Costamare Inc.

Thank you for standing by, ladies and gentlemen, and welcome to the Costomer, Inc. conference call on the fourth quarter 2022 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, Wednesday, February 8th, 2023. 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. 2022 has been a record year for Costa Mare. With a fleet of 107 vessels, including 45 framework ships, the company generated net income of about $520 million. As of the end of the year, liquidity stood at around $970 million. On the container ship side, 2022 was a unique year, with the first half growing up on favorable market conditions with strong demand and logistical disruptions continuing to impact the sector, while during the second half, charter rates and asset prices normalized as a result of reduced cargo demand and the return of capacity previously tied up by congestion. We charted a total of 16 second-hand containers during the year, which added incremental contracted revenues of more than $550 million. Total contracted revenues amount to 3.2 billion, with a weighted average remaining time charge duration of about 4.2 years. We are above 95% covered for 2023, and we have proactively arranged long-term employment on a forward basis for a number of conveniences coming off-charter between 2023 and 2025. At the same time, we are in the process of disposing of some older donors at prices fixed during a tight modern environment. On the dry bulk side, the new dry bulk operating platform previously announced commenced operation during the quarter. With an equity commitment of up to $200 million, our goal is to grow the business on a prudent basis, realizing healthy returns for our shareholders. On the back of our increased liquidity and containers at the cupboards, we are actively pursuing new investment opportunities in the shipping sector that have the potential to provide enhanced returns at acceptable risk levels. Moving now to the slide presentation. On slide three, you can see our annual results. 2022 was the best year since our listing. For the year ended, net income was above $520 million or $4.3 per share, while adjusted net income was around $400 million or $3.3 per share. Our year-end liquidity is up by almost $420 million year-over-year to roughly $970 million. Slide 4. During the previous quarter, we announced the setup of a new venture at the Costa Mare Basque Sting. CBI will charter in and out drywall pressures, enter into COAs and trade FFAs and bankers swaps. Up to now, we have already invested $100 million with a commitment for another $100. Over the last month, we fixed 23 pressures and entered into numerous COAs and FFAs. On slide 5. you can see an update on our financing arrangements which amounted roughly to $560 million without any material increase in leverage. Most of them were coupled with significant improvement of the funding cost and the extension of maturities. Our corporate leverage remains below 35% and we continue to maintain a strong balance sheet. Slide 6. We continue to charter all our drive-by buses in the sport market, charging 37 ships since our last earnings release. On the container side, our revenues days are 96% fixed for 23 and 85% for 24, while our contracted revenues are up to 3.2 billion with a DEU-weighted remaining time charge duration of about four years. Lastly, we fixed 16 containers with incremental contracted revenues of more than half a billion dollars. Slide seven. The container ship charter market has normalized in the second half of the year mostly due to reduced cargo demand and the return of capacity previously tied up by congestion. The dry bulk market has also weakened and the FFA market indicates significant threatening signs, especially from Q2 2023 onwards. Finally, we continue to have a long uninterrupted dividend track record boosted by strong support. On slide eight, our liquidity has increased significantly year over year starting at around $970 million. This liquidity gives us the ability to look for opportunities to grow the company on a healthy basis. Moving to the next slide. Here you can see a snapshot of our fourth quarter 2002 results. We had an average of 115 investments and our adjusted ending of about $75 million, or $0.61 per share. Our adjusted figures take into consideration the following items, the accrued target revenues, accounting gains or losses from massive disposals, impairments, and other non-recurring or non-cash items. On the last two slides, we're discussing the market. Moving to slide 10, box rates have normalized from historically high levels. The latest contingency fixtures that have been concluded have been for shorter periods and are lower rates. The idle capacity has reached 0.6%. On slide 11, you can see the recent dry bulk market rates, where rates have been under pressure. The order book is a 7.5% of the total fleet and new ordering continues to be subdued. With that, we can conclude 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 one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star two. That's star one to ask a question. And your first question comes from the line of Chris Weatherby from Citigroup. Please go ahead.

Yes, hi. Thanks for taking the question. Maybe we could start on the container shipping side. I was curious about your take on discussions with charterers. So I know you have a degree, you know, a strong degree of coverage as we move through 2023. In the instances where you've been having conversations with some of your customers, can you give us a sense of sort of what that dynamic feels like? Obviously, we heard from Maris earlier this morning, and I think broadly speaking, overall box rates have fallen precipitously. So I want to get a sense of how we should be thinking about sort of charter development either over the course of the next couple of quarters or maybe as we think about the next couple of years.

Okay, thanks. Thank you for that, and good morning, Chris. So a couple of things. Look, the softening in the charter market, both in charter rates and box rates, it is something that was expected. At some point, the congestion eased, and we have also seen reduced cargo demand for a lot of reasons, but it's got to be inflation-related, or it may have to be with financial tightening, et cetera. Now, as you said, we are pretty much close to 100% fixed for this year and 85% for the year after. We do have a lot of ships opening and the trend we see is that apart from the fact that other rates have been falling, at the same time, the period of the picture has been shorter and shorter and there are extension options that we see back again for two to three months charter option. Now, I cannot predict how the money will go. All I say that for the time being, we have not seen asset values being softening at the same level, although there is definitely some correlations, but like we haven't seen it yet. So regarding charter coverage, first of all, we feel more than comfortable with the quality and the credit status of our charters. Also, considering the fact that they've been extremely profitable over the last couple of years. And secondly, from our side, you saw how we liquidated. So in case or like when we feel that asset values in the container ship market are going to be at levels which we find interesting, I can tell you that we might be there as a buyer. But for the time being, we pause. We sit and wait.

Okay. Okay. That's helpful. And then I guess I just wanted to come back and ask a little bit about what your thoughts are in terms of deploying capital in the market. What maybe is the most attractive area in your opinion currently? Obviously, you have ample liquidity, as you highlighted on slide eight, so I'm kind of curious where you think the best use of that capital will be. Or does it make sense to kind of sit back a little bit and kind of see how the broader macro plays out?

Yeah, look, part of the answer is what I just mentioned, is that when we see asset values on the container sub-site being correlated to charter age today, and we will look at it again, but this sort of may take some time, both for second-hand and also for new buildings. So this is one area that I guess we're going to be active on. Again, should market prices justify that? The second applies also for the dry bag fleet. So still, we don't think that asset values have reached a level where they have become of interest again. But should this be the case, we will deploy capital, buying ships at prices which will make sense and it's going to position ourselves in a quite opportunistic timing. So it's a SIP acquisitions, both dry bulk and the containers. As you've seen, we have started the dry bulk trading platform where we have allocated up to now 100 million that's gonna go up to 200. This is another area we have been investing. And finally, we're looking at some other which have not materialized yet, so I cannot disclose them for two reasons, both for legal reasons and also because they're not material yet, or sort of they're not concluded yet. But we are working on some other initiatives where we feel that part of our liquidity could be deployed as well. However, if we don't see asset values coming at levels that make sense both in the container ship side and also in the tribal side, simply we will sit back and we're not going to be buying any ships. I have to remind you that we didn't put any new building orders at the high prices we saw in the container ship market over the last couple of years simply because we felt that asset prices were prohibited, even if the charter rates offered were at high levels as well. So we will take our time. We are patient when we feel we should be, and we will wait.

Okay, that's helpful. I guess maybe one final from me before I turn it over. Just in terms of the trading platform, are you going to need to maintain a higher degree of liquidity in the business in terms of capital reserves to be able to manage the risk potentially associated with that? I get kind of curious about how that might influence how you think about liquidity and cash balances.

Yeah, the way we see it now, our equity there is going to be up to 200 million. And that's it. Of course, if the business grows and if you see more potential, I don't think you would be surprised that we can go higher. But what we have today in mind, and let's see how it goes, but what we have today in mind is that those 200 million are going to be more than enough in order to cover our liquidity needs in this business and manage our exposure and our market risk. But as I said, if this thing is something that we feel makes sense and we feel more comfortable with the whole setup and we see potential in that market, the 200 is not a limit. It is just what we feel we should allocate today. we could easily go north of that if it is justified. Okay. Okay.

That's very helpful, caller. Thanks for the time this morning. Appreciate it.

Sure. Thank you. Have a nice day. Thank you.

Next question comes from Omar Nocta with Jefferies. Please go ahead.

Thank you. Hi, Greg. Good afternoon. Thanks for the update. Hi, Omar. I just wanted to follow up maybe on the last discussion about the dry bulk fleet and the trading operation. You've obviously moved very quickly here over the past 18 months, building up the owned asset base. And now you've chartered in those 14 capes and the nine cancer maxes you referred to in the release. And I guess from the maybe the perspective of risk or maybe just duration, how should we think about those stuff? Are these short-term charters? Are they longer term? How should we be thinking about those, how they sit in your portfolio today and for how long?

Yeah, the SIPs are targeted in the trading platform, which is the asset life. They are, first of all, not all of them have been delivered. Most of them will be delivered over the next couple of quarters. But the charter period could be between two to three years. However, most of them are on index. So, strictly speaking, when you have a SHIB charter on index, there is no real exposure because it is on index. You pay what the market is paying. and sort of you get the COA based on market terms. However, having said that, in the future we may have ships with a fixed rate, again for period. It's going to be a combination of both, I guess. But most of those vessels today, to answer your question, they are for a period rating up to three years, and most of them are on sort of an index-based charter rating.

Okay, that's awful. So good to know that they're index based. And then you do have you're saying you have the COAs basically covering them on the other side, where you can capture effectively a spread?

Correct. We have COAs and at the same time, we have started employing FFAs as well, both in order to hedge and also in order to position ourselves. So we've done FFAs, we've done COAs, especially for the versions that are sort of are going to be delivered Now, we have 23 vessels that started in, most of them on index. And for the bank exposure, we will also be doing bank exchange.

Okay, thank you. And then just on the 23 ships that you are about to have in the fleet, is that the right size it needs to be? Or is that maybe a starting point? Is there a certain number, given the liquidity or the capital you're putting in? forth into that operation? What could be the size of that trading fleet?

Yeah, no, this is a starting point, and those ships were committed over the next couple of months, I would say. I think sooner rather than later, we could easily reach the threshold of the 50 ships being operated, and of course, subject to market conditions, we could go to 100 or 250 easily. This is why I said earlier that if we feel it makes sense, the 200 million of total equity commitment could go higher. Because at some stage, you need to have a meaningful size in this business as well. So it will definitely be 50, I guess, sooner rather than later. And in the future, it could also go to 100, 150, or even all of that.

Okay. Thanks. That's very helpful. And maybe just one quick follow-up just on the reference you made to a couple of initiatives you were looking at that you can't comment on. Can we assume that those were maybe outside of dry bulk and containers?

Well, it's going to be in shipping. I cannot comment. You know, whatever I say, if I say it's going to be within dry bulk and containers, I'm giving a partly answer. If I say that it will not the same thing. So, I'm afraid I cannot comment at all. It's going to be shipping related. Of course, it's not going to be aviation. But this is something both for me and for the simple reason that it's not concluded yet. I cannot comment more than that.

Okay. I appreciate it, Greg. I'll turn it over. Sure. Thank you.

As a reminder, to ask a question, you may press star 1 on your telephone. The next question comes from Clement Mullins with Value Investors Edge. Please go ahead.

Good morning. Thank you for taking my questions. You've been clear you want to pursue additional acquisitions if attractive opportunities arise. And given your solid financial position, I was wondering, how do you plan to balance this additional spending with potential shareholder returns, especially considering the significant discount to NAV shares are trading at?

Yeah, it's a question about capital allocation, which comes quite often. And it is a fair question. I cannot rule out share buybacks, and we did in the past. And we also increased the dividend in the past, and we also had one of extra dividend payments. At the same time now, for the time being, however, if we feel that asset values make sense, and as I mentioned earlier, justify further acquisitions either in the containership sector, second-hand or new buildings, or sort of a drive-by process, this is something we would look very, very carefully without excluding share-by-backs, for example. But we follow the market for timely acquisitions should circumstances change.

Big thanks. Thanks for the call. That's all from me. Thank you. Thank you. Thanks a lot.

This concludes today's question and answer session. I would now like to pass the floor to Mr. Zikos for his closing remarks.

Thank you very much for your interest in Costa Mara and for dialing in today. We look forward to speaking with you again during our next quarterly business call. Thank you.

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