Capital Product Partners L.P.
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Thank you for standing by, and welcome to the Capital Products Partners Fourth Quarter 2020 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company. . I must advise you that this conference is being recorded today. The statement in today's conference call are not historical facts, including our expectations regarding cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation as well as our expectations regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates, may be forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated.

[Gerasimos Kalogiratos:]

Thank you, Valerie, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. As previously announced, we concluded on March 27, 2019, the spin-off of the Partnership's tanker fleet and subsequent merger of DSS Holdings, forming Diamond S Shipping. Accordingly, we present our financial results for the comparative periods on a continuing operations basis, except where references made to discontinued operations. The Partnership's net income for the fourth quarter was $7.3 million compared with net income of $5.8 million for the fourth quarter of 2019. Our Board of Directors has declared a cash distribution of $0.10 per common unit for the fourth quarter of 2020, and the fourth quarter cash distribution will be paid on February 10 to common unitholders of record on February 2. The Partnership's operating surplus for the fourth quarter was $20.7 million or $11.4 million after the quarterly allocation to the capital reserve. This translates to common unit coverage of 6x. We are pleased to announce that we have agreed to acquire three 5,100 TEU sister container vessels with long-term employment for a total consideration of $40.5 million. Moreover, our Board of Directors has authorized a common unit repurchase program of up to $30 million, expected to commence in February 2021. Finally, the Partnership's charter coverage for 2021 and for 2022 stands at 90% and 81%, respectively, and the remaining charter duration stands at 4.2 years. Turning to Slide 3. Revenues for the quarter were $31.5 million compared to $27.7 million during the fourth quarter of 2019. The increase in revenue was primarily attributable to the increase in the size of our fleet, partly set off by the decrease in the average daily charter rate earned by the vessels in our fleet, the off-hire period associated with the capesize Cape Agamemnon, which underwent its special survey during the quarter, and 1 of our 5,000 TEUs that had to remain off-hire for 21 days due to a COVID-19 incident and the associated quarantine rules. Total expenses for the quarter were $24.6 million compared to $18.2 million in the fourth quarter of 2019. Voyage expenses for the quarter increased $1.9 million compared to $1.1 million in the fourth quarter of 2019 as one of the vessels in our fleet was employed under voyage charter compared to none during the respective period in 2019. Total vessel operating expenses during the fourth quarter of 2020 amounted to $10.3 million compared to $7.7 million during the fourth quarter of 2019. The increase in operating expenses was mainly due to the increase in the size of our fleet. Total expenses for the quarter of 2020 also include vessel depreciation and amortization of $10.7 million compared to $7.5 million in the fourth quarter of 2019. The increase in depreciation and amortization during the fourth quarter of 2020 was mainly attributable to the increase in the size of our fleet, the completion of the special surveys of 9 of our vessels and the installation of scrubber systems in 7 of our vessels during the second half of 2019 and the full year of 2020. General and administrative expenses for the fourth quarter of 2020 amounted to $1.8 million as compared to $2 million in the fourth quarter of 2019. The interest expense and finance costs decreased by $0.5 million, despite the increase in average debt outstanding during the period due to lower LIBOR weighted average interest rate compared to the fourth quarter of 2019. The Partnership recorded net income from continuing operations of $7.3 million compared with net income from continuing operations of $5.8 million for the fourth quarter of 2019.

[Operator:]

. We will now take our question.

[Randall Giveans:]

Gentlemen, it's Randy Giveans from Jefferies. A couple of quick questions for me. So on the last call, you mentioned the Magdalena is on charter until February, but now you're saying it's expiring in May. So kind of what happened there over those few months slippage? And then expected duration, I know you said terms in the maybe high 30s to 40s. What about duration for that next charter?

[Gerasimos Kalogiratos:]

Yes. So I think, this is the result of very quickly changing market. When we had our last earnings call, the $39,250 that CMA CGM was paying was out of the market. So we were assuming that CMA CGM will probably redeliver towards the earlier redelivery period. Now the market has moved on, and $39,250 is well in the money. So now it's very -- it seems that CMA CGM will keep the vessels until the very end of the delivery window. So the charter period really hasn't changed. It was a different assumption with regard as to when they are going to redeliver within the redelivery window. To be honest, it's still a very good number. I mean, earning $39,250 until late April, early May, I don't think it's bad at all. Now with regard to rechartering the numbers that I gave you are for, let's say, 3 to 5-year deal. Potentially, a deal can be had at even higher than that. For a 1-year deal, the number should be considerably higher, but I think at this point, we will try to pin down, if possible, kind of a longer-term charter. These are above-average cyclical rates. So I think it's good to lock in duration at this point.

[Randall Giveans:]

Yes. And then timing for that, is that February or March event? How much in advance do you lock in that new charter?

[Gerasimos Kalogiratos:]

Well, that -- again, this has been changing. I mean, in a normalized market, in the soft market, you would fix much closer to the redelivering. Now it is much easier to fix forward positions. You can expect it at any point, we might fix tomorrow or we might fix closer to the date. We will be very -- going to be very opportunistic about it. As we discussed, there are very few ships like that out there, almost none. So we'll try to make the best out of the position.

[Randall Giveans:]

Okay. And then, I guess, looking at the acquisition. All right. So the 3 vessels, they're fixed at $12,300 a day for the next 5 years. Current market for these vessels is closer to, I don't know, $30,000 a day, right, for 1 to 2 years?

[Gerasimos Kalogiratos:]

Correct. Correct. And their asset value is probably closer to 20-plus million as well.

[Randall Giveans:]

Got it. So these vessels would certainly come at a steep discount to those asset values on the below-market charters.

[Gerasimos Kalogiratos:]

Yes. The latest charter attach valuations that we got from appraisers are around $17 million. Charter attached, not charter free.

[Randall Giveans:]

And based on the charters that you have attached, $12,300?

[Gerasimos Kalogiratos:]

Yes. Correct.

[Randall Giveans:]

All right. And aren't these the same ships that Capital bought for $28.5 million 4 months ago, right? $9 million or so, $9.5 million each. So I guess, with that, were you not able to purchase them back then? And why pay $12 million extra in a few months, considering the asset values are locked on long-term charters, and there is no real uplift in the current market strength. Like what pushed the rates from the asset valuation from $28 million that Capital paid to the $40 million that you just paid to Capital in 4 months.

[Gerasimos Kalogiratos:]

So the vessels that Capital Maritime bought, they were bought speculatively. There was no charter. It was not at all obvious at the time that a charter of that rate could be obtained. So Capital Maritime took risk by fixing those vessels, and then warehouse those vessels. Importantly, Capital Maritime passed special surveys for these vessels, fitted them with ballast water treatment system, and they are also fitted with AMP. There was no idle time for CPLP. They were delivered directly into the charter, and the total cost of passing special survey and of the upgrades is more than $2 million, but more importantly, it's the first point. I mean, you are now looking at the market as it has evolved within really 45 to 60 days, but as Capital Maritime was buying those assets, there was no charter attached, and it was a very risky proposition. CPLP typically will not acquire assets, especially Panamax assets of that type without cash flow visibility. Finally, I think it's also very good to look the returns proposition for CPLP. I think during my prepared remarks, under the presentation, you can see a range of equity returns. And even if you assume that the vessels are sold for scrap the moment the charter finishes, you're still getting a 40% type of IRR. I don't think there are many transactions like that out there that are done by our peers. If you are a little more optimistic that the vessels would trade to 22, 23, 25 years, that IRR could be well into almost 3 digits. So I think it's a fantastic transaction for CPLP. Effectively, CPLP took no risk. It took ships with special survey passed. And all the equipment, they are in the water, already delivered to a charterer, so 0 off-hire for CPLP. So if you put all this in, it's a very small premium that actually Capital Maritime took for warehousing the vessels and taking the risk. I think it's, again, a very -- and together with the sellers' credit, which I think it's at a very attractive rate, I think it's a fantastic transaction all along.

[Randall Giveans:]

Yes. All right. That's fair. And I guess, lastly, you issued this new share repurchase or unit repurchase program. How does that jive with distributions, right? You cut the distribution a few months ago, now you've got to buy back units. Any chance of increase in distribution? Or is that not until you obviously purchase the full $30 million allotment on these repurchases?

[Gerasimos Kalogiratos:]

So what we have said all along, even after the second quarter 2020 distribution cut, is that the priority of the Partnership is to grow and replenish our fleet and continue to return capital to unitholders as it has done nonstop since 2007. I think the container market has surprised everyone with its strength, and today, we feel much more comfortable with market prospects compared to 2, 3 quarters ago. Show me one company or even one liner that saw this coming. You remember the massive redeliveries from every single liner company back in May, June, as if there was no tomorrow. Even in September, October, people were very reluctant to call this a bull market until, I think, actually, December, January. So it's easy to look back with hindsight, but I think it is now that the market is very tight that it looks better. For reasons that have to do with market supply, we will see in the short-term continuation of the current market environment. So given this, let's say, backdrop, we decided at this junction to complement our common unit distribution policy with unit buybacks. And it's really kind of 2 birds with 1 stone strategy. So we are returning the capital to unitholders as we set out, but at the same time, we thought that the unit buyback is going to be also very accretive in view of the discount to NAV that the partnership is trading at. So we think that this is the right instrument at this point. Now this has been just announced. We will continue to focus on executing on this, the unit buyback and on growth, and then we can revisit the capital allocation policy going forward.

[Operator:]

We will now take our next question.

[Benjamin Nolan:]

Ben Nolan here from Stifel. Returns do look really good on the transaction. Randy brought up an interesting point relative to the purchase price, but -- and I think, frankly, you gave a really good answer with respect to the ships not having secured employment at the time. But it does sort of bring up the idea that what's to stop CPLP from undertaking those sort of things? Now that you are retaining a lot more cash flow, not paying the dividends, why not be a little bit more opportunistic when you see the opportunities arise because obviously, it's the same people making the investment decisions. It's just a matter of what vehicle those assets are being warehoused in. So why wouldn't, for instance, the Partnership have done that deal in August rather than the parent, given that you're seeking to use internally generated cash flow for growth?

[Gerasimos Kalogiratos:]

Because really, I think the business model of CPLP, at least the way that we have presented, and we see it is that of cash flow visibility and stability of income. The moment that we will start buying, let's say, Panamax vessels without the charter, which -- whose value, I mean, has oscillated over the last year between scrap to about 3x that over really the last 6 months is a very different and very speculative proposition. So far, I think we have avoided acquiring assets like that. If it was a more modern asset, let's say, post-Panamax asset where we have more visibility with regard to its ability and to retain value and earnings, it might have been a little different. Importantly, as I said, if you look at the -- if we were to market these vessels today and for sale, which is also what is indicated by the appraisal that we got, we would probably have -- we would probably get much more than we paid for. So what I'm trying to say is that I don't see many deals like that being offered around in the market with that type of returns. And we are, as you say, the same people. So I think Capital Maritime, in a way, is also supporting the Partnership when it gives deals like that at prices like that at multiples of this sort. So I think we are getting the visibility and the security of income that we want, especially with more risky assets like this, and at the same time, we don't necessarily have to -- we don't necessarily have to look at this, let's say, part of the market and focus more on more stable assets.

[Benjamin Nolan:]

Okay. Well, then that sort of leads me to another point. Obviously, you're doing a buyback program here because the thinking is that the shares or units are trading at a discount to NAV, and I presume that the thinking as well NAV is artificially low or something. But the -- ordinarily, any of these come under pressure because there is a lack of cash flow visibility, right? People are less confident that the numbers are going to materialize the way that they should. It appears and maybe you have a different opinion on this, but it appears as though the market is valuing the company as if it did not have good cash flow visibility. If that's the case, why -- again, sort of leans back to my previous question. If the market is going to value that way, then why not take advantage of situations as they arise and give what the market -- take what the market gives you?

[Gerasimos Kalogiratos:]

Well, as far as the -- as far as certain segments are concerned, I mean, irrespective of the valuation, you have to do what you think is right. So if you -- as we have said in the past, buying Panamax is on spec -- on a speculative basis. We always thought that it is a very opportunistic and very risky play. So I think the thesis is kind of indifferent to valuation. So what? I mean, let's say that we buy -- does this mean that we go out and we buy very risky assets on the peak of the market, and we risk the health of the company. It's -- what we do think is that by -- with the unit repurchase program with good drop downs like the one that we are completing today with more in the pipeline in terms of growth, this valuation gap can close. And I don't think it's very CPLP specific. It's -- I mean, the discount, I think it's something that many other shipping companies are suffering from. But you can only do -- you can only execute against your business model and do your best. I think otherwise, saying, "Oh, well, my valuation is like this, why doesn't I take on more risk?" I -- at least, we don't think that way.

[Benjamin Nolan:]

Okay. That's helpful. And then lastly for me, just sort of as it relates to that in the buyback program and sort of where you think fair value is for the company. I have an NAV estimate, but I'm curious, what sort of numbers you guys are coming up with or at least in ballpark as sort of how you -- what you think the share should be worth and that sort of is the compelling argument for buying back at levels below that. So NAV estimate, I guess, is the question.

[Gerasimos Kalogiratos:]

So we have seen NAV estimates, which are also supported by the appraisals that we get for our fleet on a quarterly basis, almost double what the unit prices today. So it's a steep discount.

[Benjamin Nolan:]

Okay. All right. I appreciate it. And again, the returns on this are pretty fantastic. So hats off on that.

[Gerasimos Kalogiratos:]

Thank you, Ben.

[Operator:]

. There are no further questions coming through at this time. I would now like to hand the call back to Jerry Kalogiratos. Please go ahead, sir.

[Gerasimos Kalogiratos:]

Great. Thank you all for joining us today.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for participating, and you may now disconnect.