Costamare - Q1 2023

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen. Welcome to the Costamare Inc. Conference Call on the first quarter 2023 financial results. We have with us Mr. Gregory Zikos, 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 Q&A session. At which time, if you wish to ask a question, please press star then one on your telephone keypad. Wait for your name to be announced. I must advise you that this conference is being recorded today, Monday, May 15th, 2023. We would like to remind you that this conference contains forward-looking statements. Please take a moment to read slide number two of the presentation, which contains the forward-looking statement. Now I will pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.

Gregory Zikos (CFO)

Thank you. Good morning, ladies and gentlemen. During the first quarter of the year, the company generated net income of $142 million. As of quarter end, liquidity was about $1 billion. In the containership market, charter rates are on a rising trend with high demand across the board, while fixed periods are increasing in duration. The order book, however, remains the principal threat to the market. We have covered nearly 100% of our containership open days for 2023. We have proactively arranged long-term employment on a forward basis for a number of containerships coming off charter between 2023 and 2025, having secured for our fleet contracted revenues of $3.1 billion and a TEU-weighted duration of about four years.

On the dry bulk side, our own dry bulk vessels continue to trade in the spot market, while the trading platform has been growing with a fleet of about 50 ships already fixed under period charters. Having agreed to invest up to $200 million, our goal is to grow the dry bulk operating platform business on a further basis and also realize healthy returns for our shareholders. Finally, during the quarter, we became the leading investor in Neptune Maritime Leasing, a growth-oriented maritime leasing platform, having agreed to invest up to $200 million. Considering current asset values, we do believe that Neptune Leasing investment is a favorable deployment of the company's increased liquidity.

This new venture is synergetic to the existing supporting platform and is expected to further enhance the strong relationships built over the last decades with shipowners and commercial lenders in the ship financing sector. Moving now to the slide presentation. On Slide three, you can see our first quarter results. Net income for the quarter was roughly $142 million or $1.60 per share. Adjusted net income was $46.5 million or $0.38 per share. Our liquidity is up over $400 million YoY to more than $1 billion. Slide four. The first quarter of 2023 was the first full operational quarter of CBI. We have fixed 51 period vessels, with the majority of the fleet being on index-linked chartering agreements. 39 of the period vessels have been already delivered and are running. Slide five.

We have become the leading investor in Neptune Maritime Leasing, having agreed to invest up to $200 million. Neptune is a favorable opportunity for the deployment of the company's excess capital. In this slide, you can also see an update on our financing arrangements, which are amounted to roughly $95 million without any material increase in leverage. Those deals have been coupled with extension of maturities and an improvement of our funding cost. Slide six. We continue to charter all our dry bulk vessels in the spot market, having entered into more than 60 chartering agreements since our last earnings release. On the containership side, our revenues days are essentially 100% fixed for 2023 and 86% fixed for 2024, while our contracted revenues are roughly $3.1 billion with a TEU-weighted remaining duration of 4.1 years.

Turning into slide seven. During the first quarter of 2023, the estimated combined net capital from NCP activity stood at approximately $85 million gain. We sold and have agreed to sell in total two containerships and three dry bulk vessels. Following the conclusion of the transactions with your capital, the company will own 100% of one vessel versus initial combined ownership of 98% on two vessels. Turning to slide eight. The containership charter market has shown an upward trend with high demand across the board while fixed periods are increasing in duration. The dry bulk market remains volatile, while for the remainder of 2023, the FFA market indicates strengthening on the segments where we own vessels. We continue to have a long, uninterrupted dividend track record boosted by strong sponsor support. Slide nine.

Our liquidity has increased significantly YoY, starting at about $1 billion. This liquidity gives us the ability to look for opportunity to grow the company on a healthy basis. Slide 10. Charter rates in the containerships are on a rising trend with high demand across the board. The latest containership fixtures have been for longer periods. The idle capacity is at a level of 1.4%. Slide 11, which is the final slide. Here you can see the recent dry bulk market trends in the spot and forward market. The order book stands at 6.9% of the total fleet. New ordering continues to remain subdued. With that, we can conclude our presentation. We can now take questions. Thank you. Operator, we can take questions now.

Operator (participant)

As a reminder, if you would like to ask a question, please press star then one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star then two. That's star then one to ask a question. Your first question today comes from Chris Wetherbee with Citigroup. Please go ahead.

Chris Wetherbee (Managing Director and Lead Analyst)

Hey. Hey, thanks. Good morning, guys. Wanted to touch base on the leasing activity that you guys have undertaken in the platform there. Maybe you could help us a little bit with sort of how to think about what the revenue profile of this business might look like over the course of the year. Just give us some help with sort of how that might play out in terms of how you want to expand it and what maybe the vessel exposure might look like as you grow through the rest of the year.

Gregory Zikos (CFO)

Yeah, sure. No, this is the right question. Look, this is a leasing platform that was already established with some transactions already in place, although of a smaller scale. We have agreed to invest, of course, subject to deals being done and approved, up to $200 million of our equity gradually, as I said, depending on the deals that we see in the pipeline and which we feel that it makes sense to invest. Now, we have invested, as already mentioned, around $21 million. The goal there is to have a healthy return on our investment. This could be containership, dry bulk vessel tankers, offshore, whatever has to do with shipping.

I mean, we're not confined to container ships, for instance. We would fund through this leasing platform, at levels which we feel it would make sense at levels at which we might as well be an owner of that asset. If it's a 60%, 70%, 80% level, depending on the specific asset. The goal is to have a steady and relatively secure and healthy return on our investment as we move forward. At the same time, if necessary, we have the platform in place. We manage our own 140 investors today, plus, like, we have the trading platform.

The platform is in place for the if we have in the future to have a technical or commercial management of those vessels, although this is not the purpose. The goal initially would be to have a steady and healthy return on our investment in a sector we feel comfortable with.

Chris Wetherbee (Managing Director and Lead Analyst)

Okay. Then just maybe a little bit more help in terms of, you know, how to think about as we're thinking about modeling this business and whether we want to think about on EBITDA or some form of profitability. Are there certain targets that you have that you'd like to be able to hit either on a margin basis or absolute dollars, whether it be this year or maybe on a run rate once you get capital fully deployed?

Gregory Zikos (CFO)

Yeah. I mean, first of all, in order to have the full $200 million deployed, I'm not saying that it's gonna take long, but most probably it's gonna take more than a couple of quarters, right? Until we find the deals, until we negotiate, we agree, we document, and then we sort of draw and deploy the funds. It's not gonna be the next quarter, although it would be growing. The way we look at it, we don't look at it from the terms of like EBITDA or EPS accretion. We look at it in terms of cash-on-cash return. There, we would try to maximize our sort of equity investment cash-on-cash return, which is, you know, according to what the leasing platforms have been yielding.

I cannot give you an exact figure right now. We just started with two transactions. If you assume a healthy returns normally achieved by shipping leasing platforms, I think, you're gonna be close to that. As we progress over the next quarters we have more deals, we can be more specific and also show EBITDA or sort of revenues, EBITDA profitability on a segment basis, also including the leasing business. Is this okay with you?

Chris Wetherbee (Managing Director and Lead Analyst)

Yeah, yeah. No, that's helpful. I appreciate the appreciate the color. Thanks very much.

Operator (participant)

The next question comes from Omar Nokta with Jefferies. Please go ahead.

Omar Nokta (Equity Analyst)

Thank you. Hey, Greg, good afternoon.

Gregory Zikos (CFO)

Hi, Omar.

Omar Nokta (Equity Analyst)

Thanks for the update. Yeah, I just wanted to check in on the dry bulk trading platform. Obviously, you built it up very aggressively to 50+ ships. You've taken delivery, I think you said 39 thus far.

Gregory Zikos (CFO)

Right.

Omar Nokta (Equity Analyst)

How much bigger are you envisioning this getting to in terms of fleet size? You know, do you feel or what risk management protocols do you have in place, you know, given the trading nature of the business?

Gregory Zikos (CFO)

Yeah. A couple of things. First of all, yes, it has grown to, it actually started in 51 vessels, and 39 of those have been delivered. So, considering that this started like some months ago, yes, I would say that this is quite a fast, a fast growth level up to now. But now, it is a business where we do manage from a risk perspective. I think we manage it properly. First of all, we look our liquidity because it is a cash-intensive business. We look on our exposure and then you may have exposure in a couple of angles. First of all, you have exposure on derivatives because you have to utilize FFAs. It is a necessary tool.

You have exposure on ships that you may charter in for a short period at fixed rate. And then you may also have exposure if you do like cargo relays, where like you pay fixed rate and then you charge floating rate. And in general, you don't have a lot of market risk for ships chartered in on index. As you will notice, we mentioned that most of the ships have been chartered in on an index-linked basis, which means that the commercial risk or the market risk there is minimized. We look at our exposure in the physical market. We look at our exposure in the paper market, in the FFAs. We do run sensitivities.

We look at our liquidity today and how this is gonna evolve over the next quarters. At the same time, we look at the operational side of the business. There is also exposure in the bunkers where we, when we take a position in the bunkers, we hedge it, and we have in place bunker hedging lines. It is a business which has a lot of potential. I mean potential not only to grow, but in terms of returns, simply because it is volatile, and it has to be volatile in order to produce those returns.

At the same time, I agree with you that you need to have a tight risk management structure, which is what I think we have put in place up to now.

Omar Nokta (Equity Analyst)

Okay. Thank you. Maybe, you know, it seems that the trading platform is a bit more top-heavy with a lot of Cape exposure, and then your own platform is more, you know, mid-sized dry bulk assets. How are those two businesses related? Are those functioning together? Are they separate? Any kind of synergies that can be realized between both?

Gregory Zikos (CFO)

You're right. I mean, in the trading platform, it's mainly Capesize and Panamax. Normally, you have Capesize there because Capesize are much more volatile by nature. In the trading platform, you need to have some volatility, because this is the nature of, you know, the business. At the same time, if you leak, if you look at the Costamare Inc. dry bulk owned vessels, which are vessels we own 100%, which have been in place prior to starting the trading business, yes, there are Handy Supramax. Our sort of average size there is close to 56,000-57,000 deadweight. Arithmetically, I think it's mainly Handysize, which is a completely different segment.

The dry bulk owned vessel and the trading platform, each one of them is run by different people and by different, you know, management teams. At the same time, of course, there are synergies. Those people talk to each other. We have a full view of the whole market. We have our internal research, which is utilized within the whole company. There are a lot of synergies. However, it's two different teams of people managing each business, and I think this is how it should be. The trading platform has a lot of Capesize, which as a ship owner, we don't own. Initially, we didn't buy Capesize because we didn't like this volatility.

In the trading platform, Capesize have to be there because they are by default, a more volatile asset.

Omar Nokta (Equity Analyst)

Got it. makes sense. I'll turn it over. Thanks, Greg.

Gregory Zikos (CFO)

Okay. Thank you.

Operator (participant)

As a reminder, if you wish to ask a question, please press star then one to enter the question queue. Your next question comes from Ben Nolan with Stifel. Please go ahead.

Benjamin Nolan (Managing Director and Senior Equity Analyst)

Thanks. Hey, Greg. I wanted to, well, touch on both the leasing and the dry bulk platform, but maybe starting with the dry bulk platform. It, you know, it seems like in the near term here, it has been, well, unequivocally, it has been a cost to the company. I mean, your earnings would have been 2x as high had it not been there. The, is it part of the ramp-up process? I know even on a rate basis, it was substantially, you can kind of back into the numbers, would have been substantially lower than market levels. Is this just part of the ramp-up basis? On a go-forward, fully built platform, how should we think about what you expect the profitability of that business to look like?

Gregory Zikos (CFO)

Yeah. It's two things. First of all, the dry bulk platform, the trading platform, CBI, Costamare Bulkers team, where like we have all those charter in vessels, this is practically a startup. We started some months ago. Initially every startup where you have increased liquidity needs, and as you ramp up, as sort of you rightly pointed out, initially you don't expect to have extreme profits, but you build a platform for the future, and of course, you have some set up and startup costs. That's one thing.

Now regarding the dry bulk owned vessels, which I think where you're referring to, in that case, the result was affected because we did a lot of repositioning in the first quarter due to market conditions. This is not something that I think in general, it's something that we would expect to take place in the next quarters as well. Although I can never predict a market, but normally we don't sort of ourselves during the same quarter. Normally this is not something that should be happening over the next quarter, or also something that happened in the quarters before. I would normally treat it as an one-off item, those repositioning costs. Now, in our Adjusted EPS, we didn't adjust for it.

We have treated it from an accounting and like presentation perspective as like something which is not extraordinary. Practically, I wouldn't expect this to be a recurring item over the next quarters. No. Normally because the dry bulk own vessels, they are trading on spot, we follow the spot markets, of course, we try to be as efficient and as profitable as possible.

Benjamin Nolan (Managing Director and Senior Equity Analyst)

Okay. With respect to the leasing platform, I mean, I sort of understand the rationale behind it, but as I think through the capital allocation, you guys haven't been buying back shares, although the share price has been under some pressure here. Can you maybe talk through the capital deployment strategy from a return basis? I mean, would seem to me that the shares would be a pretty compelling investment opportunity, maybe relative to the leasing platform.

Gregory Zikos (CFO)

Yes. Look, it's a couple of things. Regarding capital allocation, this a point that has been discussed internally and will also be discussed internally soon. You see that we have customer balance sheet of, like, close to $1 billion. We definitely have the means to buy back shares. We have a share buyback program in place with $90 million share value still available. At the same time, we could also gradually increase the dividend on a quarterly basis or even have an one-off big dividend payment or both. This is something that the dividend policy, which is part of the capital allocation, it is being discussed internally.

We still have the ability to do it irrespective of the trading platform and also of the capital assigned to the leasing business. The leasing business is up to $200 million gradually over, you know, the following quarters. They do provide, or they are expected to provide, and this is our goal, to have a healthy return, which in shipping, compared to other sectors can be quite competitive. That's our goal. The one does not exclude the other. It's not that our capital allocation ability to pay more dividends or to buy back shares is in any way restricted by either the leasing business or Costamare Bulk Shipping. I want to make this clear. We just feel that we normally deploy our capital in either buying ships.

Container ships now are too expensive still. We didn't put any new building orders because we felt the market was too high. The same applies for the dry bulk second-hand ships today. It's not at levels that we feel it would be interesting for us. Costamare Bulk Shipping and Neptune Maritime Leasing, these are alternative methods of to deploy capital, which we think it's gonna be on an accretive basis. Buyback shares and dividend increases potentially, it's something that it is discussed separately, and we are discussing this at the board level. The one does not exclude the other.

Benjamin Nolan (Managing Director and Senior Equity Analyst)

Okay. All right. I appreciate it. Thanks, Greg.

Gregory Zikos (CFO)

Okay, thank you.

Operator (participant)

This concludes our Q&A session. I would like to turn the conference back over to Mr. Zikos for any closing remarks.

Gregory Zikos (CFO)

Thank you very much for dialing in today and for your interest in Costamare Inc. We look forward to speaking to you again during our next quarterly results call. Thank you.

Operator (participant)

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