Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. conference call on the third quarter 2019 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 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, Thursday, October 24th, 2019. 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. I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. During the third quarter of the year, the company delivered profitable results. As was the case in the previous quarter, net income and earnings per share more than doubled, boosted by increased charter rates and the addition of new ships. Charter rates for the larger container ships continue to improve, and there is limited supply available for the post-Panamax sizes. Over the quarter, we chartered in total 14 vessels, benefiting from a rising rate environment. We have 18 post-Panamax ships coming off charter over the next year, which positions us favorably should market momentum continue. Turning now to the slides presentation. On slide three, you can see the highlights. Voyage revenues increased by 36% and net income by approximately 160% in Q3 2019 compared to the same quarter of last year. The adjusted EPS is $0.26.
Over the past quarter, we have concluded the refinancing of two 9,000 TEU container ships. We do maintain a strong balance sheet with approximately 42% leverage and no off-balance-sheet financing. We will pay our 36th consecutive quarterly dividend in November. Insiders have been participating in the DRIP since inception in 2016, having reinvested $77 million up to now. Moving to the next slide. During the quarter, we chartered in total 14 vessels. Regarding the market, charter rates for the larger vessels have continued their upward momentum. The idle fleet, adjusted for vessels undergoing scrubber retrofits, stands at about 2%. The order book has further declined to 10% of the existing fleet. On slide five, you can see a summary of our recent chartering activity. What is worth mentioning here is the increase in the charter rates for the larger vessels compared to last done.
As already mentioned, over the next year, we have 18 container ships above 5,500 TEUs, which are due for rechartering, which provides us with significant upside should momentum continue. On slide six, you can see the third quarter 2019 results. During the third quarter of this year, the company generated revenues of $124 million and adjusted net income of about $31 million. Based on the above, the third quarter adjusted EPS nearly tripled to $0.26 from last year's third quarter EPS to $0.09. Our adjusted figures take into consideration the following non-cash items: the affreightment charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals, and other non-cash charges. On slide seven, we are briefly discussing our capital structure. As already mentioned, there are no balloon payments due over the next 12 months. Our leverage seems sit comfortably below 50%.
Net debt to EBITDA on an annualized basis is below four times, and EBITDA over net interest is at about 3.7 times when our covenants have a minimum of 2.5 times. On slide eight, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, COSCO, Yang Ming, and Hapag-Lloyd. We have $2.3 billion in contracted revenues and a remaining time charter duration of about 3.7 years. On the last slide, we're discussing the market. Charter rates moved up during the first three quarters of the year by an average of 34%. The idle fleet is shown at 3.9%. Adjusting, however, for the vessels undergoing scrubber installation, it drops to about 2%. The order book has steadily decreased to 10%. As already mentioned, we are actively looking for new transactions in this market environment.
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 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. Again, that's star then one to ask a question. Your first question comes from the line of Ben Nolan of Stifel. Please go ahead.
Hey, good morning, Greg. Nice quarter, by the way. I have a handful of questions. Number one is, you did a little bit of recontracting on some vessels that at least I had been assuming you were at the end of their current contracts, 1991-built type ships. I was assuming they were going to be going. Is it simply a function of a better market, and so there are charters that are willing to pay a good price on those? Is there a function of maybe scrap values are a little low now, so it makes it easier decision to keep them in the fleet? What's the thinking about holding onto those older piece of equipment?
Well, mainly it's got to do with the physical condition of the vessel and with supply and demand. We have been known for also managing older tonnages, and we're not afraid of older ships. As long as the physical condition of the vessel is fine, and we have been managing those vessels for years, and at the same time, there is a demand for those ships, which makes it worth keep maintaining those vessels, we're going to continue chartering those ships. Sometimes the best returns come from older vessels, especially if you manage to buy them close to scrap price and then continue like a 15 or 17-year-old vessel, and then continue chartering and rechartering it for like five, seven, 10 years, whatever. It's mainly supply and demand coupled with the physical condition of the vessel, which we found to be satisfactory.
Scrap prices, they have come off a bit, but they are at around $400 per ton. Historically speaking, although they have come off the $450 or $480, they're not at historically low prices.
Right. Sort of tying this in here. You guys have been maybe a little bit, at least it appears to be, you haven't been buying as much in the way of secondhand vessels or a little bit older assets in the last, I don't know, year or so. Certainly there weren't any this quarter. Is that a function of it that you're just biding your time to wait for a better buyer's market or just having nothing has sort of ticked the boxes? Or is it a conscious effort or maybe talk through your secondhand acquisition strategy here.
We have inspected a lot of ships, also like older vessels, like also smaller ships, 2,500, 3,500. It's just that it didn't happen because the price, also considering maintenance cost and potential dry docking cost in the short-term, didn't make that particular asset attractive. We have inspected a lot of ships, and we have passed on those. It's not that we don't have appetite for older tonnages. It's just that what we saw in the market didn't meet our criteria. In the future, of course, this may happen. You're right that over the next couple of quarters, we haven't bought a number of secondhand ships unlike the previous year or the year before. It's just a matter of circumstances and what has been available on the market and at what price. The price of the vessel, it's not only, let's say, $5 million, $7 million, $10 million.
If there is a dry docking due over the next year or less, it's got to be factored in the numbers. There may be some initial delivery costs, depending on the physical condition of the vessel. Taking all those into account, and also factoring in the earnings capacity of the vessel. What we saw now didn't make much sense, so this is the only reason.
Okay. Lastly from me, and I'll turn it over. I'm curious what the appetite is among the liners for doing new long-term deals on new orders and more specifically or maybe in conjunction with that, one of the things that at least I've heard a lot of ship owners talk a little bit about is being uncertain what kind of engines to put in their ships. Do they want LNG, do they want not? Obviously on a long-term contract, it's going to be up to whoever the liner is. Is that part of the consideration? Are you guys looking to do, if you were to do it, would you be willing to have LNG as a primary fuel? Is it just a time where you'd rather not do any new buildings just because you don't know what the ultimate propulsion system's going to look like?
No, look, whether we're going to be entering into a new building transaction backed by a long-term charter, especially if it refers to bigger ships. It's got to do with the numbers. It's got to do at what price we buy, what is the financing we can assume, what's going to be our equity requirements, and what is our expected equity return, factoring in the charter rate. There are liner companies who have recently put orders for like a large vessels, 23,000 TEUs with hybrid scrubbers. Others that those ships are going to be LNG fueled. We are pretty much open to everything. For us, the main consideration, apart from the quality of the charterer, is mainly our equity requirements and what's going to be the return on that equity for our shareholders.
Apart from that, we are pretty much open the same way we are open for large newbuildings with a 10 or 20-year charter. As for 17-year-old vessel, both close to scrap value. In that respect, we are pretty flexible, I would say.
Okay. Would you say that there's a decent appetite currently in the market for those new building contracts from the liners?
I think there is, yes. We have recently witnessed a couple of liner companies putting orders for large vessels. There is also rumors that there are more liner companies thinking about putting orders for large ships as well. Recently there have been a couple of orders from major liner companies for ships 20,000 TEUs and above. Correct.
Okay, perfect. All right, that does it for me. I'll turn it over. Thanks, Greg.
Okay. Thank you, Ben.
Our next question comes from the line of Chris Wetherbee of Citigroup. Please go ahead.
Hey, thanks for taking the question. I want to ask a couple of capacity questions, if I could, about the market in general, just getting a sense of there's been a decent amount of blank sailing. Do you have a sense of how much capacity has been pulled out of the market through blank sailings and what you think the duration of that might be? Does that just get us over the hump until we get through to the new year, or is there a plan that you hear from liners extended beyond that? Just want to get a sense of your views on the blank sailings.
The blank sailing, this is something we've seen relatively recently, and it's also a function of the slack period in container shipping, which is traditionally the fourth quarter of the year. At this point, I cannot possibly predict whether this is going to continue and for what amount of time. However, I have to mention that the blank sailings has also to do with the fact that the larger vessels, like nine, 11,000 TEUs have not been available, and there is a very tight market. In some cases, we've seen liner companies opting for two smaller vessels simply because there are no larger vessels available in the market today. I cannot possibly forecast what capacity this could take off market over the next quarter.
Okay. All right. No, that's helpful. I appreciate that color. Maybe another question, taking it from a bit of a different angle, maybe this has to do a little bit with some of the larger vessels not being available. There's clearly been scrubber installations going on as we've moved through 3Q and into 4Q. How long do you think that lasts? What's the tail into 2020 that you would expect to see some capacity out of the market as they go through these extended dry dockings for scrubber installation in the container market?
Yes, what we see now in the market is that, generally speaking, a scrubber installation, the whole process takes longer than originally anticipated. We also have ships which are in the process of having scrubbers installed, and generally, it takes more weeks than initially thought. Based on brokers' consensus, this is something that it's going to have an effect for the whole of 2020. I cannot tell you whether it's going to be for the first or second quarter or third, but judging from the situation today, I can tell that for the whole of 2020, this is something that is going to be taking capacity off the market, especially for the larger vessels for scrubber installation. It's not like that those scrubbers can be installed within three to four weeks as initially thought. It takes much longer than that.
Okay.
Also, the capacity in the shipyards, especially in Asia, is rather constrained. There are a lot of delays there.
Okay. No, that's helpful. That's good color. I guess my last question, just is conceptually, there's been the thought that the fuel dynamic post IMO 2020 is going to be a burden shared between the customers and then maybe the liner companies if the customers aren't willing to pay. I guess I wanted to get a sense if you think that there's any risk at the charterer level, so at your level, as you're chartering out ships to liner companies, that there could be some, I don't know if it's a 2nd derivative type impact, if fuel isn't as successfully passed through to the customers as a lot of people are trying to suggest it will be.
In other words, if the liner companies end up having to absorb some more of the impact from increased fuel costs, is there any sort of ripple effect or trickle-down effect on capacity carriers like yourself?
Look, a couple of points. First of all, the fuel expense is a pass-through cost to the liner, which we all know. I have to stress that this is the case because sometimes there is some misunderstanding that charter owners also have some sort of risk regarding the fuel expense itself. Now, regarding our customers, and we have a pie chart with where our contracted cash is coming from, the liner companies we have been dealing with, we feel very comfortable regarding their credit position today. Of course, there are concerns generally about the liner industry's ability to pass on the fuel expense or part of this incremental expense to the shippers. Which I cannot possibly answer right now. Generally, I have to say that we feel extremely comfortable with the credit quality of our business partners, meaning the liner companies.
Okay. Yeah, that was the angle I was thinking about, the credit side. That makes sense.
Okay.
Okay. Thanks for the time, I appreciate it.
Thank you.
Our next question comes from the line of J Mintzmyer of Value Investor's Edge. Please go ahead.
Hi, good afternoon, Greg. First of all, fantastic results on this quarter. It's really good to watch your earnings continue to go up. Very nice charters on those two 11K TEU ships. First off, is there any interest in the other ones? I see there's three more that come off in March, and one of them is also with ZIM.
Yes, you're right. There are like three sister ships, 11,000 TEUs coming off charter over the next couple of quarters. This is something we have in mind. Generally, there is interest. We are in discussions regarding potential chartering on those vessels. On the other hand, it is a bit premature now. We have October, those come off within the next two quarters. It may be a bit premature now, but we definitely consider this more as an upside, assuming that the market fundamentals stay where they are today, and not a downside, definitely not.
Excellent. Makes sense. Can you confirm those five by 11Ks, they don't have scrubbers, correct? Is there any discussion on adding scrubbers to those?
They don't have scrubbers. Those are ships that have been delivered to us in 2017. These are new buildings, high-spec vessels. They don't have scrubbers. Their chartering up to now has been for up to one year. With a year charter, it's very difficult to have scrubbers installed, and the cost to be borne by the charterer amortized over this shortened period.
Definitely makes sense. You'd want to see a longer-term charter on those before committing to that installation. You made a really good timing transaction with buying those York vessels, the 14Ks. York also owns the ownership in the 11Ks, which as we're seeing are very lucrative assets. Is there any interest from York to sell you the rest of those 11Ks or do you think they're going to be in with the long term?
I think there is no rush. Those are young ships, as I said, 2017 delivered. We have an excellent relationship with York. We had a very good discussion regarding the acquisition of the 14,000 TEU ships, which was end of 2018. The thing is that, of course, we know the vessels. We are managing those ships. We have a 40% ownership on average in those five ships. There may be discussions with York in the future, but I think I cannot make any forecast right now regarding the outcome of those discussions. Generally, this is something that in the future may be on the table in our discussions with York.
Definitely makes sense. Thanks, Greg. Last question on the fleet. I know I'm asking a lot here. We have some 95K ships coming up in April and May, and they're at about $29,000. That used to be way above market, but now it looks like that's pretty much the current market. Has there been any discussions to extend those potentially with some sort of scrubber deal, or is that kind of a wait and see on those?
Not yet. You're right that the market is slightly below $30,000 now for those vessels. No, we don't have any sort of discussion right now. Answer is that there are no discussions for scrubbers either. We feel that the timing of the opening of those vessels for chartering, as well as for the 11,000, generally it looks like a good timing.
Excellent. Every time I turn around, Costamare is looking better. The last final question, I know it's the question a lot of investors are wondering. Earnings are going up, balance sheet is getting better, everything's looking better. What does it take to get that dividend to raise a little bit, maybe, say, $0.12, $0.13?
Okay. The dividend yield up until now was like north of 6%, which I consider to be a healthy dividend yield. Based on our track record, our credentials, and our performance since 2010, plus all the sort of potential for upside from our ships coming off charter. We like dividends. I have to remind you that insiders own north of 55% of the company, and there are no other shipping interests outside of Costamare. Those sort of increased dividends should normally come together with increased contracted cash flows from long-term business. It wouldn't be an issue for us at all to raise the dividend now by some cents per quarter. This would be easy. Whether this would be the wise decision from an economical point of view or not, this is something to be discussed.
It is a board decision, but my personal opinion would be that this should grow at the same time with the growth of the contracted cash flows.
All right. Yeah, definitely makes sense. I appreciate the balanced approach, and keep up the good work. Thanks.
Thank you.
Our next question is a follow-up from Chris Wetherbee of Citigroup. Please go ahead.
Hey, thanks for squeezing me back in with a follow-up question.
Sure.
I wanted as a specific model question, just looking at D&A, depreciation, amortization expense was a good step down from 2Q. I wanted to get a sense of maybe what drove that relatively lower line item for the quarter. Looks like maybe one of your amortization expenses went to zero. I just want to understand what that was. Is this the right run rate to use going forward somewhere in these lines?
You are referring to the line item amortization of prepaid lease rentals, correct?
Correct.
Which now is zero. This is included in the depreciation expense line.
Okay.
That's all now, I mean, we can send you separately a depreciation schedule, but the number that was there in the previous quarter it is included in our depreciation expense. This is pretty much it. The number was pretty low. It was close to $2.5 million per quarter. It wasn't a big number.
That moved from $28 million down to $25 million but also includes that other number. Is that the right way to think about it going forward?
Correct.
Okay, perfect. Thank you very much. I appreciate it.
Thank you.
This concludes today's question and answer session. I would like to turn the conference back over to Mr. Zikos for his closing remarks.
Thank you very much for your interest in Costamare and for dialing in today. We are looking forward to speaking with you again during our Q4 and year-end results call. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.