Welcome to the Costamare Inc. conference call on the first 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 and 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, Tuesday, April the 23rd, 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 would now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.
Thank you, good morning, ladies and gentlemen. During the first quarter of the year, the company delivered solid results. Larger vessels continue to benefit from strong fundamentals with low supply and strong demand. The number of idle ships has fallen across all vessel segments as liner companies launch new services. We have been active during the quarter, we have charted in total 10 ships benefiting from a rising market in the larger asset classes. We have 15 Post-Panamax ships opening over the next year, which positions us favorably should market momentum continue. Moving now to the slides presentation. On slide three, you can see the highlights. The adjusted EPS is $0.12. Over the last month, we have charted in 10 vessels. We do maintain a strong balance sheet with approximately 45% leverage and no off-balance sheet financing.
Regarding the market, larger vessels showed a remarkable increase in time charter rates. The idle fleet has dropped to 2.1% and the fleet's projected net growth for 2019 is at around 3%. On slide four, you can see a summary of our recent chartering activity. What is worth mentioning here is the increase of about 35% in the charter rates for the larger vessels compared to last done. Over the next year, 15 Post-Panamax container ships are due for rechartering, which provides us with significant upside should the momentum continue. Moving on to slide five. On slide five, you can see our dividend payments as well as the sale for scrap of two older ships. On slide six, you can see the first quarter 2019 results.
During the first quarter of this year, the company generated revenues of $113 million and adjusted net income of $13.6 million. Based on the above, the first quarter adjusted EPS amounts to $0.12. Our adjusted figures take into consideration the following non-cash items: the accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals, and other non-cash charges. On slide seven, we are showing the revenue contribution for our fleet. 98% of our contracted revenues comes from first class charterers like Maersk, MSC, Evergreen, Yang Ming, and Hapag-Lloyd. Today, we have $2.2 billion in contracted revenues and the remaining time charter duration of about 3.7 years. On the last slide, we're discussing the market. Regarding charter rates, there has been a strengthening in the market during Q1, especially for the larger tonnages.
The idle fleet stands at a low level of 2%. The order book remains at about 13%. As already mentioned, we are actively looking for new opportunities 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. That is star then one to ask a question. The first question comes from the line of Donald McLee of Berenberg. Please go ahead.
Good morning, guys. Could you comment on what you're seeing in the charter market as you negotiate for some of your upcoming charter maturities? It looks like conditions have generally improved from a rate perspective since the start of the year. Do you think that shift is driven by maybe charters getting more comfortable with the tariff overhang? Or is there something else that's supporting that uptick in rates?
Hi, Donald. Good morning. First of all, regarding charter rates, as I mentioned, what we have seen is that an increase in rates, especially for the Post-Panamax ships, this is about 6,500 TEUs. The fixers we've done is more or less for a year, but sort of a charter rate which is substantially higher from last done. Now, this all has to do with supply and demand, and also to remind you that at this point in time, liner companies, they are now launching new services. There are few big quality ships available. There is demand from charterers, and this is what brings charter rates up. I wouldn't necessarily correlate this to the potential trade war and trade barriers in the transpacific trade. It does supply and demand for the larger vessels, which has much tighter fundamentals, especially compared to Q3 and Q4 of 2018.
Okay. What do you think has to change for there to be an increase in charter duration then?
There have been also fixtures for longer charter periods, especially again for the larger ships. We have seen commitments for three years or north of that recently. It's just that in our case, for instance, for the Tainaro, we decided to go for one year, at a rate to slightly below $40,000. This is the $39,950. Considering that probably today, it might not be optimal to fix for two or three years. I would say that there is market. We've seen fixtures for two, three years or also north of that.
Okay, that's good to know. Just one more around your growth. Are you still considering near-term growth opportunities following the York JV acquisition? How would you maybe prioritize the different growth alternatives between additional JV acquisitions, secondhand purchases, and new build orders?
We're looking at pretty much everything. It could either be a newbuild or secondhand vessels, and secondhand vessels with or without charter. In the past, we have also bought older ships. In that respect, we are pretty much flexible. Now, our agreement with York, there is a type of exclusivity, meaning that whatever transaction we are considering at the Costamare Inc. level, we need to share it with York, and then our partners have a time period within which they need to revert on whether they want to participate or not. They may want to participate like they've done in the past or on certain transactions, they may decide to pass. For instance, in the five 13,000 TEU newbuilding deal we did last year, we did it at the Costamare level and our ownership there is 100%. It depends.
In the past, we've done new buildings with York. There is an investment period which goes up until 2020. This exclusivity I referred to earlier applies until that time. If York does not want to participate in some deals, and we feel that those transactions make sense for us as a long-term oriented ship owner, we're going to proceed by ourselves. The bottom line is that we are pretty much flexible regarding the asset and/or the participation in the JV.
Okay. I guess maybe one more follow-up on the flexibility of your growth. That's still within the containership segment, I'm assuming, just touching on your competitor shifting into another shipping segment. Is that something you guys would consider or maybe to gain share among the containership owner/operator group?
Yeah. I cannot comment about what other people may be doing. As far as we are concerned, our focus is in container shipping. We have been managing exclusively containers since 1992. Our focus and our growth moving forward is going to be only in container shipping.
Okay. I appreciate you taking my questions. Thanks.
Thank you. Thanks a lot, Donald.
The next question will come from Chris Wetherbee of Citigroup. Please go ahead.
Hey. Thanks for taking the question. Wanted to ask about blank sailing, just wanting to get a sense of sort of reconciling the idle capacity in the market relative to what we were hearing a month or two ago about a rise in blank sailings from the liners. Just want to get a sense of maybe what you feel sort of the real demand environment is currently. Has it materially improved over the course of the last several weeks or months? Or does it feel like we're sort of still in the same sort of a little bit of uncertainty but a bit of a balance right now?
Yeah, I think that the blank sailings over the last month or so had to do with sort of liner companies managing capacity more efficiently which had a direct effect on box rates. Now, regarding the supply and demand of the vessels, which directly applies to charter rates, we've seen the launching now of new services. I would say that generally, we have also seen a slowdown in the speed of the vessels. The fundamentals and the supply-demand are much tighter now. Overall, and especially for the larger vessels, the market over the last weeks, or I would say months since the beginning of the year, has been moving up substantially. I would have to give you an example, just an 8,500 TEU vessel. In the past, I mean, the last quarter, we had seen it close to getting for a year $12,500, $13,000.
Now the rate for those ships is like $23,000, $24,000 for a year. The change has been substantial. I would not correlate this 100% to blank sailing, which mainly applies to box rates.
Okay. That's helpful. I appreciate that. When you think about the second half of the year, what's your estimation on the % of the fleet that's going to be in the docks getting scrubbers? How much do you think that impacts, not necessarily your utilization, but overall fleet utilization for the container market?
Yeah, I would say that generally, based on the info we have today, ships that will be scrubber-fitted could be close to 10% of the global demand in container ships in terms of capacity. In terms of ships, it could be 5%, but mainly because it is the larger vessels that are fitted with scrubbers, we talk about a 10% or so percentage. It is estimated that on average, a ship may need four or five weeks to be off-hire in order to be retrofitted. Of course, for this month or these weeks, this sort of takes some supply out of the market, and it is definitely helping the supply and demand dynamics. I would consider this to be a short-term type of effect. I don't think that we're going to be seeing this in 2021, 2022.
However, in the short term, having off-hire a substantial amount of the fleet for a year, most probably coinciding the same like the fourth quarter of this year, beginning the first quarter of next year, it will definitely help supply and demand fundamentals.
Okay. Do you get a sense that that's sort of part of the reason why you're seeing this uptick in sort of relatively short-term chartering, people want to get past this potential disruption, or does that sort of not play into the discussions that you're having with your customers?
Of course, the closer we get to year-end or like the third to the fourth quarter of this year, there may be some relevance. For the time being, for instance, we have chartered now ships 11,000 TEU for a year, the Valor. I'm not sure that this one month off-hire for the ships that will be retrofitted was a crucial factor. It depends on the circumstances of each liner separately. Some liners, they do go full for scrubbers. Others have stated publicly that most probably they're going to be moving ahead with low sulfur fuel oil. It depends also on the liner company by itself.
Yeah. Okay. That makes sense. Last question from me, just want to get a sense. You have a bunch more ships coming up for charter. My guess is the answer is in this environment, you're just going to re-charter them and continue on. Is there anything, though, that you want to do in terms of sales or divestitures of any of these vessels as they come forward? Just want to get a sense of sort of your short-term view on fleet development.
No, generally, look, normally, the largest ships we have now coming off charter over the next 12 months, these are ships ranging from 2006 build to 2013 build. These are high-spec assets. I think that there is today, I know that today there is, and in the future, also there will be interest for those ships. For the larger vessels, I don't think that now we are in a position that we would be disposing of those ships, quite the opposite. If you look at the past, normally, we have been disposing of all the tonnages, or ships that we feel moving forward, they wouldn't have a potential. Like in this quarter, we disposed of the Piraeus 2004 Panamax vessels. This is the long Panamax ships.
This is 4,900 TEUs, which bearing in mind where the market is today, what is the potential for those vessels, and the fact that the ship had to also undergo a dry docking, we felt that it was preferable to sell this for demolition. That was the thought process behind the sale.
Okay. That makes sense to me. Thanks very much for the time. I appreciate it.
Thank you. Thanks.
The next question will come from Fotis Giannakoulis of Morgan Stanley. Please go ahead.
Yes. Hi, Greg, and thank you. You mentioned about potential new opportunities. I assume that these opportunities are for larger vessels. Can you give us a little bit more color of the type of transactions, durations that you see, if the returns have been comparable with the previous ones, that they were double-digit EBITDA yields? How do you think that you can finance these potential opportunities? How much is your available liquidity for new acquisitions? I see that you have also some vessels, these 9,000 TEU vessels, that they are due for refinancing. Is there ability to lever up and get any additional liquidity from the ships?
A couple of things. Regarding opportunities moving forward, as I mentioned earlier, I think we are looking both at secondhand ships with or without charter, and could also be new buildings depending on the circumstances and depending on where the market is. In every single transaction and also in the new buildings, we are first trying to cover our downside. We also look at the quality of the charterer. After that, we look at cash flow yields, EBITDA yields, et cetera. I'm not in a position now to provide with any target yield figures. In the past, the deals we did, I think first of all, they were with the top charterers, top credits, and also from a cash flow perspective, and accretion to the shareholders, they made sense. For the ships that will have to be refinanced next year, this is 2020.
It's five 9,000 TEU ships, 2013 build, which are coming out of seven-year charter in 2020. The loan outstanding on those ships today, and also at the expiry of the charter party, and of the loan tenure next year is not high. I don't foresee this to be a problem to have them refinanced, quite the opposite even. The question is, as you mentioned, whether we're going to be levering up, and also creating some liquidity for new business. The refinancing itself, considering where the value of those ships is today, I don't think that it is an issue at all.
The reason is because, as I am sure you know very well, we are repaying our loans quite fast, and we have a very steep debt amortization profile, which means that the loan outstanding on those vessels today is at very low levels. Something else which I didn't cover?
Yes. Can you give me an estimate of the total liquidity that you have or you forecast to have after these upcoming refinancings that can be available for growth?
Yes. Look, today, also as of the end of this quarter, we have cash on balance sheet of close to $155 million. This is a ballpark figure. The refinancings we discussed, it's not done yet. I wouldn't like to speculate. However, we would seek to refinance, first of all, at the low cost of debt for a longer period, taking into consideration the age of the vessels, and also provide us also with some liquidity. I cannot give specific numbers, but for us, liquidity has never been the issue in order to enter into new transactions. We do have access to commercial bank debt at quite competitive terms. I don't think that this would be an issue at all.
Thank you, Greg. In regards to your capital allocation priorities, the market is improving. You have rechartered some ships at a much higher rate than we expected than a few months ago. The cash flow seems that is improving as a result of this charter rate increases. At what level would you consider or what would you expect to see in order to increase your distribution? Also, if you would have to prioritize your goals between returning capital to shareholders, between growing your fleet or de-levering, how would you rank them?
I think, first of all, we need to make sure that we keep the same debt repayment strategy. Of course, we cover our operating expenses. We cover the debt service as it is today without backloading it. We do have some cash on the side for new business in order to grow, in order to renew the fleet, in order to enter into accretive acquisitions. Of course, the dividend, it is definitely something we care, because we have close to 56% ownership in the company. I would say that we are the main recipients of the cash dividend, generally. It is of importance. However, it will have to come at the same time with long-term new contracted cash flows.
After covering our downside and making sure that, as I mentioned, we will be always in a position to cover our obligations and have some sort of liquidity on the side for growth. Don't get me wrong, the dividend is something which is quite important to us, because we have a company where the main shareholders' interests are fully aligned with the rest of the free float .
Thank you very much, Greg. I appreciate your answers.
Thanks.
Once again, if you would like to ask a question, please press star and then one. The next question will come from Ben Nolan of Stifel. Please go ahead.
Great. Thank you, operator, and thanks Greg for the time. I had a couple questions. The first just relates to the Piraeus and getting rid of it. It's a 15-year-old ship. I know you mentioned that it was, I think, a narrow beam, so there's not as much of an appetite for those as there used to be. Still, 15 years is pretty young for you guys, I would say, who've really done well operating older equipment. First of all, are there other ships in the same category that are in the fleet? Looks like there are, that you probably will be getting rid of at some point before too long.
Yeah. Look, the Piraeus, it is a part of three sister ships. We also have the Zim New York and the Zim Shanghai. For those ships, we have an agreement with Zim. We have a put option to put the ships to Zim on a yearly basis. I think it would make no sense today to sell those ships for demolition. Specifically for the Piraeus, you are right, this is a 2004-built, 15-year-old vessel. The thought process, I can be specific, the thought process is that the vessels had to go dry docking. The market today for those ships is between $7,000, $7,500, which is max $8,000 per day. Of course, you can take a long-term view. The question is whether you think that those narrow-beam Maxi Panamax is the 5,000 TEUs. What is their cash generating capacity over the next two to three years?
The calculation was, this is the dry docking. If the market improves by so much over the next two to three years, do I make my money? In case I sell today at a relatively high scrap price of close to $450 and repay the debt outstanding. Likely in this case, we realized a cash payment of close to $3 million simply because the loan outstanding was very low. Take the $3 million today or have the dry docking, continue repaying the debt, and then in two or three years' time, see whether it makes sense to sell it. You also get the risk of a lower scrap price. More importantly, we do not believe that those Maxi Panamax, those wide beams are the asset of the future. Quite the opposite. These are purpose-built vessels.
There is a reason why the market today is pricing them below the 4,000 TEU Panamax.
Okay. No, that is very helpful and descriptive. Along those lines or maybe similar to that, as you had mentioned earlier, there has been a pretty strong acceleration of charter rates for the larger vessels. While it has not been bad, the smaller ships certainly have not participated as much, particularly anything below 5,000. What specifically would you attribute that to? It would seem as though if demand is good as a function of more cargo movements, then that would have an impact across the board.
Yes. I think that for the smaller vessels, I agree with you that we've seen the number of idle fleet going down, and we've seen general demand. However, the charter rates for the smaller vessels do not correspond and do not correlate to today having an idle fleet of close to 2%. I think that it's got to do, first of all, with the Panamax ships that stand in the middle, the classic Panamax vessels. Also in the past, most of the ships that have been idle, the biggest proportion of these most of the times has been the Panamax ships, which are pushing down the rates for the rest of the smaller vessels. For the larger ships, you had very few ships, good assets being available in the spot market when charterers wanted to charter those ships.
This is why, as I mentioned earlier, for the 8,500 vessels from 12,000 to 15,000, we've seen rates at 24,000 for a year. The Valor, the 11,000 TEU ship, initially when we accept the delivery, those ships they were chartered at the region of $17,000-$18,000 per day. Now we have it $40,000 per day. The reason we did not hurry to charter out those vessels a couple of years ago is because we thought that there is a lot of potential for those ships. Today, for us, those ships they have a $20,000 more or less break-even cost. For the smaller vessels, I think the supply and demand and the fact that most of the idle ships have been Panamax vessels and below, doesn't help at all today. Don't get me wrong. I don't make a forecast at all.
I'm not saying that the market will not improve for those vessels or vice versa. I'm just describing the situation today.
Okay. Lastly, just in keeping with that. Even for the larger ships as you've done, the rates have improved quite a lot. What's been interesting to me is that the actual box rates whether that's Transpacific or Asia to Europe which do use the much larger ships, have absolutely plummeted since the beginning of the year. I think they're down 37% since the beginning of the year. The liners are making a whole lot less money, yet they're being a lot more aggressive in the chartering of assets. Any thinking as to what they might be up to there?
A couple of things. First of all, for the Transpacific, if you compare the chart to the box rates for the last, I would say a couple of months compared to very high box rates experienced in Q4. That had to do with the China-U.S. trade war. I think you start from a very high base. In order to do the comparison. This is the first point. Apparently, liner companies, they want to They must see demand coming forward or they want to charter in some good vessels for the future, because for the larger ships, we have also seen fixtures for three years. We've seen commitment for three years. Also, let me remind you, in our previous quarterly result, the five 9,000 TEU ships we have chartered to MSC, we have in-place charters, and we have extended the charter period for three years, starting from 2023 onwards.
Liner companies must, apparently, they want to secure in some modern or high-spec tonnages. I cannot go into more detail. Probably this is a question that initially should be addressed to them, I would say.
Right. No, you're right. I just was curious if maybe they were communicating something to you.
It's also something I didn't mention that we have seen recently slow steaming. Average vessel speed going down. I'm not sure whether this also plays into the equation of supply and demand, because apparently this is creating more supply for the same demand. This is also another factor. Also, to a small extent, as mentioned earlier, the fact that some ships, close to 10% of the global capacity or part of it may be going for retrofitting during Q3, Q4 of this year and also beginning of next year may also have a small effect there.
Yeah, no, interesting. That's a very good point. I appreciate it. Thanks, Greg.
Okay, thank you.
Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Mr. Zikos for his closing remarks.
Thank you very much for dialing in today. Appreciate your interest in Costamare. We look forward to speaking with you again during our next conference call results. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.