vessel, continue operating the ship at today's levels, and then take a forward view about our residual value at the expiry of the coming charter. This is pretty much it. But again, we're going to be very flexible. We don't need the equity. We don't need the cash. It's just a matter of capital allocation. What we feel is going to be making sense for our shareholders and, you know, eventually for our equity returns. This is the only question. But we don't need to grow or, like, we don't need to sell. As long as we have no restrictions there and, as I mentioned, as long as we can be flexible and opportunistic, we're going to continue the same way.

Okay, got it. And then Greg, finally, just, you know, how do you see the dividend evolving? Obviously, you've got a pretty deep backlog at the moment. And as you mentioned, you've got four years of contract visibility on the container fleet. I know you took the dividend up from 10 cents to 11 and a half. Are you guys having any discussions or just, you know, any thoughts about a further boost from here considering just how much the earnings quality is becoming?

We like dividends since we own close to 60% of the company and this is our main income from shipping. We did raise a dividend some months ago, 15%. Now, as I said, we discussed everything. Now, the dividend, it is a poor decision. I am not authorized, but I think the last dividend increase was was pretty recent. The board, every quarter, it reassesses its dividend policy. We'll see. Let's not forget that we have very recently increased it. We have used our capital for a lot of acquisitions which we do feel make sense. We have been chartering on a forward basis. So, I don't see why the dividend cannot be also increased in the future, but let's not forget that we did increase a couple of months ago. So, I think it is a bit, this discussion today, I think it is a bit premature, at least. Okay.

Thanks, Greg. That's it for me. Thank you. Thanks a lot.

This concludes our question and answer session. I'd like to pass the call back to Mr. Zicos for closing remarks.

Thank you very much for being here with us today. We look forward to speaking again during our next quarter conference call. Thank you very much. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.