On the eighth conference call on the second 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 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, Wednesday, July 25th, 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. Thank you. I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead.
Thank you. Good morning, ladies and gentlemen. During the second quarter, the company delivered profitable results. As already announced, we entered with Yang Ming into a 10-year charter agreement for five 13,000 TEU new buildings to be delivered between the second quarter of 2020 and the second quarter of 2021. Last week, we concluded with a leading European financial institution, the debt financing of the two recently acquired 5,000 TEU wide-beam vessels. We have accepted delivery of the first ship, which commenced its seven-year charter to Maersk. As it is common during this period of the year, the market has softened over the last weeks, and the falling demand for tonners has pushed up the idle fleet. We have chartered, however, 27 ships during the quarter, including our recent acquisitions. Finally, on the dividends, we declared our 31st consecutive quarterly dividend since going public.
Insiders have decided, as has been the case since June 2016, to reinvest in full their cash dividends in new shares. Moving now to the slides presentation. On slide three, you can see the highlights of the second quarter. Our adjusted EPS for Q2 was $0.10. Over the last quarter, we have chartered 27 vessels, including our recent acquisitions. We maintain a strong balance sheet with close to 40% leverage. Regarding the market, the idle fleet is, as already mentioned, 1.4% of the total fleet and the order book less than 12%. On slides four and five, you can see a summary of our recent chartering activity. What is worth mentioning here is the recent chartering of our 11,000 TEU ship Cape Sounio for a rate of above $30,000 per day.
Moving on to slide six, you can see our dividend payments as well as the sale for scrap of two older vessels. Slide seven shows the second quarter 2018 results. During the second quarter of this year, the company generated revenues of $91 million and adjusted net income of $10.5 million. Based on the above, the second quarter adjusted EPS amounts to $0.10. Our adjusted figures exclude 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 eight, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from first-class charterers like Maersk, MSC, Evergreen, Yang Ming, COSCO, and Hapag-Lloyd. We currently have $1.8 billion in contracted revenues and a remaining time charter duration of about 3.7 years.
As you can see on slide nine, as of the end of this quarter, we had cash of $160 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 68%. Over the last five and a half years, we have raised debt funding of close to $750 million for new business. On the last slide, we're discussing the market. Regarding charter rates, there has been some softening in the market, which is not uncommon for this time of the year. The idle fleet still stands at a low level. The order book remains at historically low levels of less than 12%. As already mentioned in the past, we are actively looking for new transaction in this market environment.
This concludes our presentation. We can now take questions. Thank you. Operator, we can take questions now.
Thank you very much, sir. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star and then one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star and then two. Again, if you wish to ask a question, please press star and then one. The first question is from Christian Wetherbee of Citi. Please go ahead.
Hi, this is Liam off of Chris. Thank you for taking my question.
Hi. Good morning.
Of the 27 vessels you entered into new charters for during the quarter, it seems that a few of them saw some pretty significant increases in rates. Should we see this as indicative of a potential turn in the market or higher? Do you think that you'll be able to continue to see the same level of rate increases going forward on new charters?
Look, most of the vessels, they have been chartered at higher levels. As mentioned during the presentation, for instance, the 11,000 TEU ship, the Cape Sounio, it was getting on average 18,000. Now it's getting above 30,000. Compared to last year or sort of the beginning of last year, the market is definitely at a much better stage, especially for the larger vessels. Now, I cannot predict where the market will be heading, and as mentioned, we have seen some softening in the charter rates over the last weeks, which partly has to do with this time of the year, partly it is attributed to seasonality. Overall, I think that if you look over the last 12, 18 months, charter rates have moved substantially up.
Since most of the ships we have, especially the smaller vessels, they have been fixed for nine, 12 months or for generally shorter periods. I think that for those ships, we are now seeing some upside.
Got it. I guess focusing on the time frame, I guess, particularly for those small vessels, as rates kind of improve, are you going to continue to look for new 9-12 month charters, or are you going to consider taking longer-term charters? I'm just thinking about your perspective on the length of the charter.
It depends on the rate. If we feel that the rate is such so that it can justify a medium or long-term commitment, assuming that there is a market there for a medium-term charter, we'll do it. We are pretty flexible. Otherwise, we may keep chartering for six, 9-12 months, especially for ships that have been bought in a low asset value environment, as are most of our second-hand vessels, those that you know we have been buying over the last two to three years. I think there is generally more upside rather than downside. Regarding the tenure, it is a function of the charterer, a function of the charterer's appetite for medium or long-term commitment, and the charter rate we will be offered.
Got it. Just one final question. As you guys think about capital allocation going forward, I know you guys placed the new building orders and have purchased a couple of vessels recently. I'm just thinking about going forward, how do you see your focus in terms of capital allocation?
I guess we are pretty much flexible. First of all, our main priority is to cover our downside in every single transaction, whether it's a new building, second-hand vessels with or without charter. As you've seen, we've done new buildings with a 10-year charter back-to-back upon delivery. We've done second-hand ships, 2013 build with a seven-year charter. In the past or recently, we have also done second-hand vessels charter-free. As long as the numbers work and as long as we feel comfortable with our residual value risk, we are pretty much flexible. We're going to do everything as long as it has to do with container shipping. If you look at our fleet list, you will see that we start from a 1,300 TEU ship up to 14,000 TEU new buildings.
What matters is the numbers and whether we feel that first of all, the risk associated with every transaction is within our tolerance levels, and secondly, of course, there needs to be some upside for our shareholders.
Got it. Thank you very much for taking my question.
Thank you. Thanks.
Thank you very much. The next question is from Fotis Giannakoulis of Morgan Stanley. Please go ahead.
Yes. Hi, Greg, our thoughts are in Athens that is going through a very difficult time right now. Jumping to business, I want to ask you about if you have seen any impact from this trade frictions and the tariff discussion, and if you have any views of how the industry will be impacted by this potential U.S. tariffs on Chinese goods, and how your company and other companies in the industry are prepared for such a scenario.
Yeah. First of all, I think today it's a bit early to forecast or to judge what's going to be the effects going forward because there are various discussions regarding whether there will be some tariffs imposed on what value of goods, et cetera. This is something that has not been crystallized yet. It's not something that I am prepared to forecast what's going to be the effect, if any, on the Trans-Pacific or generally on the trade. At the same time, I need to mention that we have seen some liner companies cutting their schedules, especially from the Trans-Pacific. We need to remember that this part of the year, it is the slack season for container shipping. There are also some seasonality factors there.
Admittedly, it's not only seasonality, but I think it's too early to judge what's going to be the impact on the Trans-Pacific. Now, from our side, we have ships that are chartered under long-term contracts, and we have especially smaller ships that may be on the spot market six, nine months charters. We continue doing the same business and the same strategy as before, and I'm not in a position now to judge what's going to be the effect over the next three, six, or nine months. I think that it's in the benefit of no one to have any new trade barriers, but it remains to be seen how this is going to play out.
Can you also comment how is your company protected or prepared for any scenario that might affect trade?
Look, I think very simply we have low leverage. We're repaying our debt prudently. We are trying to buy low and charter at a low charter rate so that this is a deal which is beneficial for both the liner company, our customer, and ourselves. We have net debt as you may have seen, of $900 million as of the end of this quarter, and we are repaying north of $200 million of capital every year. I mean, we are deleveraging very rapidly. I think that we are one of the very few companies that during the post-Lehman crisis we didn't even breach a single financial covenant. I don't think that we have not been tested in previous crisis. In case there's going to be one now, which it may not be the case at all.
Also we feel very comfortable with the quality of our charters and also with our contracted cash flows. We make sure that always we have cash on the side in order to service our obligations first, and then opportunistically do some new transactions. I think this is what we have been doing and that we will continue doing irrespective of any potential trade barriers.
Thank you, Greg. I want to jump on these new deals that you announced recently, the five new buildings and the two modern vessels with Maersk. First of all, these are among the very few transactions that we have seen with very long-term contracts after a very long time, especially for new buildings. Can you give us a little bit of a background of how did you get these deals and what was the competition for these transactions? Why Yang Ming needs these vessels, and how do you view Yang Ming if this is a new name in your portfolio? Also, if you can comment about the returns of these deals, how they compare with the previous transactions that they were giving double-digit EBITDA yields.
Yeah. First of all, regarding the Yang Ming new buildings, with Yang Ming, we did have a relation in the past. We had ships chartered to them. I agree that this is the first new building transaction we have with this company. We are very happy with the expansion of this relationship with Yang Ming. This was a simple competitive bid process where also other ship owners participated, providing a bid for the vessels. Apparently, Costamare won five ships, and five other ships were won by another ship owner. This was a competitive bid process that took place some months ago. Now, regarding the returns and the numbers, I'm not at liberty to discuss those publicly. I can say that the returns are more or less reflect previous new building transactions we've done in the past.
We are now in the process of arranging the financing for those ships on a pre and post-delivery basis. Hopefully during the next quarterly results call, we will be in a position to announce the closing of this funding. Apart from the Yang Ming transaction, there were two 2013 wide-beam vessels, which we bought from a third party, and we chartered on a back-to-back basis to Maersk. This mirrors another transaction we did with Maersk in 2017 for the Kyparissia and for the Leonidio. Similar vessels, again, for seven years. There are not a lot of medium to long-term charter commitments in the market today for secondhand ships. We are very happy that we concluded this deal with Maersk which is one of our main clients today. Those two transactions today, we talk about contracted revenues of close to $650 million in aggregate for both deals.
I think that these are deals that are definitely accretive and make sense for the company.
Can you comment a little bit on why you managed to have the most competitive bid for this long-term charter? Was it a matter of cost of capital or financing? Did you know what type of financing you would be able to get? You were bidding for these vessels. Give us, if you can, some idea about the cost of construction of the new buildings. I see on Clarksons that the price for a 13,000-14,000 TEU new building has jumped from $108 million-$112 million. I’m just trying to see if these values that we see on Clarksons are close to what you are buying these vessels, and what was the competitive edge that you had?
Yes. First of all, I don’t have information about what sort of other ship owners offered. I can tell you that we tried to put together a competitive bid that had to do with the new building price, that had to do with the charter rate. Into the charter rate offering, we have factored in our cost of funding, we try to be competitive there. It’s not only the charter rate, it is the whole package which is provided to the liner company. Apparently, this is something that made sense for Yang Ming, we are very happy with that. Regarding the new building prices, I’m afraid, again, I cannot reveal the price. I think the $110 million or something, I think we had a more competitive price compared to those figures.
Can you also comment about the potential of new transactions, where do you view the opportunities going forward? We saw a very spectacular rally for the smaller ships. How shall we view the fact that you chartered so many vessels during this quarter? Is this more of a defensive approach or just an opportunity that it was too good to take it? Also, where do you see that among the different classes, there are better returns going forward? In the past, you have said that you will avoid the traditional Panamax vessels. Has this view changed given the recent improvements in rates for Panamax?
Yeah. First of all, as mentioned earlier, we look at pretty much everything, whether it is secondhand or it is new buildings, we are actively looking at new transactions, both new buildings and secondhand vessels. Now, regarding the Panamax ships, as you can also see in our fleet list, we have a very few traditional Panamax in our fleet. These are ships that we bought years ago with a long-term charter. The two ships now we have chartered for seven years to Maersk, these are 5,000 wide-beam ships, so these are definitely not the traditional Panamax vessels. I agree that charter rates for the Panamax ships, for the traditional 4,250 TEUs, they have moved up from 2016 up until now, or beginning of this year.
Still, we feel that we could make a better use of our funds if we invested in other ship types compared to the traditional Panamax vessels, which today they are getting close to $13,000 per day, let’s say. We don’t view a lot of upside on this specific asset class. I think that most probably you will not see us entering into any secondhand Panamax-type transactions.
One last question about the favorite topic of the year and the IMO 2020, if you’ve seen the approach of the liners changing at all the last few months. We’ve been hearing in other sectors a lot of companies willing to install scrubbers. How do you view that the container ship industry overall will address these new regulations, and what will be the impact also on speed of the fleet and also the profitability of the industry overall?
Generally, the scrubbers, when there is a long-term charter, it's normal and it makes sense to enter into an open discussion with the charterer regarding the cost of installing the scrubbers, and this is something that should be discussed with the charterer. For smaller secondhand ships, older vessels, it's more a wait-and-see type of approach from us for the time being. We are now evaluating the situation. I cannot tell you that today we are prepared to start installing scrubbers in the whole of the fleet. It doesn't make sense. For long-term charters, we are in discussion with the current charterer or with future charterers that have an interest in the vessel, how to allocate the cost of the scrubbers. I think this is pretty much it.
For secondhand ships or for older vessels, we're not in a position now to start installing scrubbers, especially when we don't have a clear view about the payback period and mainly whether there will be any payback at all.
Can you comment from the perspective of the liner operators, how do they view the new regulations? Are they going to install scrubber in a large part of the fleet? Do you have an estimate if it's going to be 10%, 20%, 30% of the fleet, or if they will go with a new low sulfur fuel. What would be the impact on the average speed of the global fleet, these new regulations?
I think I don't have the concrete number for the whole sector right now, I think this equation, this would be mainly addressed to the liners. I think, different liners companies have come out publicly with a different approach. Some have said that, most probably they will not be installing scrubbers. Others have been more positive on the scrubber potential. I don't think that today there is a common view to be followed by sort of all the sector participants. Each liner company has its own circumstances and concerns and may follow a different path. Some of them have publicly mentioned that they will not be installing scrubbers. Others have hinted that may be doing the opposite. I'm afraid there is not a clear answer here.
Thank you very much, Greg.
Thank you. Thanks for that. Thank you.
Thank you very much. Our next question is from Michael Webber of Clarksons Platou Securities. Please go ahead.
Hey, good morning, Greg. How are you?
Yeah. Hi, Mike. Good morning.
Hi. I think there are probably a handful of questions left. Just digging back into, I guess both the new build deal, and then maybe the scrubbers. Maybe starting on scrubbers, just because where you just left off. Forgive me if you mentioned this during your prepared remarks, the new builds that you're providing to Yang Ming, are those going to be scrubber-ready? Was that something that was specified in the tender? Was that left open to the ship owners to make their best estimates on?
No, this is something that was specified in the tender. There is an agreement with the charterer regarding the use or probably not the use of scrubbers. I cannot go into more details, I can tell you for sure that there has been an agreement with the charterer regarding the potential use of scrubbers in the future.
All right. It would be safe for us to consider those new builds scrubber-ready, at least?
Yes, you can say that. As I said, this is a common decision. This was a discussion that took place during the bidding process with the charterer. There is a very specific timeframe within which to sort of decide whether to install scrubbers or not.
Okay. Now, I guess within that conversation and others you've had, are you noticing within the container lines, are they in your customer base? Are they starting to get a bit more specific around their views, where maybe six months ago, it was left wider open? Are more people in your customer base starting to make up their minds now? Maybe, if you can think about some of your recent conversations, have you had any recent conversations with liners where they just weren't sure about what they were going to do?
I think that for long-term charters, liners are investigating the possibility of installing scrubbers, subject to agreeing on the cost.
Yeah.
There are discussions. There are definitely many more discussions for long-term charters compared to discussions we had on the scrubbers six months ago or a year ago, obviously. There are discussions, but I cannot say that this is an easy decision. There is some interest, but I'm not sure in how many cases this interest will finally lead us to installing scrubbers or not. I cannot tell. There are definitely discussions with charters.
Got you. That type of math is going to be different for your smaller ships that are going to be on shorter term employment.
Correct. For shorter term-
Has that started to permeate the way you think about the residual value risk for some older ships in the smaller size, in your smaller scale tonnage that are pretty flexible, that I think provide a lot of utility to container lines. It doesn't drive a lot of your cash flow, but I think it's nice for your customers. I'm just curious, have you guys internally with those ships, knowing that if you put scrubbers on them, you're probably going to have to pay for it. Is that something that you guys have made your mind up about yet, and just how you think about it specifically for the Panamax and below?
No. For those ships, unless we have a very clear picture, and conviction that there's going to be a payback period for those scrubbers. No one would start investing in something without having an investment plan. The payback, unless it is clear, I don't think any ship owner would be willing to put money for something that, not sure whether this will be paid back or not, and over what period of time. Especially for ships that have a six or nine-month time charter, it's going to be difficult. For those ships, I think we are considering our options, but as the situation is today, we wait and see. We're not ready to proceed-
Right
installing scrubbers for those ships.
For smaller container ship tonnages, more likely we see people wait to after 2020 to see how spread shapes up.
Correct.
At that point, you'd go in. Okay. That makes sense. Just one more on the deal on adding the term tonnage. I know you guys have left some of the specifics out, but With the revenue guidance, we can back into a rate. There's obviously a fair amount of sensitivity in terms of price, but can you give us a vague sense of an EBITDA multiple you think we could apply to that tonnage? If I think about it, if I think of a rate of a little over between $35 and $36 a day, if those vessels are priced like the data stream that Fotis was referencing, that implies a multiple that's in the low to mid double digits. If they're priced more like 10,000 TEU vessels, that's at or below $100, and that's something around 10.5x, which seems a bit more palatable.
I'm just curious, within that kind of context, can you help us out with discerning exactly how much you paid for these ships?
Look, I cannot comment on any figures, neither on the charter rate nor on the acquisition price. I can tell you that the economics of those transactions are very similar to the economics of previous newbuilding transactions we've done. I'm afraid I cannot discuss.
Where would you ballpark the payback period on the ship? Getting color on exactly how much you paid for a pretty big investment I think is pretty reasonable, right? Without getting too specific or giving away any kind of trade secret, like some ballpark number around either payback period or even a range of EBITDA multiples that's probably big enough to drive a bus through would be helpful at this point. Are we talking about an EBITDA multiple that's north of 11 times?
Look, regarding the capital commitment, okay, to start with, I think in our 6-K, we will have some disclosure because it is required, and you will see it then. Now, regarding the, again, EBITDA multiple you will have a different EBITDA multiple for a 10-year deal compared to a five or seven-year deal. I'm afraid I cannot provide an EBITDA multiple. If you see the capital commitments for those five vessels and also knowing that the economics are pretty similar to previous newbuilding transactions we have for a similar tenure of 10 years, I think it's going to be pretty obvious what's going to be the EBITDA multiple or what is the range of the time charter rate. I'm afraid I cannot enter into more discussions here on the numbers.
Yeah. No, what I just want to mention, what I'm saying is when I apply that historical math, I get to an EBITDA multiple that's pretty high. That implies a pretty healthy amount of residual value risk, which is why I was hoping you could give a bit of a range. Again, because that pricing is fuzzy. I can wait until this filing comes out where we get some actual pricing detail. It's helpful for owners of your stock to know what you're paying for big slugs of.
I understand. No, I fully understand. I wish I was at liberty to discuss more because I truly believe that these are very good transactions and accretive transactions for our shareholders. Because they are done in a low asset value environment, I consider them to be good transactions both for the liner company and for ourselves. There will be some disclosure in our 6-K, and we can take it from there. I think this is the wisest way forward.
Okay. Thanks, Fotis.
Thank you.
Thank you very much. Our next question is from Donald McLee of Berenberg. Please go ahead.
Good morning, Greg.
Yeah. Hi, Donald. Good morning.
A lot of the questions have already been addressed, but I just want to follow up on the Cape Sounio charter. Could you provide more color on the negotiating process there? Was there an opportunity for more term, or was that duration dictated by the charterer?
I think the ship was getting around $18,000, this was extended with the same charterer for a period of seven to nine months at about $30,000. It is close to $30,700 or so. The reason is that the charterer apparently committed a vessel. This is a 2017 new build by Hanjin in Philippines, the market for those type of vessels has moved up substantially compared to where the market was in 2017, beginning of mid-2017. especially those type of assets have moved up a lot. We didn't fix for a longer period because we feel quite comfortable with the earnings potential of the vessel. At this point, we decided to extend the ship for seven to nine months, then we'll see. The $30,000-plus charter hire is more than enough in order to service the ship's debt obligations and provide us with an equity return.
Got it. Just looking at some of the sister ships, the Accretis and Accordia, are there similar level of interest for rechartering discussions there?
Yes, there is some interest. The second sister ship opens up in October. We are in discussion with potential charterers for period and for charter hire. We'll see. The market today definitely is not where it used to be in the region of 18,000. It's a much healthier market environment for those ships today.
All right. Perfect. That's all my questions. Thanks. I'll turn it over.
Thanks.
Thank you very much. Sir, it would appear that we have no other questions in the queue at the moment. Do you have some closing comments?
Okay. Thank you very much for dialing in today and for your interest in Costamare. We are looking forward to speaking with you again during our next quarterly results call. Thank you.
Thank you very much, sir. Ladies and gentlemen, that does conclude our conference call today. Thank you all for participating, and you may now disconnect your line.