Thank you for standing by, and welcome to the Capital Product Partners First Quarter 2022 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive 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 one on your telephone keypad and wait for the automated message advising your line is open. I must advise you that this conference is being recorded today.
The statements in today's conference call that are not historical facts, including our expectation regarding cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectation or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation, as well as our expectations regarding market fundamentals and the employment of our vessels, including their delivery date, dates, and charter rates, may be forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated.
Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand you over to your speaker today. Mr. Kalogiratos, please go ahead, sir.
Thank you, Sandra, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. The partnership's net income for the first quarter of 2022 was $25.1 million, compared with a net income of $10.9 million for the first quarter of 2021. Our board of directors has declared a cash distribution of $0.15 per common unit for the first quarter of 2022. The first quarter cash distribution will be paid on May 12 to common unit holders of record on May 6. The partnership's operating surplus for the first quarter was $44.6 million, or $13.5 million after the quarterly allocation to the capital reserve.
We recommenced acquiring units under our unit buyback program on February 14th . For the quarter, we repurchased 89,345 of the partnership's common units at an average cost of $15.67 per unit. As of yesterday, and since the inception of our unit buyback program, we have acquired a total of 508,505 units at an average unit price of $12.78. Finally, the partnership's charter coverage for 2022 and for 2023 stands at 95% and 92% respectively, with the remaining charter duration corresponding to 4.7 years. Now turning to slide three. Revenues for the quarter were $73.4 million compared to $38.1 million during the first quarter of 2021.
The increase was primarily attributable to the net increase in the average number of vessels in our fleet by 38%. Following the acquisition of three Panamax containers in February 2021 and the acquisition of six LNG carriers during the second half of 2021, partly set off by the sale of the 2 9,000 TEU container vessels in 2021. Total expenses for the quarter were $40.2 million, compared to $24.2 million in the first quarter of 2021. Total vessel operating expenses during the quarter amounted to $16.7 million, compared to $9.2 million during the first quarter of last year. The increase in vessel operating expenses was mainly due to the net increase in the average size of our fleet.
Total expenses for the first quarter of 2022 also include vessel depreciation and amortization of $18.4 million, compared to $11.1 million in the first quarter of last year. The increase in depreciation and amortization was again mainly attributable to the net increase in the average size of our fleet. General administrative expenses for the quarter amounted to $1.5 million, compared to $1.7 million in the first quarter of 2021. Interest expense and finance costs increased to $10.3 million from $3.4 million in the first quarter of 2021 due to the increase in the partnership's total outstanding indebtedness.
The partnerships recorded a net income of $25.1 million for the quarter, compared with a net income of $10.9 million for the first quarter of last year, representing an increase of 130%. On slide four, you can see the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure which is defined fully in our press release. We have generated approximately $44.6 billion in cash from operations for the quarter before accounting for the capital reserve. We allocated $31.1 million to the capital reserve in line with the previous quarter. After adjusting for the capital reserve, the adjusted operating surplus amounted to $13.5 million. On slide five, you can see the details of our balance sheet.
As of the end of the first quarter, the partners capital amounted to $546 million, an increase of $21 million compared to $525 million as of the end of last year. The increase reflects net income for the quarter and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in the total amount of $3 million, and the repurchase of the partnership's common units for an aggregate amount of $1.4 million. Total debt decreased by $26 million to $1.29 billion, compared to $1.32 billion as of year-end 2021.
The decrease is attributable to the scheduled principal payments during the period of $22.5 million, and a decrease by $3.5 million of the euro-denominated balance of the bonds translated into U.S. dollars as of quarter end. Total cash as of the end of the quarter amounted to $49.6 million, including restricted cash of $10.6 million, which represents the minimum liquidity requirement under our financing arrangements. The next slide six, provides an overview of the solid financial performance of the partnership during the quarter compared to the same period last year, with major financial metrics including revenue, EBITDA, and operating surplus having increased between 80%-105%.
The strong year-over-year growth is predominantly the result of the full impact of the partnership's financials of the six LNG acquisitions, which was completed in the fourth quarter of 2021. The six LNG carriers generated revenue of $37.6 million during the quarter, which represents just above 50% of the partnership's total revenue for the three-month period. It is also worth highlighting that this growth is not market driven, but mainly a result of the expansion of our asset base with vessels that have long-term charters in place, thus ensuring that our improved financial performance is sustainable in the long run. Moving to slide seven. The partnership's remaining charter duration amounts to approximately 4.7 years, while charter coverage remains high throughout the next four years, thus providing our unitholders with increased cash flow visibility. Turning to slide eight and the LNG charter market.
During the first quarter of 2022, we experienced a weaker spot market due to the low ton mile demand caused by the shift in gas pricing dynamics and the greater share of LNG cargo heading to Europe. Europe has imported significantly more LNG in the first quarter of 2022 compared to the previous years. This is mainly sourced from the U.S., and as a percentage of total U.S. volumes, Europe's share has more than doubled since last year. In total, EU imports are expected to increase by 25% by the end of the year and reach 97 million tons per annum.
European efforts to diversify away from Russian pipeline gas will continue to shape the global LNG markets, with a large share of U.S. LNG expected to flow to Europe rather than Asia, while the LNG liquefaction project FID environment appears more positive in the coming years than previously anticipated. Overall, demand fundamentals for LNG shipping remains robust as the expectations for global LNG trade have increased and volumes are projected to grow by 6.6% in 2022. In addition, the Russian-Ukraine war is expected to generate demand for LNG trade and investment in the wider sector in both the short and the long term, as EU is planning to reduce its dependency on Russian gas.
As a result of the improved market fundamentals and the need for energy security, which partly passes through LNG seaborne transportation, the period charter market has improved significantly with numerous charterers coming to the market to secure both prompt as well as forward tonnages and increasing levels, with five-year time charter deals being negotiated for delivery into 2023, 2024 in the $85,000-$95,000 per day region for a two-stroke vessel. The LNG fleet order book stands at 33% of the current fleet, with 37 new orders placed during the quarter, utilizing almost all available shipyard slots up to 2026.
As a result of increased demand, the increased competition from other sectors, as well as inflationary pressures in raw materials and equipment, yards are continuing to increase prices, with the latest newbuilding prices in Korean shipyards exceeding $225 million per vessel for a basic specification two-stroke ship. LNG commodity prices have remained high since the start of the year and have shown considerable volatility due to persistent uncertainty in the European gas markets. As we have previously discussed, the increased LNG commodity prices and the preference for large cargo sizes, as the LNG export market continues to expand, increasingly favors latest generation two-stroke LNG carriers, such as the vessels owned by CPLP. On slide nine, we review the container market.
The containership charter market continued to climb to new highs in the first quarter of 2022, with charter rates reaching successive records and freight rates remaining close to all-time highs. The Clarksons Charter Rate Index reached an all-time high in March with a three-year time charter rate for a Neo-Wide Beam 9,000 TEU container, like the Akadimos, standing at approximately $95,000 per day for a prompt vessel. The Akadimos is expected to come off its present charter by April 2023. In the box rate market, spot rates remained firm as the continuation of exceptional market conditions has reflected two key factors, strong box demand and severe COVID-19 related logistical disruption, including port congestion, which has significantly reduced available capacity and driven major upside to the market.
Against this positive background, the supply of post-Panamax tonnages for 2022 dates has become thin, with a delivery window moving towards 2023. At the same time, period fixtures for classic Panamax units were being concluded with laycans into the fourth quarter of 2022 and starting to stretch into the first quarter of 2023. It should be noted, however, that the freight and charter markets have been softer over the last few weeks, partly as a result of the staggered Easter holidays, but also due to the impact of the lockdown to China on factory output and port operations, as well as economic uncertainty stemming from the Russia-Ukraine war and the inflationary backdrop. In view of these developments, charter rates in some sizes have eased as of late, although they remain at exceptionally high levels.
Charter discussions continue to center around the situation in China and when restrictions may be lifted as it seems that there is significant amount of pent-up cargo already waiting to be processed by Chinese ports, while a return to full-scale production should support volumes going forward. The newbuilding market remained very active during the quarter, but contracting of new vessels was slightly lower compared to the first quarter of 2021. The order book has increased to 26.5% of the total fleet. Concurrently, no vessels were scrapped in the first three months of 2022, which comes as no surprise given the exceptional market conditions.
As a result, fleet growth is expected at 3.5% in 2022, accelerating to 8.2% in 2023, while global container growth is expected to increase by 3% this year and 2.6% next year. As a final remark, the IMF has cut its global growth forecast for 2022, down to 3.6% from 4.4% published in January. In view of the conflict in Ukraine, a global economic slowdown could adversely affect the container market. Overall, however, the outlook for the container sector remains positive in the short to medium term, with logistical disruption likely to continue to provide support throughout the end of the year.
Further ahead, an easing of the market conditions looks likely once congestion eventually starts to unwind, while an increase in the pace of fleet growth is expected to exert material supply pressure in 2023 and 2024. Turning to slide 10. As previously discussed and following the acquisition of the six LNGs, we are now targeting a number of additional drop-downs. In the short term, our primary focus will be the vessels on which we have a right of first offer. This includes three 13,000 TEU container vessels with delivery from the third quarter of 2022 onwards until May 2023, which have a 10-year firm time charter in place to Hapag-Lloyd, as well as three additional LNG carriers with delivery in 2023.
The Asterix I is the first LNG carrier to be delivered and has secured time charter employment for a minimum of five years at a highly attractive rate. In addition to the above vessels, Capital Maritime has contracted three additional LNG carriers at Hyundai, with delivery set for 2024. As the additional LNG vessels find deployment and subject to our ability to acquire these vessels, CPLP can potentially become one of the very few companies that control a fleet of up to 12 latest generation two-stroke LNG carriers with a unique portfolio of charters. As explained earlier, we anticipate that two-stroke LNG carriers, like the vessels we already own and these potential drop-down candidates, will benefit greatly from the LNG market fundamentals ahead.
The total market value of the six LNG carriers and the three 13,000 TEU containers is approximately $1.7 billion, thus giving us a strong growth pipeline for 2022 and beyond. As we continue to grow the partnership's asset base and the distributable cash flow, we will also seek to increase the amount we pay out to unitholders in the form of common unit distributions and unit buybacks, thus executing our stated strategy of continuing to grow the partnership's asset base and at the same time returning capital to our unitholders. With that, I'm happy to answer any questions you may have.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for the automated message advising your line is open. Please state your first and last name and company name before you ask your question. If you wish to cancel your request, please press star two. We will now take our first question. Please go ahead. Your line is open.
Liam Burke, B. Riley. Hey, Jerry, how are you?
Hi, Liam. I'm well. How are you?
Good, thank you. You've got some very attractive drop-down opportunities here, the end of 2022 and then early 2023. Obviously, there's the loan-to-value that you have in your head. How do you plan on funding the equity portion of it?
That's, I think, a great question. The focus right now is really on the four vessels that come first. That is the 3 13,000 TEU as we discussed and the LNG carrier which has time charter in place. In broad terms, assuming, let's say, for ease of reference, $60 million of EBITDA and a multiple of 10x, that would imply an equity requirement of somewhere between $100 million to $140 million to $160 million. I think we have this number in mind, and this is not set in stone, but just, you know, just to be able to navigate through this question.
I think we will have a number of levers at our disposal. In the first place, I think as demonstrated by this quarter, the free cash flow of the partnership is quite strong, and it will remain strong as everything is fixed out on charters. There is additional liquidity that we can source by refinancing certain of our credit facilities that have ample room in view of the relatively small debt balance outstanding. Finally, we will continue to look for attractive capital, external capital, be it in the preferred equity or fixed income market, like for example, we did with the Greek bond. Of course, markets are much more challenging at this point, but I think we will definitely look as to what we can tap. Just to make this a little more tangible. If you look at the cash balance as of quarter end, it's around $50 million.
Right.
Operating surplus, after reserve, which is, let's say a proxy for free cash flow was $13.5 million. In the reserve, there is a non-cash item, which is the reserve that we make for the bond of about $8.5 million. If you want the more accurate proxy for free cash flow, it would be around $22 million per quarter. Annualized, that's about, you know, $88 million. If you add to the current cash balance of $50 million, three quarters of the same free cash flow generation or proxy for free cash flow generation, that would imply that by the end of 2022 we have $115 million.
You know, if the equity required is about 150, we are almost there. You should also think that, under one of our facilities, the HSBC facility, which finances a number of our containers, the LTV currently is at 12%, with about $98 million outstanding. Raising an extra $25 million-$50 million across, let's say, the container fleet would have been very easy. In addition to that, of course, something I didn't mention before is that you can potentially sell older ships like some of the older container ships or the Cape Agamemnon we have discussed.
In reality, I think given the strong cash flow generation and the very low leverage that we have in certain of our facilities, getting to the equity required for let's say these four drop downs should not be a threat. Should be quite easy without even accessing external capital.
It sounds like you have that surrounded. In terms of asset, just staying with the drop downs, are you particularly, I mean, do you prefer LNG to container or is it more the shorter duration and structure?
I think cash flow is very important to us and visibility. For example, the 313,000 new containers with the ten-year charters, they may very much fit our business model. On the other hand, we are, as you know, quite sensitive to market developments and what we perceive to be residual risk at the end of the charter. Would we buy containers at current valuations? Probably not, because they are quite inflated values going around. Buying containers with average or below cycle valuations with a ten-year charter attached, that I think does make sense. We like the cash flow.
LNG is obviously we like a lot and, I think over the last few months, the world likes also, a lot, maybe for the wrong reasons because of the unfortunate developments in Ukraine. We want to be expanding there as well, but always with the same conservative business model that is with taking some charter coverage as we expand. Cash flows are important to us, but we do have an eye on market risk and residual market risk.
Great. Thank you, Jerry.
Thank you, Liam.
Thank you. We will now take our next question. Please go ahead. Your line is open.
Chris Robertson.
Hi, Chris.
Hey, Jerry. How are you?
I'm very well. Thank you.
Thanks for taking my question.
Sure.
Good. I guess just springboarding off of Liam's question. As it relates to the distribution and ongoing unit repurchases, would it be fair to say that the priority for the free cash at this point is probably related to these growth opportunities on the drop downs?
I think as we complete more drop downs and we increase our distributable cash flow, you should also expect that we will continue to increase the capital return to unit holders, that is through unit buybacks and quarterly distributions. I think overall, you know, as a guidance and of course that is subject to the final decisions of the board, we intend to return to our unit holders about a fifth to a quarter of our free cash flow in the form of quarterly distributions and unit buybacks. I think that means that, you know, we increase our distributable cash flow. You should expect also the capital return unit holders to increase incrementally.
I think this is our way of balancing solid total returns for our long-term unit holders and growing our fleet while of course continuing to ensure long-term viability and cash flow generating capacity for the partnership. Hopefully we can achieve both.
Okay, that's fair. Thanks for that. As it relates to the Cape Agamemnon, when is the next special survey for that vessel? And is it IMO ready, for 2023 and beyond? Or is there any incremental CapEx that would be required to get it up to speed?
She must be 2025 due for her next special survey. Do you mean in terms of EEXI? Whether she will-
Yes.
require an additional CapEx? We anticipate some incremental CapEx, but not something material. I don't necessarily have a number, but it's not going to be anything that will move the needle. Having said that, I think the idea is to hopefully divest from this asset before that. I know that I have said that before. I think so far, you know, we are very opportunistic about it. I think so far, not having sold the ship has been the right decision. If we see the market firming up, we want potentially to sell the ship. It's a non-core asset, doesn't really fit the bill because of the spot exposure. It's also an older ship. To the extent that we can sell older ships, that of course applies to container vessels. We will opportunistically try to get there.
Okay. Yeah, that's great color. I guess last question for me relates to the G&A expense for this quarter. It was much lower quarter-over-quarter versus 4Q. Just wondering if there's anything special about that, a one-time occurrence or if we should think about that as a run rate from here.
I think firstly, you didn't have transaction expenses and which we had in the fourth quarter, and that plays a role. We also had a smaller impact in terms of the equity incentive plan, which will pick up into the next quarter. I, you know, I think a run rate closer to what you had in the previous quarter or maybe slightly lower than that is a better proxy, including non-cash items.
Okay. Yeah. Thanks for the time.
Thank you, Chris.
Thank you. We will now take our next question. Please go ahead. Your line is open.
Hey, Jerry. Ben over at Stifel. Can you hear me?
Hi, Ben. How are you?
Good. Good. I wanted to start on interest rates. I'm curious if you could give a little color as to the interest cost was a little bit lower we thought it would be. Could you talk to where your cost of interest is at the moment and going forward, how much you have hedged or how much is fixed?
I think about a fifth of our debt is fixed in a sense, you know, split between, or rather, which is the total of the bond plus one of our facilities, sale-leaseback facility that is on a fixed rate. We also in certain of our facilities, we are able to fix one-month LIBOR and potentially, I'm not sure if that made a difference compared to your model, if you were assuming three-month LIBOR, because there has been the delta there has grown for obvious reasons over the last few months.
There is no other cap or hedge at this point, but we are of course mindful of developments on the interest rate front, and we will seek to the extent that we can to grow the percentage of our indebtedness going forward on a fixed basis. In terms of the actual all-in cost, happy to give you a call after this to give you a precise number.
Okay. Well, that's clear. Do you have a sense as to sort of what the blended average is going forward, LIBOR plus whatever?
The margin is, you mean excluding the, I assume, the fixed-
Excluding the fixed. Yeah, yeah. Right.
That would be close to lower than three, so closer to 2.7%-2.8%.
Okay, perfect. To that end, you know, obviously interest rates have been rising quickly and appear to continue to be headed that direction. Does that change at all how you think about acquisitions? I know you outlined the container ships and obviously the ones that haven't been delivered, you're not gonna be buying until they're delivered, so not all of that happens right away. The, you know, as the cost of debt and the, and the absolute cost of capital rises, do you have to think about the appropriate multiple differently, i.e., sub 10% because, you know, the return requirements are greater?
In the end, all transactions that we will look at, they have to be accretive and to be suitable cash flow as well as EPU. The rise of interest rates, and because also we know that typically the cash flows going forward, the rise of interest rates eats into that accretion. Hitting the right blend of debt and equity, I think it is going to be important going forward. We don't disagree. In terms of the multiple, I think this is dictated by a number of things.
You know, we have done transactions on the LNG front around 10 x with charters that are in place with charter duration of 5+ years . I think even in an increased interest rate environment, if you at the same time are getting longer cash flows, it would be justifiable to transact around the same multiples. You know, in the end, the criterion is quite robust. Accretion has to be there. This is what the board will be looking for if we were to acquire more ships.
Okay. That's helpful. Lastly for, you know, we had seen quite a bit of forward fixing on container ships. The market was really hot, so owners were willing to transact on vessels, you know, well in excess of a year prior to the current charters rolling off. There's been very little activity because there's been very little available, but it feels like the market is softening a little bit. Was curious if that has also translated into the ability to forward fix, especially if you have the one vessel that comes off contract next year. Is it too far out to be able to do something on that?
Is the window sort of, or the appetite to do that sort of forward fixture shrinking at all, do you think?
As always, this is a yes and a no question, answer. You have two things going on. I mean, on the one hand, you're right, the charter market is in a wait and see mode right now, especially for forward fixing. There has been some softening on rates, but of course still at, you know, very high levels. I mean, transactions and fixtures are taking place at historically extremely high levels. There is no doubt about that. What has become less liquid is the forward end. You look at the Akadimos, our 9,000 TEU vessel. This is a Neo-Widebeam ship with 1,650 reefer plugs, A and B on both sides.
A very good ship, unique ship in a way, and very fuel efficient. You know, compared to an 8,000 TEU classic post-Panamax, it has as much as 30 tons per day savings. This is a very attractive vessel. We don't know of any similar sized vessel opening between now and April 2023, actually. You know, I think we have seen people approach us on the vessel because of its uniqueness. On the other hand, we don't feel that the market is about to crash. You know, there might be a bit less liquidity in the forward curve, but people are still there to do deals.
If anything, there is a good chance that, if whenever China opens up, we will have a huge rush for cargo to be moved. We are not in a hurry either. But I would expect that over the next, you know, three to four months, we should have a lot more clarity with regard to the Akadimos. It should, you know, people are already looking at it. It's a good ship. I think we will find a good charter quite soon.
All right. I appreciate the thorough color as always, Gerasimos.
Thank you, Ben.
Thank you. There are no further questions. I will now pass the floor back to Mr. Kalogiratos for closing remarks.
Thank you all for joining us, today.
Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you all for participating, and you may now disconnect.