Capital Product Partners L.P. (NASDAQ:CPLP) Q3 2022 Results Conference Call November 9, 2022 9:00 AM ET

Company Participants

Gerasimos Kalogiratos - Chief Executive Officer

Conference Call Participants

Omar Nokta - Jefferies
Liam Burke - B. Riley

Operator

Thank you for standing by, and welcome to the Capital Product Partners’ Third Quarter 2022 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive 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. [Operator Instructions] I must advise you this conference is being recorded today.

The statements 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 expectation 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. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no predictions or statements about the performance of our common units.

I would now like to hand over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

Gerasimos Kalogiratos

Good afternoon, 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. Since the end of the second quarter of 2022, we have completed a number of significant transactions for the partnership, including the successful issuance of a €100 million senior unsecured bond, the completion of the sale of two of our older container vessels, as well as acquisition of the first of four new building vessels we have agreed to acquire with long-term employment in place.

Now turning to the partnership’s financial performance, net income of the third quarter of 2022 was 58.7 million compared with net income of 11.9 million for the third quarter of 2021. Our Board of Directors has declared the cash distribution of $0.15 per common unit for this quarter.

And the third quarter cast distribution will be paid on November 10^th to common unit holders of record on November 2^nd. The partnerships operating surplus for the third quarter were 37.6 million or 7.8 million after the quarterly allocation to the capital reserve.

During the third quarter of 2022, we repurchased 102,085of the partnerships common units and our unit buyback program at a number it is cost of $14.63 per unit. As of yesterday, and since intention of our program, we have acquired a total of 708,575 units at an average unit price of $15.36.

Finally, the partnership charter covers for 2022 and 2023 stands at 95% and 92% respectively with the remaining charter duration corresponding to seven years that is including the four new build vessels we have agreed to acquire.

Now turning to Slide 3. Revenue for the quarter was 71.9 million compared to 43.1 million during the third quarter of 2021. The increase was primarily attributable to the net increase in the average number of vessels in our fleet by 17% following the delivery of four LNG carriers during the fourth quarter of 2021, partly offset by the sale of the Adonis in December, 2021 and of the 28,000 container vessels in July of this year.

Total expense for the quarter were 40.4 million compared to 27.8 million in the third quarter of 2021. Full year expenses for the quarter increase to 4.4 million compared to three million in the third quarter of 2021, primarily due to the increase in the average size of our fleet and the increase in the voyage expenses incurred by one of the vessels in our fleet employed under voyages charters.

Total vessel operating expenses during the quarter amounted to 17 million compared to 11.3 million during the third quarter of 2021. The increase in vessel operating expenses was mainly due to the net increase in the average size of our fleet.

Total expenses for the third quarter of 2022 also included the vessel depreciation amortization of 16.2 million compared to 11 million in the third quarter of last year. The increase in depreciation amortization was mainly attributable to the net increase in the size of our fleet, offset by lower amortization of deferred dry-docking costs.

General and administrative expenses for the quarter increased to 2.8 million compared to 2.6 million third quarter of 2021, mainly due to the increase in the amortization associated with our equity incentive plan.

Interest expense and finance cost increased to 14.9 million from 3.6 million in the third quarter of 2021. The increase in interest expense and finance costs is attributable to the increase in the LIBOR weighted average interest rate compared to third quarter of 2021.

And the increase in our total upstanding debt following the issue of the two bonds and the debt assumed following the acquisition of the four LNG carriers during the fourth quarter of 2021, partly offset by the scheduled principal payment during the period, debt prepayments relating to the vessel sales and the full prepayment of two of our credit facilities of a total amount of 95.7 million during the third quarter of 2022.

The partnership recorded net income of 58.7 million of the quarter compared with net income of 11.9 million for the third quarter of last year. Net income for the quarter includes gain of 47.3 million from the sale of two of our vessels, and the net loss of 5.2 million presented other expenses relating to the cross-currency swap agreements associated with the issuance of our Euro denominated bonds and unrealized foreign exchange laws.

Net income per common unit excluding the gain of sale and the loss related to the impact of the effects and swap agreements was $0.83 for the third quarter of 2022 compared to $0.62 in the third quarter of last year.

On Slide 4, you can see the details of our operating surplus calculations that determine the distributions that unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately 37.6 million in cash from operations for the quarter before accounting for the capital reserve.

We allocated 29.7 million to the capital reserve as decrease of 1.4 million compared to previous quarter due the decreased debt monetization resulting after the debt repayments and the inclusion in the capital reserve of 3.5 million corresponding to an additional reserve for the bonds issued in July, 2022.

After deducting the capital reserve, the asset operating surplus amounted to 7.8 million. This approximately 6.3 million less compared to the previous quarter as a result of loss of revenue associated with the sale of two of our container vessels early in the quarter.

The increased interest cost as the weighted average interest cost for the quarter was 4.38% compared to 3.46% in the previous quarter, and due to the increased debt outstanding during the quarter between the issue of the bond in July and the prepayment of the two facilities in August, and 31-days unscheduled of hire associated with a Cape Agamemnon.

Now on Slide 5, you can see the details of our balance sheet. As of the end of the third quarter, the partner's capital amounted to 615 million, an increase of 88.3 million compared to 525.5 million as of the end of 2021.

The increase reflects net income for the nine-months and the amortization associated with the equity incentive plan partly offset by distributions declared and paid during the period in the total amount of 9.1 million, the repurchase of the partnership common units for an aggregate amount of 4.4 million, and other comprehensive loss of 4.7 million.

Total debt decreased by 126.5 million to 119 million compared to 132 billion as of year-end 2021. The decrease is attributable to scheduled principal payments during the period of 77.6 million, debt repayments of 28 million relating to the sale of Cape Agamemnon.

The repayment in full of our 2017 and 2020 credit facilities of a total amount of 95.7 million and the 26.5 million decrease in the US dollar equivalent of the Euro denominated bonds as of September 30^th, partly offset by the issues of a €100 million in bonds in July, 2022.

It is important to note here that following the repayment in full of our 2017 and 2020 credit facilities, seven of our vessels are unencumbered, which can be significant liquidity lever for the partnership in the future. Total cash as of the end of the quarter, amounted 104.2 million, including restricted cash of 9.7 million, which represents a minimum liquidity requirement under financing arrangements.

On Slide 6, we will review the delivery of the Manzanillo Express, the first of three 13,000 TUE eco container vessels, which we have agreed to acquire together with one latest technology LNG carrier. The vessel was successfully delivered from Hyundai on October 12^th and commence 10-year charter with Hapag-Lloyd.

The acquisition was funded through a combination of cash, approximately 505,200 common units with aggregate value of 7.5 million and 105 million drawn under a new loan facility. The new loan facility will be paid in 24 equal consecutive portal installments of 1.3 million and the balloon payment of 73.1 million tabled together with final quarter installment in October, 2028. The facility bears interests at softer plus a margin up to 15%.

Moving to Slide 7 and after the agreement with [Indiscernible] to extend the employment of two of our LNG vessels to 2031 and an increased rate, the partnerships contracted revenue backlog now stands at 1.95 billion with over 63% of contracted revenue coming from LNG assets. Moreover, our customer base is well diversified across seven charters with more than 83% of our revenues stemming from investment grade counterparties.

Turn to Slide 8. The partnerships remaining charter duration amounts approximately seven years while charter coverage remains high throughout 2025. That is providing our unit holders with increased cash flow visibility.

Turning to Slide 9. You can see our debt maturities by year. As you can see, we have eliminated all maturities through 2025. I do not have any significant maturities before 2026 when our first €150 million bond becomes due.

At the end of the quarter, Floating rate, debt accounted for 67% of the total. Basis current discussions with our lenders with regard to the financing of the new building vessels we have agreed to acquire, we expect fixed rate debts to account for more than 40% of our debt by the time we complete our acquisition program in the second quarter of 2022.

Turn to Slide 10, the LNG carrier charter market continues from strength-to-strength with spot rates rising sharply in December, sorry, in September. Major factor for the very strong freight market is the record high floating storage as our gasification slots or scars and traders are trying to position themselves for the winter cargos.

Despite initial estimates of 2.1% total - demand growth for the year against LNG fleet capacity growth of 4.6%, the LNG carrier charter market has put very resilient supported by record gas prices and the boost towards energy security.

Term charter rates have moved continuously upwards throughout the third quarter with the one year term charter rates for a two-stroke vessel increasing from 260,000 per day at the start of the quarter to 230,000 per day by the end of the quarter.

The same trend was seen for TFDE vessels. However, the increase for steam turn bind vessels was less marked as term fixing of older less efficient vessels is less attractive given next year's high forecasted LNG price and upcoming environmental regulations.

The LNG fleet order book stands at 42% of the total fleet with 15 new orders placed within the third quarter of 2022. 30 of the 50 orders are for the Qatar Northfield expansion project. At the same time, the price of a new building vessel has reached 245 million.

The positive market sentiments in is here driven by energy security, concerns, especially in Europe, is expected to continue at least until the new wave of liquifaction plants become operational in 2026.

On Slide 11 we will review the container market. Container rates have decreased amid demand headwinds while losing congestion and market sentiment have put pressure on freight and chatter rates.

Clarkson’s time charter rate index decreased by 20% compared to the previous quarter, whereas the Shanghai Containerized Freight index fell by 22% in the same period. Despite both freight and charter rates easing somewhat, they still stand at higher the 2021 year-on-year average.

Trade is now expected to fall by 0.3% in 2022 compared to 4% growth forecasted in the beginning of the year. Meanwhile, with supply side growth expected to accelerate and congestion expect to continue to gradually unwind, markets should continue to soften approaching more normalized levels next year.

The container vessel order book stands at 27% of the fleet down 0.7% from the previous quarter. For the first time in years, the number fully cellular container vessels scrapped in the first nine-months of 2022 is zero, with the exception of two small units recorded as sold for recycling.

Recent market trends combined with the upcoming environmental regulations and policies are expected to have moderating effects on future supply speed adjustments, energy saving devices retrofit time and increased recycling should affect older vessels. Slippage including cancellation of new building or tenure vessels is expected to be at 6% in 2022.

Now turning to Slide 12, as previously discussed, we have now exercised our right to first offer to acquire four vessels, one of which has been already delivered to the partnership earlier in October. We still retain the right of first offer and two more LNG carriers, current vendor construction in Hyundai Heavy in South Korea, and delivering in late 2023.

In addition, Capital Maritime has contracted an additional five LNG carriers since Hyundai Heavy and heavy with delivery set for 2024 and 2026. As this fine deployment in a currently strong charter market and subject to our ability to acquire these vessels, CPLP could be uniquely positioned to control a fleet of up to 14 latest generation LNG carriers with a unique portfolio of charters.

Given the positive LNG market fundamentals ahead will anticipate the two-stroke latest generation LNG cards like the ones we own and this potential dropdown candidates will constitute very attractive assets.

With increased financial flexibility after the issuance of our second bond, the sale process of our two oldest container vessels, seven unencumbered vessels, and with a strong cash flow generation, we expect from our fleet and acquisitions. We believe that CPLP is strategically positioned to take advantage of such growth opportunities while continuing to return capita per unit holders through distributions and unit buybacks.

And with that, I'm happy to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Omar Nokta with Jefferies. Please proceed with your question.

Omar Nokta

Thanks for the update. Just wanted to ask as you are split now basically between the container ship and LNG shipping, segments, we have been able to secure long-term contracts really across both having vessels on hand and in acquiring them with contracts.

But just in terms of opportunities that are out there whether from the ability to secure charters or maybe the ability to acquire ships with attractive or at attractive price levels. Where are you spending more of your time currently and where do you see the opportunity? Is it an LNG obviously, you have outlined on Slide 12, the drop-down opportunities. All opportunities in LNG, but then also how about in containers, given the pull back in asset values? How do those look?

GerasimosKalogiratos

I think as far as containers are concerned the market seems to have stabilized as of the last couple of weeks and we have seen now increased activity. It feels like in terms of charter rates at least we have seen floor. It remains to be seen whether this is temporary or not.

But I think this is a market that it is very much still in flux. Overall, and when it comes to long-term fundamentals, as I outlined in my prepared remarks, I think, there is a very positive story for the LNG carriers that goes much beyond, of course, the current energy crisis in Europe. That was never the main story in the first place.

Their story was really was increased demand for LNG, LNG also being a transition fuel. The increased liquidation capacity that is predominantly coming online from 2026 onwards. They increased the demand that we were seeing, especially from the far east as China was moving away from coal.

And I think what the - and of course we have now the added, if you want ingredient of energy security, which is new but very important and very important element in this. So when you look at the LNG market, it is also well suited for business model.

You have long-term fixtures high quality counterparties you can typically fix forward as LNG carriers are fixed in relation to projects mostly. So I think that it is a good fit, and not to say the least it is also a good fit in the sense that we think it is - these vessels, the latest technology, LNG carriers are more future proof.

Of course also, as you know, we have been divesting of the older container vessels and investing in new ship. So, this has been a very persistent, if you want threat of our policy. But I think at this point the LNG fundamentals and business structure looks more attractive to us, containers. I think we still have to see where prices and rates stabilize.

Omar Nokta

Thanks Jerry that makes sense and speaking of LNG, we have seen the reports that the Capital Maritime was able to secure a three year contract on one of the new buildings at a very attractive, very high rate. And just in terms of how, where CPLP stands, do you see the potential of acquiring those, say that one particular ship that was fixed for three years, does that you think look attractive to make its way into the structure or do you prefer to have a bit more longer term contract before that happens?

Gerasimos Kalogiratos

I think that is an interesting discussion to be had. I think we are ready to have this discussion. We still have another three vessels to acquire until May 2023. And this vessel that has been reported in the press fix for three years is not delivered before October 2023. So there is lot of things that can happen between now and then.

Three years, typically, I would say is on the lower end that you would expect when you are looking at a brand new LNG vessel and the CapEx that comes with it, but it is also -I mean what was reported in the press is also quite high rate. Let us see where we are over the next couple of quarters, whether there will be an add on fixture on the back of this.

And of course, it all depends on what will be the price and offer. So I think we still have some way to go, but if you ask me, sure. I think this is definitely, let's say the direction that we want to be growing with these type of assets in the LNG segment.

Omar Nokta

Okay, yes it makes sense and you still have plenty of time and you still have a few ships to bring on as well. Great, I will turn it over.

Gerasimos Kalogiratos

Thank you, Omar.

Operator

Next question comes from the line of Liam Burke with B. Riley. Please proceed with your question.

Liam Burke

You have got multiple uses of your capital and you are effectively managing the addition of assets buying back of shares and then maintaining the unit payout. Do you see any shift in that strategy as you go forward or as you take deliveries, is there any thought process you are giving on how to adjust your allocation strategy?

Gerasimos Kalogiratos

I think as we have communicated in the past once we complete, the dropdowns we will - and we increase our cash flow. You should also expect that we will continue to increase the capital, return the unit holders through unit buybacks and or quarterly distributions.

As I said before, I think we want to see the acquisitions completed as well as having a little more stable outlook, outlook with regard to interest rates before we revisit our capital allocation policy, but you should expect more news from us on this front, I think, next year.

But overall, let's say and subject to the decision of our Board, we continue to intend to return to unit-holders about the fifth to a quarter of our free cash flow. And that will be the form of quarterly distributions as well as unit buybacks. So I think in that way, we can achieve balance solid - and solid total returns for our long-term unit holders.

While effectively we continue to boost our earning per unit and ensure the long-term viability and cash flow generation capacity of the partners income. I think that is really the way that we see things. So to your point, let us wait closer to the transaction completion and I think we will again look at the capital allocation policy.

Liam Burke

Great. Thank you. And on your fleet renewal program, you have been rather def in sort of increasing the value of the assets as well as reducing the average age of the fleet, increasing contracted cash flows. Are there any assets that you are looking at that may provide a source of cash for the renewal program or are you happy with what you have now?

GerasimosKalogiratos

I think, the one that is stands out mostly is the one dry bulk vessel that we have, the capital amendment. So that vessel still trades spot. The dry-bulk market, as has been quite volatile and especially the Cape size market.

But we remain opportunistic about it will see a good exit point that will be, I guess the prime, candidate, but also the container assets in general especially the older assets, but opportunistically also the more modern ones as we have done in the past.

If we see something that makes sense or looks like better returns compared to what we can do in the charter market, especially given, the use of the capital we have - the alternative use of capital that we have, we will look at it. But the priority, I think is more the cape size vessel.

Liam Burke

Great. thank you Jerry.

GerasimosKalogiratos

Thank you Liam.

Operator

Next comes from the line of Benjamin Nolan with Stifel. Please proceed with your question.

Unidentified Analyst

This is [Makayla] (Ph) on for Ben. Thank you for taking our question. We just had a quick one. The sponsor has been a leader in ordering new LNG vessels and given the order book is pretty large at this point could you provide any color on what gets them comfortable in ordering at this point? Is it may be a need for slow speed, two-stroke vessels or any other insights could be helpful? Thank you.

GerasimosKalogiratos

No overall, that is certainly a very good question. First of all, I mean, as we highlighted, also in our prepared remarks, while there is a fairly large order book, most of these vessels are committed on long-term projects. Very few of these vessels that you see currently in the order book do not have an existing commitment.

So when you look, let's say over the next couple of years, we are talking about a dozen ships that do not have employment currently. So that is one, don't forget that a lot of the big driver of this order book is just one charter Qatar Gas on the back of their own expansion.

Now, the other main driver is of course the technology shift in propulsion and containment systems we have seen on the LNG side, and this is if anything has been amplified by the higher commodity price.

Nowadays that the delta between, let's say two-stroke ships TFD ships and steam ships has been ever increasing as commodity price has been increasing due to the, of course, lower boil of that the two-stroke units can offer the lower bankers bill, but also the larger side.

So the unit freight economics of two-stroke ships compared to all the technologies are really create effectively a three tier market. Depending on the price of the commodity, you can the real differential in terms in terms of unit freight costs can be more than $500,000 per day.

Finally, there is the regulatory impact and the environmental impact, if you want the regulatory impact, the more strict regulatory impact means that with CXI and CII, all the technologies and especially steam ships will be impaired potentially with speed reductions and won't be able to compete.

But also, the carbon footprint of many of those ships is going to be a huge impairment going forward, especially if there is an introduction of market based measures like the ones that are being discussed in Europe for the ETS or the IMO. And of course, there is also the methane sleep, which can be quite important and can further impair some of these older vessels.

So all in all, when you look at the demand fundamentals, which I mentioned earlier, that is newly liquefaction capacity coming online, where the demand for LNG is located compared to the supply, of course, the new concerns about energy security and now Europe being a major importer of LNG, and so on and so forth.

Compared to the other book that is already committed for many of these projects, but definitely not for all. And of course the technology shifts and what it means going forward. I think, this is what makes us as well as the sponsor quite bullish.

And I think the proof is in the pudding, the kind of rates and returns that are being achieved. I mean, I think Omar referred to what was reported in the press for a three year deal. This is our record, high numbers, and we expect the market to remain quite strong going forward.

Unidentified Analyst

Great, thank you so much. I appreciate the time.

GerasimosKalogiratos

Thank you.

Operator

[Operator Instructions] We have reached the end of our question and answer session. Therefore, I will turn the call back over to Mr. Jerry Kalogiratosfor closing remarks.

Gerasimos Kalogiratos

Thank you all for joining us today.

Operator

And this concludes today's conference, and you may disconnect your lines at this time. Thank you and have a good day.