Thank you for standing by, ladies and gentlemen, and welcome to the Costamare conference call on the third quarter 2018 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 followed by one on your telephone keypad and wait for your name to be announced. I must advise that this conference is being recorded today, Thursday, 25th of October, 2018. 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 third quarter, the company delivered profitable results. Seasonality combined with concerns about demand growth and trade tensions have resulted in a softer market, both in terms of charter rates and asset prices. We have, however, chartered in total 25 ships during the quarter. This includes the agreement to install scrubbers on five Post-Panamax container vessels, subject to an increase in the current charter hire and a further extension of the original charter tenure for three years. We recently acquired with equity two 1996 built 8,000 TEU sister container ships, which we chartered to Maersk for a fixed period of two and a half years. We are currently in discussions regarding the debt financing of those ships.
Finally, on the financing side, we have concluded with a leading financial institution on a pre- and post-delivery basis, the debt finance for the five 13,000 TEU newbuildings chartered to Yang Ming for 10 years. The vessels are expected to be delivered between the second quarter of 2020 and the second quarter of 2021. Moving now to the slides presentation. On slide three, you can see the highlights of our third quarter. Our adjusted EPS for Q3 was $0.09. Over the last quarter, we have chartered in total 25 vessels. We maintain a strong balance sheet with a 40% leverage. Regarding the market, the idle fleet is 2.6%, and the order book stands at less than 13%. On slides four and five, you can see a summary of our recent chartering activity.
At the top of the page, you can see the five MSC ships, whose charter was extended till 2026 and 2027 as a result of a scrubber installation. Moving on to slide six, you can see the sales for scrap of two older vessels, as well as our dividend payments. On slide seven, you can see the third quarter 2018 results. During the third quarter of this year, the company generated revenues of $91 million and adjusted net income of $10 million. Based on the above, the third quarter adjusted EPS amounts to $0.09. Our adjusted figures take into consideration the following non-cash items: the accrued charter revenues, accounting gains and losses from asset disposals, prepaid lease rentals, and other non-cash charges. On slide eight, we are showing the revenue contribution for our fleet.
99% of our contracted costs comes from first-class charterers like Maersk, MSC, Evergreen, Yang Ming, Cosco, and Hapag-Lloyd. We currently have $2 billion in contracted revenues and the remaining time charter duration of about 3.9 years. As you can see on slide nine, as of the end of this quarter, we had cash of $155 million. We are conservatively managing our balance sheet, having brought down net debt from $1.7 billion in 2013 to $900 million as of today, which represents a net debt to equity ratio of about 71%. Over the past six years, we have raised debt funding of close to $800 million for new business. Our estimated leverage, calculated as per our refinancing agreements, is in the region of 40%. On the last slide, we're discussing the market. Regarding charter rates, there has been a softening in the market.
The idle fleet stands at a level of 2.6%. The order book remains at low levels of less than 13%. As already mentioned in the past, 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 question now.
Thank you. As a reminder, if you'd like to ask a question, please press star, followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, you may press star followed by two. That's star one to ask a question. Your first question comes from the line of Noah Parquette with JP Morgan. Please go ahead.
Yeah, great, thanks. I just wanted to ask, following up on the ships that you're putting scrubbers on, do you have any more discussions ongoing with other charterers for a similar situation? With the Yang Ming vessels, will those have scrubbers as well?
Yeah. Hi, Noah. Look, there are currently ongoing discussions with other charterers for ships in the water with long-term charters. Also, there are discussions with Yang Ming as well. As long as there is a long-term charter and the deal makes sense for both parties on a commercial basis, of course, we are willing to cater to our clients' needs.
Okay. Then with the existing arrangements, let me just make sure I understand correctly. Are you guys footing the CapEx and then you're getting repaid, or is the charter funding part of it, or how does that work?
Yeah. The way it works is the following. Those ships, they have an original time charter expiration, some of them in 2023 and some of them in 2024. Upon the scrubber installation, which is expected to be by the end of 2019, the charter will be paying an additional charter hire up until the original redelivery date, which is 2023, 2024. From now, we have already agreed an extension for three more years, which goes to 2026 and 2027 at a new rate, which also includes some calculations regarding the scrubber amortization. The whole scrubber investment will be amortized over the extended charter period. Is this clear?
Yeah, no, I got it. That's great. Thanks. Then I wanted to ask, one of the arguments or the bullish arguments on containers in 2020 is that the higher fuel costs may cause the fleet to slow down. Do you guys see room for that to happen now? How are vessel speeds? How have they been on the balance leading? Thanks.
Well, generally, vessel speeds, compared to the past, they have come down. Now, it is one scenario that slow steaming will be increased further. I cannot predict from now. These sort of regulations kick in 1st of January 2020, but those will be in place for quite some time going forward. I cannot predict what the situation is going to look like. I agree with you that one possible scenario is that the ships may slow down further, which, regarding the supply and demand dynamics, this is something positive for the ship owners, correct.
Okay. That's all I have. Thank you.
Thanks.
Next question comes from line of Fotis Giannakoulis with Morgan Stanley. Please go ahead.
Yes. Hi, guys, and congratulations on this charter extension. I want to clarify, Greg, whether the extension rate is higher than the current rate of $43,000 and $42,000, respectively. These vessels were chartered at a much higher rate environment, and I was wondering if the extension is better.
Yes. Those ships today, you're right, they are getting $42,000 and $43,000. To this amount, an incremental charter higher payment will be paid as soon as the scrubbers are installed. For the extension, I'm afraid I cannot go into more detail for commercial reasons. I can tell you that we feel that the extension period together with the new pre-agreed rate make commercial sense both for the charterers and also for us. I'm afraid I cannot go into more detail. It is definitely a charter rate which makes sense for both parties. It is, I guess, a win-win situation for both the charterer and Costamare.
Thank you, Greg. Can you also describe how is the deal flow that you see out there right now to make acquisitions? Obviously, the market since early summer has softened. I wonder whether you're seeing more deals available. What type of deals do you see? Is it secondhand acquisitions or potential larger deals with long-term contracts? What kind of competition do you see right now compared to earlier this year?
Yes. First of all, there is activity. There is also activity in the new building market. We recently had some new building projects, especially for smaller and feeder vessels. Also, as you rightly mentioned, the market has softened recently. This applies both to charter rates and to asset value. There is activity. There are deals for secondhand ships with or without charter, also for older vessels. As an example, we've done recently two old ships, 1996 builds, however, with back-to-back with a two and a half year charter to Maersk. There is activity and the competitions, first of all, compare this competition to the competition we used to see back in 2007, 2008, there's a huge difference. Today there is definitely much less competition.
There is not a lot of players in the container ship sector that have the financial means to fund either new buildings or secondhand ships with long-term charters. There is competition. It is definitely limited compared to the competition we used to see some years ago.
Can you explain to us why is this softening taking place the last couple of months? Is this something that worries you? Is it the seasonality? Is it the concerns about some slowdown in the trade or the impact of the tariffs? How do you see the market developing the next year or year and a half?
Yeah. First of all, the situation there, I think it is pretty much a mixed bag. More or less all the factors you mentioned. There is definitely seasonality. The last two quarters of the year, traditionally, they are not the strongest quarters for container shipping. At the same time, you look at the supply and demand dynamics and some specific trades, for instance, Asia to Europe, this trade, which is the biggest one, and this is the trade where all the larger ships are being employed. The demand there is not as strong as was expected. At the same time, ships are being delivered throughout the year. It is, at this point in time, supply and demand. It is seasonality and also trade tensions that definitely do not help the sentiment in container shipping.
However, I have to say that in Transpacific, up to now, we have seen a positive trend in demand, which is also reflected in box rates. You can argue that a part of it is because of front-loading before the new tariffs kick in from the beginning of 2019. Up to now, we see trade growth in the Transpacific to be quite healthy. I have to add something here regarding our vessels. I have to say that we have five 11,000 TEU ships, and those ships are most commonly used in the Transpacific trade. We feel quite comfortable for those vessels. We recently chartered a couple of those at $28,000 per day for a short period.
We could go for a longer period, because we feel comfortable about the supply and demand dynamics going forward, and especially for those vessels and how many ships like those are currently in the market, we decided to go for a shorter period. Although we don't forecast the market, I have to say, however, that we don't feel negative regarding the potential of those vessels and the supply and demand dynamics over the coming quarters.
Thank you, Greg. One last question about your growth strategy, whether you are in a growth mode right now and what is your acquisition capacity. I see in your balance sheet you have $112 million of liquid cash, although you've rarely dropped below $100 million. Are there sources of potential capital that you have in mind? Is this an environment that you are looking to grow? How do you view your cost of capital relative to the industry, both in access to commercial debt and other sources of funding?
Yeah. First of all, we have cash on balance sheet of $155 million, $154 million to be exact. Take away the restricted cash, which is ballpark figures, $30 million or so. It's sort of $120 million, our liquid cash capacity today. We have access to commercial bank debt, and we've shown it by funding the newbuildings. We raised debt for 12 years, two years pre and 10 years post-delivery. We are in the process of financing the older ships as well. Our growth strategy, we are not going to be growing for the sake of growing in order to create volume. The deals need to make sense. In this environment, especially over the last couple of months that we've seen asset values dropping, we may be more active, depending, of course, on the transactions that we see in front of us.
Now, our cost of capital and any competitive advantage there, generally, we tend to have a competitive cost of capital base. Take, for instance, the commercial bank debt, the fact that we never had to restructure, we never breached any financial covenant over the last 40 years or so. We never breached any covenant since the company went public, and even after the Lehman crisis. The fact that we never gave any trouble to our lenders. This track record definitely helps in securing debt at terms that make sense. Also, I have to stress here that commercial bank debt today is available for shipping and also for container shipping. It may be true that the banks have become more selective, which is a healthy signal, bank debt is available today for clients that the banks consider to be the top-tier clients in the sector.
Thank you very much, Greg.
Thank you. Thanks.
Your next question comes from line of Ben Nolan with Stifel. Please go ahead.
Yeah. Hi, this is Frank Galante on for Ben.
Hi, Frank.
Hi. The vessels that come off contracts in the next two years or so, have you guys considered installing scrubbers on them to make them more competitive for a long-term charter?
Normally, we would install scrubbers when we have an agreement with the charterer. If a ship is, let's say, relatively smaller without a long-term employment, it will be a bit awkward to have an agreement with the charterer to install scrubbers of those vessels. In container shipping, contrary to some other shipping sectors, the fuel expense is a pass-through cost to the charterer. Whatever type of investment we decide to do regarding scrubbers, I think this needs to be on the basis of a commercial agreement with the charterer, who will be taking all the benefit of the scrubber installation. The long story short, if it is a ship coming out of charter over the next months, and without a long-term or a medium-term employment, and without an agreement with the charterer regarding the payback period of this investment, we wouldn't be installing scrubbers.
Okay, that makes sense. Kind of a balance sheet question. You have a couple preferreds that are going to become callable soon. Just wanted to see how you guys are thinking about those and how they fit within the capital structure versus debt or growth CapEx in the next, say, year or so.
Yes. First of all, our CapEx commitments, to start from that, are pretty manageable because as you've seen, we have funded the Yang Ming vessels at quite attractive terms. There are no CapEx commitments without the debt funding already in place. You're right that a couple of the preferreds are callable or sort of will be callable over the next year or so. We are considering all the options. Of course, one of them is to call them, it's going to be also a decision of where do we allocate our capital and whether it makes sense to call the whole type of instrument or part of it, and at what point in time. We do have the flexibility, and this is something to consider, especially next year when the second preferred is becoming subject to call.
Okay. Yeah, that's all I had. Thank you.
Thank you. Thanks.
Next question comes from the line of Chris Wetherbee with Citi. Please go ahead.
Hi, this is William on for Chris. Thank you for taking my question.
Yeah, hi.
I just wanted to follow up on some of the questions that you've already received on scrubbers. Just really quickly, I know that you aren't really providing a lot of details on the rates, but I'm just wondering if overall, generally speaking, do you think that installing scrubbers will meaningfully impact the returns you expect to get on those vessels and just the kind of the unit economics of those Post-Panamax vessels?
Look, the fact that we have extended today in 2018 the charter contract on a forward basis from 2024 to 2027 at a charter rate which we feel makes sense, I think it's a positive thing, definitely. From the scrubbers, we don't make money out of the installation of the scrubbers. This is something that we are doing after the charterer's request. The fact that we can find an agreement with the charterer where we are sort of extending the charter cover, and we are also receiving some type of incremental cash from day one after the scrubber installation, I think it's definitely a positive. Those ships, they are 2013 built. At the expiry of the 2013 and 2014-built, originally the time charter was expiring when they will become 10 years old, and now it will be expiring when those are becoming 13 years old.
We definitely consider this to be a positive. However, the same applies for our client.
Got it. Thank you. Also, just generally speaking, when you're thinking about charter renewals, I know you have quite a few vessels with charters expiring either by the end of this year or sometime in next year. When you're thinking about that and taking into account the overall macro environment and how it impacts the container market, when you're engaging in discussions with the charterers, how are the recent trade discussions kind of impacting your discussions with charterers? Is that coming into play?
I think that more simply, if it is a low charter environment like the one we are experiencing today, most probably we would decide to go for a shorter period, like a shorter period could mean 6-9 months or sort of up to a year. Then sort of rediscuss. For example, for the 11,000 TEU ships, which are new buildings delivered a couple of years earlier, for instance, for the Cape Akritas, as you saw, we chartered for $28,000 for a short period, although we had offers or there was an interest from liners to go for a longer period. We decided that based on where the market is today and feeling confident about the earnings potential of those vessels, we felt that the proper thing to do was to charter for a shorter period and then revisit.
At the same time, when you are repaying your loans and you have low leverage, like the leverage we have in those vessels, you have more flexibility in order to decide and determine your chartering strategy.
All right. Thank you very much for taking my question.
Thank you.
Next question comes from the line of Donald McLee with Berenberg Capital Markets. Please go ahead.
Hey, guys. Just to stick with the scrubbers for a bit. Could you talk maybe about.
Well, the cost, it depends on the type of the scrubber, but I would say for a large container ship vessel, it could be up to $6 million, the total cost.
Yeah.
It depends. Now, the installation, it depends again, but it could be four to six weeks, but it depends. You have to look at sort of each case individually. The cost, it is the cost of buying this equipment, of also installing. There may be some additional daily operating expenses. It is the cost of funding, and it is also the dry docking cost or the off-hire during the installation periods.
Okay. Just in terms of the timeline, I'm assuming it's before 2020. I'm not sure how much clarity you gave around if that CapEx is going to sit with you guys or it's going to be kind of amortized through the charter. If I had to model that CapEx directly on your cash flow statement, how should I look to unwind that through 2020, or is it ahead of that?
Look, if you want to adopt a generic approach about how to amortize scrubbers, I think the proper thing to do would be to amortize it over the entire charter period. This would be the proper thing to do.
Okay. Switching gears to the S&P purchase, could you talk a bit about what you thought was attractive? Those assets are, I believe, 20-plus years old, and they have charters that'll expire into a post-IMO 2020 world. Maybe what your long-term strategy is for those vessels, and what was the rationale behind the purchase?
Those ships, they are 1996 built, today they are 22 years old. They have a two and a half year charter, they will be, upon the charter expiry, they will be 25 years old, actually. We have chartered them to Maersk, which is a first-class charterer, we looked at the physical condition of the vessel, our expected cash outflows for the operating expenses, the charter hire, and the potential of financing. We are in discussions regarding the funding of those vessels overall, without factoring in any further chartering activity of those vessels, I mean, taking a more conservative scenario, we feel that the economics may change. In the past, we had ships of Costamare trading up until the age of 30 or 35 years old. I cannot claim that this is what we count on those vessels.
Conservatively, we have looked at the numbers factoring only this 30-month charter period.
Are you able to give any color around what the CapEx was for those vessels?
I'm afraid not. When we're going to be in the next quarterly results call, we may be announcing the financing of those vessels. I guess you may be getting an idea about the sort of actual CapEx.
Okay.
I can tell you that although they are older vessels and there is a misconception, older vessels can provide very good returns and can also be financeable as long as there is a proper technical management and also a creditworthy charterer.
Okay. One more just on where you guys sit and how's your view changed on counterparty risk from the liners over the past 12 months. There's been a couple of headwinds that have emerged, rising fuel costs for the liners, all the tariff overhang. How comfortable are you guys there?
Look, we have a slide with a pie chart showing the composition of our charterers, where the contracted cash flows of $2 billion come from. With all those names, we feel very comfortable regarding their credit quality today.
All right. That's all my questions. I'll turn it over. Thank you.
Thank you, Donald.
Next question comes from the line of Michael Webber with Wells Fargo Securities. Please go ahead.
Hey, good morning, guys. This is Salman for Mike.
Hi, Salman.
Hey. You guys talked a little bit about the fleet, and when I look at the, there's a couple tranches of vessels in your fleet that fit the age and tenor profile of the MSC vessels that are going to be installing those scrubbers, do we expect that this is the type of deal for other vessels in your fleet? Have you noticed or foresee a tipping point where other charterers might start engaging more aggressively to get those installations completed?
Yes. We are currently in discussions with other charterers as well for scrubber installation. Those discussions have to do with the cost of this investment and how this investment cost is going to be allocated between the charterer and the owner during the charter tenure. There are discussions as we speak. I think that should we find a solution which makes sense for both parties, it's going to be a win-win situation both for the charterer and for the owner.
Great. You touched on this a little bit, can you talk a little bit more about the timing mechanics of the actual installations and whether or not those are going to be incorporated into existing dry dock schedules or if they're going to need to come into new dry docks? What does the timing look like for that?
This depends on the vessels, and also on the specific dry docking schedule of each vessel individually. For those ships that we're discussing, we would expect to have the scrubbers installed, of course, prior to the first of January 2020, and most probably during the third and fourth quarter of 2019.
Okay, great. Then just taking a quick step back, I guess, looking at demand dynamics across vessel sizes, what is your perspective on looking at your future fleet and replenishing some of your older, smaller vessels? Do you see the need to maintain that fleet for those specific trades, or how are you looking at your fleet going forward in the next couple of years?
Look, if you look at our fleet list, you will see that we have pretty much all the sizes from 1,500 TEUs including 14,000 TEUs. These are the ships we have together with York Capital. We are pretty flexible. We mainly focus on how much we buy a vessel, what is the vessel's physical condition, earnings capacity, funding potential. We first try to cover our downside risk, then, of course, we also want to make sure that there will be also some upside for our shareholders. We don't analyze each vessel type with each type of trade, et cetera. We have view for some ships, especially, as you've seen all the new building transactions we've done, these are mainly for larger vessels. We tend to focus on larger new building deals.
Without meaning, however, that if the numbers make sense, that we wouldn't be doing new buildings. We are pretty much flexible as long as we feel comfortable with the asset and its earnings potential.
Okay, great. That's all from me, guys. Thank you.
Thank you.
I would like to pass back to Mr. Zikos for closing remarks.
Thank you for dialing in today and for your interest in Costamare. We are looking forward to speaking with you again at our Q4 results conference call. Thank you.
Thank you. That does conclude our conference call for today. Thank you all for participating. You may now disconnect.