Capital Product Partners L.P. (NASDAQ:CPLP) Q1 2022 Earnings Conference Call May 6, 2022 9:00 AM ET

Company Participants

Gerasimos Kalogiratos - CEO

Conference Call Participants

William Burke - B Riley
Chris Robertson - Cardinal Capital Management
Benjamin Nolan - Stifel, Nicolaus & Company

Operator

Thank you for standing by and welcome to the Capital Product Partners' First 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 a 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 that 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 re-delivery 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.

Those 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 those forward-looking statements, whether because of future events, new information, a change in our usual 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

Thank you, Sandra [ph]. Thank you all for joining us today. As a reminder, we'll be referring to the supporting slides available on our website as we go through today's presentation. The partnership's net income for the first quarter of 2022 was $25.1 million, compared with a net income of $10.9 million for the first quarter of 2021. Our Board of Directors has declared a cash distribution of $0.15 per common unit for the first quarter of 2022. The first quarter cash distribution will be paid on May 12 to common unit holders of record on May 06.

The partnership's operating surplus for the first quarter was $44.6 million or $13.5 million after the quarterly allocation to the capital reserve. We recommend acquiring units under our unit buyback program on February 14th. For the quarter, we repurchased 89,345 of the partnership's common units at an average cost of $15.67 per unit. As of yesterday and since the inception of our unit buyback program, we have acquired a total of 508,505 units at an average unit price of $12.78.

Finally, the partnership started coverage for 2022 and for 2023 stands at 95% and 92% respectively with a remaining total duration corresponding to 4.7 years.

Now, turning to Slide Three, revenues for the quarter were $73.4 million compared to $38.1 million during the first quarter of 2021. The increase was primarily attributable to the net increase in the average number of vessels in our fleet by 38% following the acquisition of three Panama containers in February, 2021 and the acquisition of six LNG carriers during the second half of 2021, partly set off by the sale of the two 9,000 TEU container vessels in 2021.

Total expense for the quarter were $40.2 million compared to $24.2 million in the first quarter of 2021. Total vessel operating expenses during the quarter amounted to $16.7 million compared to $9.2 million during the first quarter of last year. The increase in vessel operating expenses was mainly due to the net increase in the average size of our fleet.

Total expenses for the first quarter of 2022 also includes vessel depreciation, amortization of $18.4 million compared to $11.1 million in the first quarter of last year. The increase in depreciation and amortization was again mainly attributable to the net increase in the average size of our fleet.

General and administrative expenses for the quarter amounted to amortization 1.5 million compared to amortization 1.7 million in the first quarter of 2021. Interest expense and finance costs increased to $10.3 million from amortization $3.4 million in the first quarter of 2021, due to the increase in the partnership's total outstanding indebtedness. The partnership's recorded net income of $25.1 million for the quarter, compared with net income of $10.9 million for the first quarter of last year, representing an increase of 130%

On Slide four, you can see the details of operating surplus calculations that determine the distributions to our 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 $44.6 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $31.1 million to the capital reserve in line with the previous quarter. After adjusting for the capital reserve, the adjusted operating surplus amounted to $13.5 million.

On Slide five, you can see the details of our balance sheets. As of the end of the first quarter, the partners capital amounted to $546 million, an increase of $21 million compared to $525 million as of the end of last year. The increase reflects net income for the quarter and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period, to the total amount of $3 million and the repurchase of the partnership's common units for an aggregate amount of $1.4 million. Total debt decreased by $26 million to $1.9 billion compared to $1.32 billion as of yearend 2021.

The decrease is addable to the scheduled principal payments during the period of $22.5 million and a decrease by $3.5 million of the Euro denominated balance of the bonds translated into US dollars as of quarter end. Total costs of the end of the quarter amounted $49.6 million, including restricted cash of $10.6 million, which represents the minimum liquidity requirement under financing arrangements.

The next slide, Slide six provides an overview of the solid financial performance of the partnership during the quarter, compared to the same period last year, with major financial metrics, including revenue, EBITDA and operating surplus, having increased between 80% to 105%. The strong year-on-year growth is predominantly the result of the full impact of the partnership financials of the six LNG acquisitions, which was completed in the fourth quarter of 2021. The six LNG carriers generated revenue of $37.6 billion during the quarter, which represents just above 50% of the partnership's total revenue for the three month period.

It is also worth highlighting that this growth is not market-driven, but mainly a result of the expansion of our asset base with vessels that have long term charters in place, thus ensuring that our improved financial performance is sustainable in the long run.

Moving to Slide seven, the partnership's remaining charter duration amounts approximately 4.7 years while charter coverage remains high throughout the next four years, thus providing our unit holders with increased cash flow visibility.

Turning to Slide eight and the LNG charter market; during the first quarter of 2022, we experienced a weaker spot market due to the low tonne-mile demand caused by shift in gas pricing dynamics and the greater sale of LNG cargos heading to Europe. Europe has imported significantly more LNG in the first quarter of 2022, compared to the previous years. This is mainly sourced from the US and as a percentage of total US volumes, Europe share has more than doubled since last year.

In total EU imports are expected to increase by 25% by the end of the year and rates $97 million tons per annum. European efforts will diversify away from Russian pipeline gas will continue to save the global LNG markets with a large share of US LNG expected to flow to Europe rather than Asia, while the LNG liquefaction project FID environment appears more positive in the coming years than previously anticipated.

Overall, demand fundamentals for LNG shipping remains robust, as the expectations for global LNG trade have increased and volumes are projected to grow by 6.6% in 2022.

In addition, the Russia and Ukraine war is expected to generate demand for LNG trade and investment in the wider sector, in both the short and the long term as the EU is planning to reduce it's dependency in Russian gas. As a result of the improved market fundamentals and the need for energy security, which partly passes through LNG seaborne transportation, the charter market has improved significantly with numerous charters coming to the market to secure both prompt as well as forward donuts [ph] and decreasing levels with five-year time charter deals being negotiated for delivery into 2023, 2024 in the 85,000 to 95,000 per day region for a two stroke vessel.

The LNG fleet order book stands at 33% of the current fleet with 37 new orders placed during the quarter utilizing almost all available CPR slots up to 2026. As a result of the increased demand, the increased competition from other sectors, as well as inflationary pressures in raw materials and equipment, CPRs are continuing to increase prices with the latest new building prices in Korean CPRs exceeding $225 million per vessel for a basic specification to stroke.

LNG commodity prices have remained high since the start of the year, have some considerable volatility due to the persistent uncertainty in the European gas markets. As we have previously discussed, they increased LNG commodity prices and the preference for large cargo sizes as the LNG export market continues to expand, increasingly favors latest generation two stroke LNG carriers such as the vessels owned by CPLP.

On Slide nine, we'll review the container market, the container ship charter market continuing to climb to new highs in the first quarter of 2022, with charter rates reaching successive records and freight rates remaining close to all-time highs, The Clarksons Charter Rate index reach an all-time high in March with a three-year time chatter rate for [indiscernible] wide beam 9,000 EU container like the AKADIMOS standing at approximately $95,000 per day for a prompt vessel. The AKADIMOS is expected to come of its present charter by April, 2023.

In the box rate market, spot rates remain firm as the continuation of exceptional market conditions has reflected two key factors; strong box rate and severe COVID 19 related logistical disruption, including port congestion, which has significantly reduced available capacity and driven major disruption upside to the market.

Against this positive background, the supply of post-Panamax donuts for 2022 dates has become thin with a delivery window moving towards 2023. At the same time, period fixtures for classic Panamax units were being concluded with latent [ph] into the fourth quarter of 2022, and starting to stretch into the first quarter of 2023.

It should be noted, however that the freight and charter markets have been softer over the last few weeks, partly as a result of the start of Easter holidays, but also due to the impact of the lockdown to China on factory output and port operations, as well as economic uncertainty stemming from the Russia Ukraine war and the inflationary backdrop.

In the view of this development, charter rates in some sizes have eased as of late; although they remain at exceptionally high levels. Chartering discussions continue to center around the situation in China and when restrictions may be lifted, as it seems that there is significant amount of pent-up cargo already waiting to be processed by attending [ph] sports while return to full scale production to support volumes going forward.

The new building market remained very active during the quarter, but contracting new vessels was slightly lower compared to the first quarter of 2021. The order book has increased to 26.5% of the total fleet. Concurrently, no vessels were scraped in the first three months of 2022, which comes as no surprise given the exceptional market conditions.

As a result, fleet growth is expected at 3.5% in 2022, accelerating to 8.2% in 2023, while global container growth is expected to increase by 3% this year and 2.6% next year.

As a final remark, the IMF has got its global growth forecast for 2022 down to 3.6% from 4.4% published in January, in view of the conflict in Ukraine. A global economic slowdown could adversely affect the container market. Overall however, the outlook for the container sector remains positive in a short to medium term with logistical disruption likely to continue to provide support throughout the end of the year.

Further ahead, an easing of the market conditions looks likely once congestion eventually starts to unwind while an increase in the pace of lit growth is expected to exert material supply pressure in 2023 and 2024.

Turning to Slide 10, as previously discussed and following the acquisition of the six LNGs, we are now targeting a number of additional dropdowns. In the short term, our primary focus will be the vessels on which we have a right of first offer. This includes three 13,000 EU container vessels with delivery from the third quarter of 2022 onwards until May, 2023, which have a 10-year firm time chatter in place to Hapag-Lloyd as well as three additional LNG carriers with deliver in 2023. The ASTERIX I is the first LNG carrier to be delivered and has secured time chatter employment for a minimum of five years at a highly attractive rate.

In addition to the above vessels, al Maritime has contracted three additional LNG carriers at Hyundai with delivery set for 2024. As the additional LNG vessels find deployment and subject to ability to acquire these vessels, CPLP can potentially become one of the very few companies that control the fleet of up to 12 latest generation two stroke LNG carriers with a unique portfolio of charters.

As explained earlier, we anticipate that two stroke LNG carriers like the vessels we already own, and this potential dropdown candidates will benefit greatly from the LNG market fundamentals ahead.

The total market value of the six LNG carriers and the three 13,000 EU containers is approximately $1.7 billion plus giving us a strong growth pipeline for 2022 and beyond. As we continue to grow the partnership's asset base and the distributable cash-flow, we will also seek to increase the amount we pay out to unit holders in the form of common unit distributions and unit buybacks, thus executing our steady strategy of continuing to grow the partnership's asset base and at the same time returning capital to our unit holders.

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

Question-and-Answer Session

Operator

[Operator instructions] And we will now take our first question. Please go ahead. Your line is open.

William Burke

William Burke. B Riley. Hey Jerry, how are you?

Gerasimos Kalogiratos

Hi, Liam. I'm well, how are you?

William Burke

Good. Thank you. You've got some very attractive dropdown opportunities here, the end of '22 and then early '23. Obviously there's the loan to value that you have in your head. How do you plan on funding the equity portion of it?

Gerasimos Kalogiratos

That's I think a great question. So the focus right now is really on the four vessels that come first. That is the three 13,000 users we discussed and the LNG carrier, which has time charter in place. So in broad terms, assuming let's say for ease of reference $60 million of EBITDA and multiple of 10 times, that would imply an equity requirement of somewhere between $140 million to $160 million.

So I think then we have having this number in mind, and this is not setting stone, but just to have to be able to navigate through this question. I think we will have a number of levers at our disposal. In the first place, I think as demonstrated by this quarter, the free cash flow of the partnership is quite strong and we remain strong as everything is fixed out on charters.

Then there is additional liquidity that we can source by refinancing certain of credit facilities that have ample room in view of relatively small debt balance outstanding. And finally, we will continue to look for attractive capital, external capital, be it in the preferred equity or fixed income market like for example, with a Greek bond.

Of course markets are much more challenging at this point, but I think we will definitely look as to what we can tap, but just to make this a little more tangible. So if you look at the cash balance as of quarter end, it's around $50 million. Operating surplus after reserve which is -- let's say proxy for free cash flow was $13.5 million. In the reserve, there is a non-cash item, which is the reserve that we make for the bond of about $8.5 million.

So if you want the more accurate proxy for free cash, it would be around $22 million per quarter. So annualize that's about $88 million. So if you add to the current cash balance of the $50 million, three quarters of the same free cash flow generation or proxy for free cash generation, that would imply by the end of 2022, we have $115 million. So, if the number, let's say the equity is required is about $150 million, we are almost there.

Then you should also think that under one of our facilities, the HCOB facility with finances a number of our containers, the LTV currently is at 12% with about $98 million outstanding. So raising an extra $25 million to $50 million across let's say the container fleet would have been very easy and in to that, of course, and some I didn't mention before is that you can potentially sell all the ships, like some of the older container ships or the amendments [ph] we have discussed.

So in reality I think given the strong cash flow generation and the very low leverage that we have in certain of our facilities, getting to the equity required for let's say these four dropdowns should not be a stretch. should be quite easy without even accessing external capital.

William Burke

It sounds like you have that surrounded and in terms of asset, just staying with the dropdowns, are you particularly -- do you prefer LNG the container or is it more the charter duration and structure?

Gerasimos Kalogiratos

I think cash flow is very important to us on visibility, for example, the three 13,000 EU containers with a 10-year charters. They very much fit our business model. On the other hand, we are as you know, quite sensitive to market development and what we perceive to be residual risk at the end of the charter.

So would we buy containers and current valuations? Probably not, because they are quite inflated values going around, but buying containers with average or below cycle valuations with a 10-year charter attached, that I think does make sense and we like the cash flow. LNGs obviously we like a lot and I think over the last few months, the world likes also a lot maybe for their wrong reasons because of the unfortunate developments in Ukraine. But we want to be expanding there as well, but always with the same conservative business model that is with taking some charter coverage as we expand So cash flows are important to us but we do have an eye on market risk and residual market risk.

William Burke

Great. Thank you, Jerry.

Gerasimos Kalogiratos

Thank you, Liam.

Operator

Thank you. And we will now take our next question Please go ahead. Your line is open.

Chris Robertson

Chris Robertson.

Gerasimos Kalogiratos

Hey Jerry, how are you?

Chris Robertson

Good. So I guess just springboarding off of Liam's question. So as it relates to the distribution and ongoing unit repurchases, would it be fair to say that the priority for the free cash at this point is probably related to these growth opportunities on the dropdowns?

Gerasimos Kalogiratos

I think as we complete more dropdowns and we increase our disable cash flow, you should also expect that we'll continue to increase the capital return to unit holders that is through unit buybacks and quarterly distributions. So I think overall, as you know, as a guidance, and of course that is subject to the final decisions of the board, we intend to return to our unit holders about a fifth a quarter of our free cash flow in the form of quarterly distributions and unit buybacks.

So I think that means that we increase our disable cash flow. You should expect also the capital in terms of unit holders to increase incrementally, but also I think this is our way of balancing solid total returns for our long term unit holders and growing our fleet while of course, continuing to ensure long-term viability and cash flow generating capacity for the partnership. So hopefully we can achieve both.

Chris Robertson

Okay. That's fair. Thanks for that. As it relates to the Cape Agamemnon, when is the next special survey for that vessel? And is it IMO ready for 2023 and beyond, or is there any incremental CapEx that would be required to get it up to speed?

Gerasimos Kalogiratos

So 2000 -- must be 2025 due for here next special survey. If you -- do you mean in terms of EXI, we'll require an additional CapEx. We anticipate some incremental CapEx, but not something material. I don't necessarily have a number, but it's not going to be anything that will move the needle.

Having said that, I think the idea is to hopefully divest from this asset before that. I know that I have said that before. I think so far we are very opportunistic about it. I think so far not having sold the ship has been the right decision, but if we see the market firming up, we want potentially to sell the ship. It's a non-core asset doesn't really fit the bill because of the spot exposure. It's also an older ship and to the extent that we can sell older ships, that of course applies to container vessels. We will we opportunistically try to get there.

Chris Robertson

Okay. Yeah, that's great color. I guess last question for me relates to the G&A expense for this quarter. It was much lower quarter-over-quarter versus 4Q. Just wondering if there was anything special about that a one-time occurrence, or if we should think about that as a run rate from here?

Gerasimos Kalogiratos

I think firstly you didn't have transaction expenses which we had in the fourth quarter and that plays a role. We also had a smaller impact in terms of the equity incentive plan, which will pick up into the next quarter. I think a rate closer to what you had in the previous quarter or maybe slightly lower than that is a better proxy including non-Cash items.

Chris Robertson

Okay. Yeah. Thank you for -- thanks for the time.

Gerasimos Kalogiratos

Thank you, Chris.

Operator

Thank you. And we will now take our next question. Please go ahead. Your line is open.

Benjamin Nolan

Hey, Jerry. It's Ben from Steve. Can you hear me?

Gerasimos Kalogiratos

Hi Ben, how are you?

Benjamin Nolan

Good, good. So I wanted to start on interest rates. I'm curious if you could give a little color as to well, I guess the interest cost was a little bit lower, we thought it would be. Could you talk to where your cost of interest is at the moment and going forward, how much you have hedged or how much is fixed?

Gerasimos Kalogiratos

So I think about a fifth of our debt is fixed in the sense, split between or rather which is the total of the bond plus one of our facilities, a lease back facility that is on a fixed rate. We also, in certain of our facilities, we are able to fix one month LIBOR and potentially I'm not sure if that made a difference compared to your model, if you were assuming three month LIBOR because there has been -- the Delta there has grown for reasons over the last few months.

There is not -- there is no other cap or heads at this point, but we are of course mindful of developments on the interest rate front and we will seek to the extent that we can to grow the percentage of our indebtedness going forward on a fixed basis. In terms of the actual all-in cost, happy to give you a call after this to give you a precise number.

Benjamin Nolan

Okay, well, do you have a sense as to sort of what the blended average is going forward LIBOR plus whatever?

Gerasimos Kalogiratos

It should be. So the margin is you mean excluding that, I assume the fixed.

Benjamin Nolan

Excluding the fix. Yeah, yeah. Right.

Gerasimos Kalogiratos

So that would be close, lower than 3%. So closer to 2.7%, 2.8%.

Benjamin Nolan

Okay, perfect. And to that end, obviously interest rates have been rising quickly and appear to continue to be headed that direction. Does that change at all how you think about acquisitions? I know you outlined the containerships and obviously the ones that haven't been delivered, you're not going to be buying until they're delivered. So not all of that happens right away, but as the cost of debt and the absolute cost of capital rises do you have to think about the appropriate multiple differently i.e. sub 10% because, the return requirements are greater.

Gerasimos Kalogiratos

So in the end, all transactions that we would look at, they have to be accretive and to distributable cash flow, as well as EPU and the rise of interest rates and because also we know that typically the cash flow is going forward, the rise of interest rates eats into that accretion.

So hitting the right blend of data and equity, I think it is going to be important going forward. We don't disagree. In terms of the multiple, I think this is this dictated by a number of things and we have done transactions on the LNG front around 10 times with charters that are in place that with charter duration of five years plus and I think even in an increased rate interest rate environment if you're at the same time are getting longer cash flows, it would be justifiable to transact around the same multiples but, in the end, the criterion is quite robust. So accretion has to be there and this is what the board would be looking for if we were to acquire more ships.

Benjamin Nolan

Okay. That's helpful. And then lastly, we hadn’t seen quite a bit of forward fixing on containerships. The market was really hot and so people were willing to -- minors were willing to transact on vessels, well, in excess of a year of prior to the current charters rolling off.

There's been very little activity because there's very little available, but it feels like the market is softening a little bit. I was curious if that is also translated in the ability to forward fix, especially if you have the one vessel that comes off contract next year. Is there -- is it too far out to be able to do something on that and is the windows sort of short or the appetite to do that, that sort of forward fixture shrinking and all these things?

Gerasimos Kalogiratos

So as always, this is a yes and a no question -- answer. So you have -- you have two things going on and on the one hand you're right, the charter market is in a wait and see mode right now especially for forward fixing. And there has been some softening on rates, but of course still at very high levels. Transactions and fixtures are taking place at historically extremely high level. So there is no doubt about that. What has become less liquid is the forward end.

But then you look at the AKADIMOS our 9,000 TEU vessel, this is [indiscernible] wide beam ship with 1,650 reefer flags AMP on both sides. So a very good ship, unique ship in a way and very fuel efficient compared to an 8,000 TEU classic post Panamax. It has as much as 30 tons per day savings.

So this is a very attractive vessel and we don't know of any similar size vessel opening between now and April, 2023, actually. So, I think we have seen people approach us on the vessel because of its uniqueness. On the other hand, we don't feel that the market is about to cross. There might be a bit less liquidity in the forward cave, but people are still there to do deals.

If anything there is a good chance that if whenever China opens up, we will -- we will have a huge draw [ph] for cargo to be moved. So we are not going to hurry either. but I would expect that over the next three to four months, we should have a lot more clarity with regard to the AKADIMOS. It should, people are already looking at it. It's a good shape. I think we will find a good charter quite soon.

Benjamin Nolan

All right. I appreciate the thorough color as always, Jerry.

Gerasimos Kalogiratos

Thank you, Ben.

Operator

Thank you. There are no further question. I will now pass the floor back to Mr. Kalogiratos for closing remarks.

Gerasimos Kalogiratos

Thank you all for joining us today.

Operator

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