Good morning, and welcome to the Costamare third quarter 2017 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Gregory Zikos, CFO. Please go ahead, sir.
Thank you, good morning, ladies and gentlemen. During the third quarter, the company delivered positive results. On the financing side, we entered into a debt financing agreement with a leading institution for the financing of the Maersk Kowloon. The vessel has a five-year charter to Maersk. Regarding our commitments, all of our newbuilding program is fully funded with remaining equity commitments amounting to only $2 million during 2018. Regarding chartering, we chartered in total, 15 ships during the quarter at substantially higher rates. We have no ship laid up. Finally, on the dividend and the dividend reinvestment plan currently in place, members of the founding family have decided to reinvest in full the third quarter cash dividends. This is the sixth consecutive quarter that insiders have decided to reinvest their dividends in new shares. Moving now to the slides presentation.
On slide three, you can see a summary of our recent chartering activity. The way the market has been moving is obvious. On average, the ships opening have been rechartered at a 23% higher rate. On slide four, you can see the new financing for Maersk Kowloon, which has been acquired in the second quarter and commenced its five-year charter to Maersk Line. The loan is being amortized during the tenure of the charter party. We also sold, during the quarter, two nearly 30-year-old container vessels for demolition. The sale of those ships resulted in an accounting gain of approximately $1.5 million. Moving on to slide five. During the previous quarter, we declared $0.10 cash dividend per share on our common equity and dividends for all three classes of our preferred stock.
As already mentioned, insiders have decided to invest all their third quarter cash dividends in new shares under our dividend reinvestment plan. On slide six, you can see the third quarter 2017 results. During the third quarter of this year, the company generated revenues of $101 million and adjusted net income of $17.2 million. Based on the above, the third quarter adjusted EPS amounts to $0.16. Our adjusted figures take into consideration the following non-cash items: the accrued charter revenues, the gain or loss on sale of vessels, the gain or loss resulting from derivatives, the amortization of the prepaid lease rentals, which is a non-cash charge, and the non-cash D&A expenses. On slide seven, we are showing the revenue contribution for our fleet. 99% of our contracted costs comes from first-class charterers like Evergreen, MSC, Maersk, COSCO, Hapag-Lloyd.
We currently have $1.3 billion in contracted revenues, and the remaining time charter duration of about three years. On slide eight, you can see the resilience of our business model. The bars show the revenues and adjusted net income since 2008. The dotted line is a time charter index. Irrespective of market movements, the company has been consistently performing. Moving on to slide nine. As of the end of this quarter, we had cash on balance sheet of $234 million. We are conservatively managing our balance sheet, having brought down net debt from $1.7 billion in 2013 to $1 billion as of today. During a five-year period, we have raised debt financing of close to $750 million for new business. Based on the latest compliance certificates provided to our lenders, we have a leverage in the region of 51%. On the last slide, we're discussing the market.
Charter rates moved up during the first three quarters of the year with the market softening since the beginning of the fourth quarter. The idle fleet currently has moved up to 3.1%. The order book remains at a historically low level of around 14%. As already mentioned, we are actively looking for new transactions in this market environment. This concludes our presentation. We can now take questions. Thank you. Operator, we can take questions now.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Chris Wetherbee of Citigroup. Please go ahead.
Good morning. This is Dora Huang for Chris.
Yeah. Hi, good morning.
Hey, good morning. First question is, there were several vessels, I think around 10, approaching the end of charters in the next two months. Just wondering if you could comment on the renewal activities so far in fourth quarter.
Yeah. Two points. First, as you have seen, we chartered 15 ships since our latest announcement. We have been relatively active, and today although the number of idle ships has come up slightly above 3%, we have no ships laid up. I cannot possibly predict the rates and the tenures for which those ships will be chartered. I can tell you that we will try our best in order to maximize the potential of those assets. I'm afraid I cannot give you a precise answer about the chartering of those ships. Generally speaking, we start marketing the vessel sometime before its opening, meaning before this comes out of charter, either with the current charterer for an extension or with new charterers.
I see. That's helpful. Just to follow up, do you have any updates on the two vessels that are scheduled for delivery in 2018?
Yes. You are referring to the 2 new buildings chartered to Hamburg Süd for 7 years. Based on the latest information we have, those ships will be delivered on schedule, meaning during the 1st and 2nd quarter of 2018. The 1st ship will be delivered during the 1st quarter of the coming year, and the 2nd during the 2nd quarter, as per the initial schedule with the shipyard. The ships are chartered to Hamburg Süd for 7 years. Just to remind you that those ships have been bought under our joint venture with York, and Costamare has a 49% stake in each of those vessels.
Okay, that's helpful. If I may, can I show that order book for container ship now, I think it's 13.8%?
Correct
There are a lot of ships to be delivered in 2018, assuming no slippage. Can you give us some color on how you think about order book and the charter rate environment next year? Thank you.
Yeah. You're right that we have an order book today which is slightly below 14%, which from a historical perspective is a very low number. However, there are deliveries to take place within 2018. Different people come with different projections regarding what's going to be the net additions to the fleet. This has to do with the assumptions you make regarding slippage and demolition of older ships. The order book today is heavily skewed towards the larger vessels. There's more than 1 million TEUs to be delivered next year. However, the precise numbers have to do, they are a function of the slippage and of the demolition. I cannot possibly forecast that. However, from 2019 onwards, the order book is very thin, and apart from the 2 latest orders from liner company which we saw, which are for large vessels, 20,000 TEUs.
Generally speaking, the new building market has not been very active, especially compared to the previous years.
I see. That's very helpful. Thank you.
Thank you.
Our next question today comes from Gregory Lewis of Credit Suisse. Please go ahead.
Hey, good afternoon. This is Joe Nelson on for Greg today. Thanks for taking my questions.
Hi, Joe.
First one from me. The market looks to be off its bottom, we seem to be in the early stages of a recovery here. Are customers beginning to come to you with sort of longer terms on their charters, maybe looking to extend where maybe a year ago it was a six-month charter, now maybe it's a year at a better rate? Maybe a second part to that is, what do you think we need to see before we start to get those real long-term multi-year charters starting to get fixed once again?
Yeah. The charter market has been moving up during the first three quarters of the year. From the beginning of October, which is something relatively unusual in container shipping because there is some seasonality there, we have seen some softening in charter rates, especially after the week of the Chinese New Year. However, I'm not sure whether this is a trend or whether this has to do with the seasonality of the business. As you may have seen, we've chartered our two 11,000 TEU ships for about a year. In the second quarter, we chartered three second-hand ships for five and seven years. I cannot say that today there are long-term or medium-term fixtures like the ones we experienced in the past. However, there are transactions which involve longer charter durations.
What needs to be done or what do we need to see before liners committing for longer periods? This has to do with each liner company's strategy, positioning. It's also a function of demand growth. Liners, I guess they need to feel comfortable about committing for long-term chartered in tonnage. I cannot possibly predict when this will be happening, but we've seen some encouraging signs over the last quarters.
Thank you. Second, in thinking about your fleet, the IMO does have a couple of new environmental regulations coming into effect, the ballast water treatment, sulfur caps.
Some of your customers have been pretty vocal in their support of some of these rules. Do you have a view on what, if any, potential capital outlays might be needed in, say, the next two years or so to position your fleet ahead of these new rules?
First of all, regarding the water ballast treatment, as per the latest developments, this will be effective from 2020 onwards. This was postponed, so it's like two and a half years until actual implementation. Internally, we have looked at numbers about how much would be the CapEx required for that, but I think in shipping, trying to predict two and a half years in advance what's going to be the situation and what's going to be the capital outlay required from 2020 onwards, I'm afraid this is going to be a very generic approach. For the next two and a half years, as far as we know, the water ballast treatment is something that will not be applicable. However, we have run some numbers from 2020 onwards, but it is at a relatively premature stage today.
Just kind of thinking about it, when do you think you might have to make some decisions on timing any potential upgrades? Is it maybe next year or a 2019 kind of decision?
First of all, it's impossible to know today to whom those ships will be chartered in 2020, is the first point. The second point, I guess a year in advance or some quarters in advance, we will have a much better picture. From our side, we will make sure that whatever cost requirements are there, we're going to be more than able to meet them.
All right. Thank you very much for the time today. Now I'll turn it over.
Thank you.
ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then one at this time. Today's next question comes from Ben Nolan of Stifel. Please go ahead.
Yeah, thanks. Hey, Greg. I wanted to follow up a little bit on something that you were mentioning earlier with respect to looking for new opportunities. Obviously you did the Maersk vessel, and announced it in the second quarter. Has there been much activity there among some of the liner companies looking at their existing fleets, trying to find assets that can be chartered out, taken off the books and held by someone like you and doing it on longer term charters, or are more of your conversations revolving around sort of new builds or new opportunities?
Today, the new building market is not very active with a couple of exceptions. Most of the discussions or the new transactions we look at mainly have to do with second-hand vessels, either a sale-and-leaseback or buying from a third party ship owner or buying from a financial institution and chartering out the ship to the liner company for a period. We have not engaged in any discussions regarding new buildings today, the market is not very active in that front.
Okay. There are discussions for maybe existing equipment, that sort of thing is more active, I guess?
Yeah. Sale-and-leaseback or sort of buying some distressed, in brackets, type of assets which we can lease out or charter to liner companies. I think this is the vast majority of the business we're currently looking at. We are engaged in a lot of discussions. We're generally active. We need to make sure that the deals we're going to be entering into will also be making sense for our shareholders.
Yeah.
The first thing we look at every transaction is first to cover our downside. The second step is to also make sure that there is some good return for the shareholders.
Okay. To that extent or thinking through it, obviously you guys had been relatively active in buying vessels without contracts over the last few years just at distressed prices, as well as a few sale-and-leaseback. Given the improvement in asset values, do you think that there is still good value in buying vessels without contract, or is it better at this point in the cycle to be doing things that have firm contracts and guaranteed return?
Oh, I think you can still find deals that make sense whether it is with the charter coverage, like the transactions within beginning of the year with Maersk or buying ships with equity with a short remaining time charter duration. As long as we feel comfortable with the quality of the asset and also with its chartering potential, we're looking at both cases.
Okay.
Of course, if we buy something without charter coverage, we need to make sure that the price we pay is something that we feel very comfortable with the chartering potential of this vessel.
Right. Lastly for me, this is something that has come up in a few conversations that I've been having with various owners recently. It seems like some of the bigger owners like yourselves did a relatively good job or had better success in finding employment for vessels in the really trough parts of the market rather than a lot of the smaller operators who it seems like they had the preponderance of layups. There's a sense that among people that I've talked to, that it's increasingly harder for smaller container owners to really be viable throughout the cycle, and that it makes more sense for bigger owners to sort of be that counterparty for the liners. Is that something that you guys feel as well, and are you seeing any difference in the level of competition out in the market?
Yeah. It's a couple of points. First of all, it's a capital-intensive business, and as a shipowner, you need to maintain the vessel in such a way so that it can be chartered out to a major liner counterpart. Liner companies want to charter in vessels from ship owners that they know that they have the financial means to service their debt, to manage properly their vessels for the coming years. Although I don't have something specific in mind, I can tell you that generally, having access to capital and being well-capitalized, it's something that definitely makes sense, especially in today's market environment.
Okay. All right. Thanks a lot. Appreciate it.
Thank you.
Our next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.
Yes. Hi, Greg. Thank you for the opportunity. Greg, I want to ask you about the competitive landscape and the use of the capital that you have in your balance sheet. I understand that asset prices have moved up the last six months. I'm wondering whether you encounter more competition from other ship owners when you look for new acquisitions or from liners, and how overall is the landscape out there?
I think that if you compare the competition we are seeing today with the competition that we experienced years ago, I think today there are definitely less competitors as pure container ship owners. As I was mentioning earlier, access to capital, whether it is equity or whether it is commercial bank debt or whether it is Chinese leasing in whatever form, it's something that's definitely important. The competition is much less compared to what we saw in the past. This is the first point. The second point is that Costamare has been shipping for over 40 years. There are very strong relationships with all of our clients, and we need to make sure that we cater to their needs. There is competition today. However, the competition is much less from what was in the past, which is a healthy sign.
Can you give us an idea of how many deals you have seen the last six months since the most recent capital raise, and what were the reasons that we haven't seen any deployment of this capital? Also, would you consider using part of this capital to buy back your stock?
First of all, we have done some transactions since the beginning of the year. Two of those vessels were 2014 build. The other was 2005 build, 2012 build. We've seen transactions that, and we have done some deals now. We have participated in various bid processes for ships coming out from other ship owners or coming out from financial institutions. However, we were willing to bid for up to a specific price for the vessel, and we didn't want to take excessive residual value risk. We might have access to commercial bank debt, a Costamare balance sheet of north of $200 million to use as equity. However, it doesn't mean that we're going to go and buy or commit to anything that it is out there without making sure that we feel comfortable about the quality of the counterparty and of the deal economics.
If you ask me, yes, we've seen a number of transactions involving more than, I would say, 15, 20 vessels over the last couple of quarters. We have passed on most of them. It doesn't mean that, and today, as we speak, we look at a lot of things. I think that there are definitely opportunities. Hopefully, over the next quarters, we're going to be able to discuss those in more detail. We also have some internal risk assessment, and we need to make sure that we don't take excessive risk, especially in today's market environment.
Thank you, Greg. One last question. There are some articles out there about a potential cooperation with one of the largest ship managers and ship owners in the container ship space and the creation of a chartering joint venture with Costamare. Is there something that you can comment about to give us some color? How important it is for you that you have a large fleet to secure profitable charters versus some ship owner that has a much smaller vessel? How this cooperation can change your bargaining power versus your customers?
I cannot say a lot at this stage, also for legal reasons. The only thing I can say is that we are in discussions regarding putting together just a simple charter brokerage business. That's all. I cannot say more, and this is something that we can discuss, I guess, in the next quarterly results call.
Could you give me a brief comment of the importance of having a large fleet versus ship owners that they have two or three or five vessels, and how different is the competition when you are trying to secure charters?
I think that it's two things. What we are discussing with our German counterparts, I have to stick to that. It is a charter brokerage business where we're going to be combining the commercial charter activities of our fleet, that's all. We feel it is something that generally makes sense. Costamare will not be involved. It's going to be affiliate parties being involved. Costamare will not be part of this agreement. At this stage, I'm afraid I cannot say anything more. However, I have to stress that it is a simple, a plain charter brokerage business. That's all.
Thank you very much, Greg.
Okay. Thank you.
Our next question comes from Michael Webber of Wells Fargo. Please go ahead.
Hey, good morning, Greg. How are you?
Hi, Mike. Good morning. Hi. Thank you.
Hey. Good. Just a couple questions. A lot of it's already been kind of parsed over. I just wanted to comp maybe where we are this year relative to last year when rates got a bit tighter, a bit faster than everyone expected. It looks like the idle shipping capacity it's up maybe quarter-on-quarter, but we're still off year-on-year, so things are naturally a bit tighter this year relative to last year. I'm just curious, how would you compare your rate expectations for the next 6 months relative to where we were last year? Do you think we're on the same kind of seasonal pattern, albeit maybe a bit amplified?
Yeah. Look, last year, 2016, I think it was a very bad year for container shipping, especially for charter rates. If you look at the charter rates like Q2 or Q3 2016 versus 2017, today the market is much better, and charter rates have improved substantially during the first 9 months of this year. We have seen some softening beginning from October of 2017, which is something expected from our side, and it's got to do with seasonality, Chinese New Year, and traditionally, the third and especially the fourth quarter of every year are the type of weakest quarters in container shipping. I cannot predict where sort of rates are going to be heading moving forward. However, I can tell you that there are positive signs coming from demand growth, which has been exceptional up to now this year.
The order book, apart from two big new building orders put by liner companies, has not been very active. We haven't seen a lot of new building ordering. There is, up to now at least, generally speaking, much more discipline. Charter rates, although they are much below the mid-cycle levels, they sort of have improved, and it remains to be seen whether they will continue. From 2019, we have a very thin order book. There are some positive signs. However, it is a market. We have been experiencing a down market, generally speaking, for the last 6, 7 years at least. I cannot possibly predict, but I can tell you that as a company, we know what to do, and we have a plan under each scenario. If the market stays as it is, meaning the softening in the charter rates, this may provide with more opportunities.
Yeah. Okay.
At the same time, we have ships coming out of charter over the next couple of quarters, and it's going to be a positive surprise to see the market moving where it was beginning of this year.
Okay, thanks. Maybe just one more strategic question. If you think about the fact that you've got some real consolidation happening now among the liner complex as opposed to alliances and really more capital discipline and those larger lines, the cost of capital advantage there relative to their, at least their container ship leasing partners is going to be even wider and inverted. I'm just curious, when you think about the intermediate-to-long-term with larger customers, when you look at your fleet, you've got the smaller operating vessels, it's probably a higher return business than you've got these large slugs of vessels on the container lines. Does that business make sense in terms of those large slugs of large ships chartered into lines five, six years from now?
If you look at the split of your business, do you think you are more of an operator in five years than you are maybe a balance sheet provider to some of the container lines?
Look, we have always been an operator.
Right. You're an operator now. More so than some of your competitors. I'm just curious, does that split get a bit wider five years from now? Are you doing more of that shorter term business where you can really add value from an operating perspective as opposed to just chunks of capital that's less attractive?
No, I think that I cannot predict the future, but I can tell you that our strategy is to remain an operator, charter our ships to liner companies. Liner companies they always need to charter in some ships, and they cannot own 100% the fleet they operate. However, it's not part of our strategy to become a financing vehicle. Our goal is to continue buying operating, financing those assets which we charter out to liner companies. We also take the residual value risk at the expiry of the charter party. This is what we have been doing.
Yep.
I think this is what we will continue doing. I understand that the market, the liner company business is much more consolidated. At the same time, this has some positive implications because we have stronger clients who may be willing to do bigger business. I don't think that this should change our business model.
Okay. All right. Thanks for your time, Greg. Bye.
Thank you.
Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Zikos for any closing remarks.
Okay. Thank you very much for your interest in Costamare and for dialing in today. We're looking forward to speaking again with you at the next quarterly results call. Thank you.
Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.