Welcome to the Costamare Inc. conference call on the second quarter and first six months 2017 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 questions, please press star then one on your telephone keypad, and wait for your name to be announced. I must advise you that the conference call is being recorded today, Wednesday, July 26, 2017. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read slide number two in the presentation, which contains the forward-looking statements. I will now pass it to our speaker today, Mr. Zikos. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. During the second quarter, the company delivered solid results. We recently accepted delivery of three second-hand vessels, which have been chartered for periods ranging from five to seven years. During the quarter, we entered into debt financing arrangements for two of them, and we are into discussions regarding the debt finance of the third ship. As of today, all of our newbuilding program is fully funded, with remaining equity commitments amounting to only $2 million during 2018. On the chartering side, we have no ship laid up. We continue to charter our vessels, having chartered in total six ships since the last quarter.
Finally, on the dividend and the dividend reinvestment plan currently in place, members of the founding family, as has been the case since the inception of the plan, have decided to reinvest in full the second quarter cash dividends. As mentioned in the past, our goal is to strengthen the company to enhance long-term shareholder value. In that respect, we are actively looking at new transactions selectively. Turning now to the slides presentation. On slide three, you can see the vessel delivered during the quarter. As already mentioned, three second-hand ships were delivered, and the debt for the two of them has been arranged. We are currently in the process of arranging the debt for the third ship as well. Also, the last of a series of five 11,000 TEU newbuildings were delivered. This vessel was bought under our JV with York, and upon delivery, she commenced her charter employment.
On slide four, we discuss our recent common stock offering. The offering was upsized from initially 12.5 million shares to 13.5 million. The net proceeds amounted to $92 million. Insiders, as has been the case in all of our common stock offerings, participated by buying $10 million worth of shares. On slide five, you can see a summary of the chartering arrangements which have taken place during the quarter. We chartered in total six vessels. Today we have no ship laid up. Moving on to slide six, we are showing the dividend declarations. 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 second-quarter cash dividends in new shares under our dividend reinvestment plan.
On slide seven, you can see the second quarter 2017 results versus the same period of last year. During the second quarter of this year, the company generated revenues of $105 million and adjusted net income of about $21 million. For the same period of 2016, the revenues amounted to $119 million and adjusted net income to $32 million. 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 prepaid lease rentals, which is a non-cash charge, and the non-cash G&A expenses. Based on the above, the second quarter adjusted EPS amounts to $0.21. On slide eight, we show the revenue contribution for our fleet. Almost 100% of our contracted cost comes from first-class charterers like Evergreen, MSC, Maersk, COSCO, and Hamburg Süd.
We currently have about $1.4 billion in contracted revenues and the remaining time charter duration of about 3.1 years. On slide nine, 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. On slide 10, you can see on the left-hand side our remaining CapEx. Following the financing and delivery of the last 11,000 TEU vessel, the company has just above $2 million of remaining CapEx during 2018. On the right-hand side, we also show the recent acquisitions as part of our fleet renewal. As already mentioned, the three second-hand ships have been chartered for periods from five to seven years to Maersk Line, with contracted revenues in excess of $100 million. On the last slide, we are briefly discussing the market.
Charter rates moved up during the first months of the year and have softened over the last weeks. The idle fleet is at a low rate of about 2.5%. There have been no meaningful orders year to date, bringing the order book down to about 13%. Box rates have been stabilizing. As already mentioned, we are actively looking for new transactions in this market environment. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now.
Thank you. As a reminder, if you would like to ask a question, please press star then one on your touchtone keypad and wait for your name to be announced. If you wish to cancel your request, please press star then two. That's star then one to ask a question. And our first question today comes from the line of Gregory Lewis of Credit Suisse.
Yes. Hi, thank you. This is Joe Nelson on for Greg today. Thank you and good afternoon, and thanks for taking my questions.
Hi, Joe.
Just first one from me. You guys mentioned you have one vessel left to finance. It's got a long-term charter, more generally speaking, post the capital injection a few months ago, are you starting to see the lending market maybe thaw a little bit here now that you've got a combination of maybe a little bit of a better backdrop and, post that capital injection, as we think about maybe new financings and refinancings going forward?
Okay. For the third vessel, the Maersk Colombo, we chartered for five years to Maersk. We are in discussions with a major European financial institution. We have an agreement on terms, we are now in the process of finalizing the loan documents. This is something we would expect to close over the next weeks, it's not closed yet. Generally, I would say that, of course, we did an equity offering end of May, as you will notice, we have cash on balance sheet of about $240 million. Generally, however, I would say that the commercial bank debt market is open for containership owners with a track record and for deals that make sense, especially on the back of charter coverage with a major liner company. Up to now, I don't recall ever missing on an opportunity because the debt could not be secured.
The first two ships, the 2014 wide-beam vessels, which have a seven-year charter each, they were funded as well, of course, providing our corporate guarantee, on the back of the contracted cash flows from Maersk.
Great. Thank you. Maybe just one, maybe just more industry. Idle fleet is down. Charter rates are, well, it doesn't look like they're great, but they're certainly better than they were a year ago. Are you starting to see your customers look maybe towards having discussions again about chartering for more term, or do we still need to see a little bit more improvement before those conversations start to happen again?
Yeah. First of all, from our point of view, we've seen term chartering for five and seven years, this is what we did in the previous quarter. I would agree, however, that this is definitely not the norm today, that the market has not reached a stage where liner companies are generally willing to commit for long periods, especially comparing to the charter periods we used to see in the past. Now, if you look at charter rates summer 2016, summer 2017, we are definitely in a much better market today. Overall, the containership market is down. Asset values and charter rates, if you look at them from a historical perspective, I think no one would disagree that we are now experiencing a down market for quite some time now.
We believe that in this market environment, there are and that there will be definitely more opportunities.
Great. Thank you for the time today, guys, I'll turn it over.
Sure. Thank you, Joe. Thanks.
Thank you. The next question comes from Chris Wetherbee with Citigroup.
Hi, good morning. This is Prashant Rao on for Chris. Thanks for taking the questions.
Hi, good morning.
Good morning. I wanted to pick up on that last question a little bit. Clearly you guys have had strong execution. The market fundamentals are getting a little better than what we expected entering the year, and the new alliances are supporting some of the rates as well. I wanted to get a sense then, the rest of the market, though, isn't as strong as you guys are. When you look out in terms of the macro view, how do you think about that in terms of thinking about, A. financial performance and what your capital commitments are over the next several quarters, timing of the turnaround, and then Two, more specifically, when do we start thinking about reassessing the dividend? Or is it too early to enter that discussion?
Is that something that, given where we are today and your performance, we could think of as early as 2018 as we lapse some of these CapEx commitments, or would you need to see the market firm up even more to give you some assurance?
Okay. Let me start with the second part of the question that has to do with the dividend. We are paying $0.10 per share per quarter, and we have the DRIP in place, and the founding family insiders have been fully utilizing the DRIP. The dividend, first of all, I have to say that it is subject to the board's discretion, and this is a decision taken by the board. On top of that, I would say that as the founders own more than 50% of the company, I think we are fully aligned interests. We definitely like dividends. However, the dividend growth should have on a proper way, on healthy basis, meaning that it should come out at the same time with incremental excessive contracted cash flows coming from new business.
Otherwise, just to raise the dividend, which in theory we could do tomorrow morning, but just to raise the dividend for the sake of raising it, without this sort of cash flows being based on solid contracted revenues, I don't think that this would be the appropriate thing to do. Regarding the first part of the question, where we are with our CapEx commitments and how we see the market. We've mentioned in our press release and also in the slide presentation that today, we are pretty much covered regarding our CapEx commitments, which is nothing. It's close to $2 million, June 2018, and has to do with the 2,500 TEU ships, which will be delivered. Those are chartered to Hamburg Süd for seven years each. We have no CapEx commitments. We have cash on balance sheet in the region of $240 million.
We still see opportunities. Charter rates moved up the first three, four months of the year. We have been witnessing some softening in the market thereafter. We do believe that today asset values and charter rates are at historically low levels, and we definitely see opportunities. We're not going to rush to enter into new transactions without making sure that the fundamentals are there and that these are transactions that make sense. We will continue executing, hopefully, but we will also continue being selective.
Okay. That makes sense. Thank you for that very detailed answer. Also wanted to touch on, you mentioned that the commercial bank debt market is open for more established players and, particularly of charter linked cash flows with established liner companies. We've seen the order book be fairly controlled. We've got all the pieces in place for a recovery in the containership market. If the financing side is starting to open up again, do you think there's any risk that the order book could build back up, even if it's long tailed, like building out to 2019? Is there some other factor that might constrain that? Are we seeing more rational thinking by participants in the market? How should we be thinking about that given that that aspect of the market is improving?
I think that, first of all, commercial bank debt, as already mentioned, is available today. Banks have a budget to meet, they are looking for transactions with established players, transactions that are solid and make sense. There is some discipline also in the lending area, which is a healthy sign. I think that there is no reason why this would not continue in the future. Regarding new transactions and new building orders, as you mentioned, you also need the piece of equity, which I think today there are very few players who have the means to put equity and also secure the debt at terms that make sense.
Okay. That's very helpful. Thanks very much for the time. I'll turn it over.
Thanks.
Thank you. The next question comes from Michael Webber with Wells Fargo.
Hey, good morning, Greg. How are you?
Hi, Mike. Good morning.
Hey. Couple quick ones. You've already parsed over this a little bit, but I was hoping you could kind of sketch out maybe a more defined kind of priority list in terms of use of equity proceeds and kind of using that cash balance. Are we more likely to see new builds or picking off existing secondhand assets at the lines? To what degree do you expect York to be involved?
The new building market today, as we speak, I think it's closed. Year to date, there have been no meaningful orders, either from liner companies nor from pure container ship owners on a speculative basis. Most of the deals that have been taking place, and it's quite an active S&P market, has to do with secondhand vessels. For secondhand vessels, we will continue being active, either ships that on which we can secure employment, like what we did in the previous quarter or, like we've done in the past, secondhand vessels without charter, which we can buy with equity and that we may start chartering them opportunistically. Only when we have a fixed employment, we could then lever the asset. Respective with regards to size, age, et cetera, we have been and we will continue being quite flexible.
Where the market is today, I would say that it's got to be more of secondhand ships simply because liner companies as well are not willing to commit for a new building project.
That makes sense. In terms of the blocks of ships you're looking at, are you looking at anything that's big enough where you would need to bring in the JV partner, or are these two or three vessel ships that you could handle with the cash balance you've got?
No, as I said, we can be pretty flexible. First of all, we have the JV with York. We can be buying ships together with our partners, and this partnership up to now has been going extremely well.
Right. No, I know you have a lot of flexibility. I'm just curious, specifically what you're looking at. Are you looking at anything that would be big enough that you would need to actually tap off those additional resources?
I don't think so today. Of course, I can never predict the market.
Okay
I cannot for the future. The way we are set up today with that cash on balances, with our ability to access the commercial bank debt at quite good terms, I cannot foresee today the reason to raise fresh equity, if that's the question, common stock today, and dilute ourselves.
Oh, no. Not really. I can follow up with the F1. I was just trying to get a sense of the scale of the blocks of ships that you're looking at or investigating, how large they were. I can follow up offline. Just one more, and I'll turn it over. This is just higher level, and it kind of gets into the new build question. We've seen a handful of press releases throughout the first half of the year, I think most recently with MOL announcing a design with, I believe it was Samsung, for an LNG-powered 20,000 TEU container ship. It seems like we're not quite there yet, but I'm trying to get a sense of how a third party vessel owner or asset provider thinks about that new technology.
I guess maybe, one, have you looked at anything in earnest that would involve LNG as a marine fuel? Maybe, can you talk a bit about how you would look at the residual value risk associated with that first gen tech as opposed to say, something secondhand in the conventional space? How much more worried would you be about stepping in and providing that kind of tonnage to somebody on a five or a 10-year basis?
Yeah. First of all, because you touched upon the residual value risk, which normally the shipowner is taking. In all of our transactions, whether it's a new building or a second-hand ship, we first try to cover our downside, which is the residual value risk. Now, we are aware of the discussion for such projects. I don't think that we are there yet. If in the future, this is something that our clients would ask us to do, as long as we feel comfortable with the residual value risk and with the cash flows and everything, we would of course look at it. I think it is a bit premature today, especially when there is no new building market at all. I would say that it's really premature.
Okay.
We would be there, of course, if there is a need. We would definitely look at it.
That's fair. All right, I will turn it over. Thanks for the time, Greg.
Okay, thanks, Mike. Thank you.
Thank you. Once again, please press star then one if you would like to ask a question. The next question comes from Ben Nolan with Stifel.
Hi, good morning. This is actually Steven Tittsworth on for Ben Nolan. Just one quick question.
Hi, Steve.
Hi. I know in the past you've talked previously about scrubber technologies, given the new fuel emissions that are going to hit the market in the next couple of years or so. Can you provide just a little more color or update on your thinking behind whether to install emission scrubbers on your vessels or not?
Okay. It's a couple of things. First of all, are the regulations regarding the water ballast treatment, which there are discussions about postponing this for a couple of years. Means that from 2017 to 2019. These are the discussions now. Now, regarding the water ballast treatment, the cost that had to do with our fleet, this is something that we had budgeted. The fact that it is postponed for a couple of years, from a pure cash flow perspective, you can argue that it is positive for the ship owners. On the other hand, if it's something that would slow down scrapping of older ships, of course, it's something that does not help the sector as a whole. Because scrapping, especially last year, has been quite helpful in managing supply and demand imbalance. Have I covered you or not?
Yeah. The water ballast treatment makes sense. I was wondering about the fuel emissions for the low sulfur fuel regulations that are coming into the market.
This is something, yes. This is something which a factor, which is going to be determined the cost and like whether the scrubbers are required will be the cost of this fuel. Whether there is such a difference in the cost which would justify installing the scrubbers. Also, whatever other technical implications the installation of those scrubbers involves. I think this going to be pushed down the road in 2020. For us, it would be a bit premature to give you a concise answer from now. This is something we definitely are looking at, but it will depend on a number of factors, and also mainly on the oil price.
Okay. Assuming you want to go ahead and install the scrubbers on your vessels, how much time do you think you would need to give a shipyard in order to meet the regulations' deadlines?
I think, look, this is something, if we were to do it, we would do it in advance. We wouldn't wait for the regulations to kick in, especially if it's something we have agreed with the charterer, and then go to the shipyard. I guess, we would start the discussions or the negotiations, plus covering all the technical aspects quite some months in advance. Whether this would be three or five months, I cannot tell you from now, but we would definitely be proactive.
Okay. That works for me. That's all I have. Thank you for your time.
Thank you.
Thank you. The next question comes from Brandon Oglenski with Barclays.
Hey, this is Eric Morgan. I'm in for Brandon. Thanks for taking our question.
Hi, Eric.
Just wondering if you could comment on consolidation among the liners. Is there a way to quantify or how would you describe how recent M&A and alliance ships are impacting rates relative to other factors? I guess in light of COSCO and OOCL, would you say that this recent wave of consolidation is nearing an end, or do you think there are more opportunities out there?
Okay. The first part of the equation, consolidation in the liner sector, it is something that has been going on for a couple of years now, or even more. It's something that, from the liner's perspective, I think it definitely makes sense. Now you have the three alliances controlling close to 80%-85% of the global trade. That was not the case if someone looked at the liner company landscape four, five years ago. Now, from our point of view, you can argue that there are less lines. However, we want to have healthy and strong lines also from a credit perspective and also from a profitability perspective. This is where the whole sector is heading. We are fine with that. As long as this is helpful for our clients, I guess, this is something that we would also welcome.
Now, you can argue that there is more bargaining power. However, what's the value of having more liner companies around if some of them cannot meet their debt service payments or their charter hire obligations? I think the consolidation, as I said, is something that makes sense. There are synergies to be achieved. It's something that I think that was expected. It's not something that has caught us by surprise.
Okay, maybe just one more on the market. Could you give us some insight on the demand side of the equation? A lot of the global trade data looks pretty strong right now. Just wondering how the liners are thinking about the outlook on trade.
I think that from the demand point of view, demand has been okay. If you look at the major trades, for instance, Asia-Europe, year to date, overall, you have a growth in the region of 5%. Asia-U.S., transpacific, you are in the region of 8% plus. This is based on brokers' statistics. Demand, although we don't have the previous three times GDP multiple, is still something that overall is fine. It is the supply of the vessels, and it is the sort of the 1.5 million-1.7 million TEUs scheduled to be delivered this and next year that has been creating imbalance between supply and demand. We have an order book of around 13%, and this order book, as it stands today, assuming no new orders, is very thin from 2019 onwards.
There are a lot of big ships to be delivered or scheduled to be delivered, without factoring in any slip-ups, in 2017 and in 2018.
Appreciate it.
Okay.
Thank you. At this time, I would like to return the call to management for any closing comments.
Thank you very much for dialing 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. That does conclude our conference call for today. Thank you all for participating. You may now disconnect.