Capital Product Partners L.P. (NASDAQ:CPLP) Q4 2022 Earnings Conference Call February 3, 2023 9:00 AM ET

Company Participants

Gerasimos Kalogiratos - Chief Executive Officer

Conference Call Participants

Omar Nokta - Jefferies Research Services, LLC

Liam Burke - B. Riley Securities

Operator

Thank you for standing by, and welcome to the Capital Product Partners’ Fourth 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 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 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 morning 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 third quarter of 2022, we have taken delivery of two 13,000 TEU newbuilding eco-container vessels, both with long-term employment in place. I remind you these are the first two of a total of three 13,000 TEU eco-container vessels we agreed to acquire last year.

In addition, we agreed to acquire latest generation LNG carrier, which is expected to be delivered to us later this month, and whose charters have exercised an option to extend the firm charter period from five to seven years.

Turning to the Partnership's financial performance, net income for the fourth quarter of 2022 was $21.1 million compared with net income of $40 million for the fourth quarter of 2021. Our Board of Directors has declared a cash distribution of $0.15 per common unit for the fourth quarter of 2022. The fourth quarter cash distribution will be paid on February 10th to common unit holders of record on February 7th. The Partnership's operating surplus for the fourth quarter was $37.3 million or $6.3 million after the quarterly allocation to the capital reserve.

We continued acquiring units under our unit buyback program during the fourth quarter of 2022. We repurchased 102,838 of the Partnership's common units at an average cost of $14.34 per unit. I'm pleased to announce that our Board of Directors authorized a new unit repurchase plan replacing our earlier plan that expired in January. Pursuant to our new plan, we may purchase up to an additional $30 million of our common units effective for a period of two years through January, 2025.

Finally, the Partnership's charter coverage for 2023 and for 2024 stands at 92% and 91% respectively, with the remaining charter duration corresponding to seven years, taking into account the two recent deliveries and the two remaining newbuilding vessels we have agreed to acquire.

Turning to Slide 3, total revenue for the fourth quarter of 2022 was $79.9 million compared to $63.6 million during the fourth quarter of 2021. The increase in revenue was primarily attributable to the revenue contributed by four LNG/Cs acquired in November and December, 2021 and operating for the full period in the fourth quarter of 2022. The previously announced increase in the daily rate earned by the LNG/Cs Aristarchos and Asklipios effective from September 1, 2022 and the delivery of the Manzanillo Express in the fourth quarter of 2022, partly offset by the sale of the three container vessels.

Now total expenses for the fourth quarter of 2022 $42.1 million compared to $35.7 million in the fourth quarter of 2021. Voyage expenses for the fourth quarter increased to $3.8 million compared to $3.2 million in the fourth quarter of 2021 due to the increase in the average size of our fleet and the increase in voyage expenses incurred by the Cape Agamemnon employed under voyage charters, compared to the respective period of 2021.

Total vessel operating expenses during the fourth quarter of 2022 amounted to $17.3 million, compared to $14.9 million during the fourth quarter of 2021.the increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet. Total expenses for the fourth quarter of 2022 also included vessel depreciation and amortization of $17 million compared to $14.8 million in the fourth quarter of 2021. The increase in depreciation and amortization during the fourth quarter of 2022 was mainly attributable to the net increase in the average size of our fleet, partly offset by lower amortization of deferred dry-docking costs.

General and administrative expenses for the fourth quarter of 2022 amounted to $4 million, compared to $2.7 million for the year before. The increase in general and administrative expenses was mainly attributable to the increase in the amortization associated with our equity incentive plan and certain one off write-offs associated with long outstanding trade receivables.

Interest expense and finance costs increased to $18.4 million for the fourth quarter of 2022 compared to $8.9 million for the fourth quarter of 2021. The increase in interest expense and finance costs was mainly attributable to the increase in the weighted average interest rate, which amounted to 5.38% in the fourth quarter of 2022 compared to 2.85% in the fourth quarter of 2021.

The Partnership recorded net income of $21.1 million for the quarter compared with a net income of $40 million for the fourth quarter of last year which also includes a gain of $21.4 million from the sale of the vessel Adonis. Net income for the fourth quarter of 2022 also includes a foreign exchange gain of $3.4 million from the physical conversion of the euro cash balances to U.S. dollars during the quarter, and interest earned on our cash deposits presented under other income/expense net. Net income per common unit was $1.03 for the fourth quarter of 2022 compared to $0.94 excluding the gain on sale of the vessel in the fourth quarter of the year before.

On Slide 4, you can see the details of our 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 $37.3 million in cash from operations for the quarter before accounting for the capital reserve.

We allocated $31 million to the capital reserve an increase of $1.3 million compared to the previous quarter due to the increased debt amortization resulting after the drawdown of the Manzanillo Express facility. After deducting the capital reserve, the adjusted operating surplus amounted to $6.3 million.

On Slide 5, you can see the details of our balance sheet. As of the end of the fourth quarter, the Partner's capital amounted to $638.4 million, an increase of $112.9 million compared to $525.5 million as of yearend 2021. The increase reflects net income of $125.4 million for the year end 2022, $6.6 million of CPLP common units transferred to the seller upon delivery of the Manzanillo Express, and the authorization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in a total amount of $12.2 million, the repurchase of common units for an aggregate amount of $5.9 million and other comprehensive loss of $4.8 million.

Total debt decreased by $18.2 million to $1.3 billion compared to $1.32 billion as of yearend 2021. The decrease is attributable to the scheduled principle payments for the period of $85.2 million debt repayments in connection with the sale of certain of our container vessels, the repayment in full of two of our credit facilities, the repayment of $10 million seller's credit and the $5.5 million decrease in the U.S. dollar equivalent of our Euro denominated bonds as of year and 2022.

The decrease was partly offset by the issuance of a €100 million in bonds in July, 2022 and the drawdown of $105 million of a new credit facility to partly finance the acquisition of the Manzanillo Express our new 13,000 TEU container vessel in October, 2022. It's 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 in the future.

Total cash as of the end of the quarter amounted $154.8 million, including restricted cash of $10.2 million, which represents the minimum liquidity requirement under our financing arrangements.

Turning to Slide 6, we review the delivery of the Itajai Express, the second of the three 13,000 TEU eco-container vessels, which we have agreed to acquire, together with one latest generation LNG carrier. The vessel was successfully delivered from Hyundai Shipyard on January 10th and commenced a 10-year charter with Hapag Lloyd. The acquisition was funded through a combination of $6 million cash deposit paid in 2022, $108 million drawn under Japanese Operating Lease and $8.5 million of cash paid on delivery. Japanese Operating Lease or JOLCO is funded 70% by commercial debt and 30% by tax equity. It has a term of eight years and is repayable in escalating quarterly installments and a balloon of $84.5 million in January, 2031.

On Slide 7, we provide an update on the acquisitions announced in June, 2022, which includes three 13,000 TEU container vessels together with one latest technology LNG carrier. Of those, the Manzanillo Express and Itajai Express have now been successfully delivered to the Partnership and have commenced their 10-year charters with Hapag. The last of the three container vessel is to be named Buenaventura Express is currently under construction at Hyundai Heavy Industries Korea, and is expected to be delivered to the Partnership in mid-June 2023.

The LNG carrier Asterisk 1 also currently under construction is scheduled to be delivered to us in mid-February 2023. The charter Hartree as previously announced, has exercised the option to extend the vessel's firm employment by two years for a total of seven years and maintains an option to extend by an additional two years exercisable closer to the charter expiration.

Moving to Slide 8, after the extension of the employment of LNG Asterisk 1, the Partnership's contracted revenue backlog now stands at $1.93 billion with over 64% of contracted revenue coming from LNG assets with highly diversified customer base of seven charters.

Turning to Slide 9, the Partnership's remaining charter duration amounts approximately seven years while charter coverage remains at 92% for 2023 and 91% for 2024. As you can see here, and except for Cape Agamemnon with trade in the spot market, our next charter expiration is the ECO-9000-TEU container vessel Akadimos, which is expected to be delivered from its present charter in April. The vessel is still regarded among the top fuel efficient vessels in its size and type with increased reefer capacity.

While vessel chatter rates have for sure softened into the second half of 2022 and into the first quarter of 2023, and the market remains volatile with few new fixtures for this type of vessels, considering the uniqueness of the Akadimos, we are confident that we can fix the vessel at healthy rates and in any case, higher than its current charter rate. We hope to be able to disclose further details in our next quarterly call, if not earlier. It is also important to highlight here that once we fix the Akadimos, our next charter expiry does not come up before 2025.

Turning to Slide 10, the LNG carrier sector continues to stand in a strong position despite the recent corrections in the spot market from previous record highs. Currently, the spot market is experiencing short-term pressure on freight rates due to warmer than expected weather in both Europe and Asia dampening demand for both spot and short-term cargos. Term rates, on the other hand, remain firm barely affected by the weaker spot market levels and are significantly higher compared to the start of 2022.

One year TC rate for a two-stroke vessel is at around $230,000 per day compared to $110,000 per day at the beginning of 2022. The period market for modern vessels is further supported by freight differentials between the modern two-stroke vessels and the older steam and tri-fuel vessels. This differential reached record highs in 2022 due to the combined benefits of lower boil-off rates, higher cargo volumes, and better fuel efficiency in this high-price environment.

Shipping demand in 2022 has been mainly driven by voyage durations while floating cargos have kept tonne-mile mile demand high during the year. LNG tonne-mile trade is projected to grow by 3.8% in 2023, following growth of 0.4% in 2022. Meanwhile, the LNG carrier fleet capacity is projected to grow by 4.4% in 2023, following growth of 4.1% in 2022. The LNG fleet order book stands at 49.7% of the total fleet with 320 vessels currently on order, while CPRs have effectively no slots left until 2027.

Record contracting in the sector has been primarily driven by project-related ordering with a record volume of LNG liquefaction capacity scheduled to come online between 2025 to 2027. Most notably 64 LNG carriers were contracted in 2022 backed by charters to Qatar Energy with the vessels set to lift volumes from the Northfield expansion project in Qatar as well as from Golden Pass LNG in the U.S. Simultaneously, the current price of a newbuilding vessel has surpassed $250 million.

The positive market sentiments in this year, driven by energy security concerns in Europe is expected to continue at least until the new wave of liquefaction plants become operational in 2026. Looking ahead to 2023, the outlook suggests another positive year for the LNG carrier sector with the market expected to remain tight.

On Slide 11, we review the container market. The container shipping charter market has softened during the second half of the year into the fourth quarter from the previously exceptional levels with rates returning towards more normalized levels. The pace of decline has been faster than expected with both trade volumes faltering and port congestion easing against the backdrop of eroding consumer and business confidence and capacity availability increasing.

Container spot freight rate levels have softened on most trade lanes with the container freight index down by 80% from the 2022 peak, but still 27% higher compared to the pre-COVID 2019 average. The charter market has seen a correction as well. Clarkson's charter rate index stood at 97 points by the second week of January and down by circa 80% from the 2022 peak, but still 1.7 times higher than the pre-COVID 2019 average. Rates have dropped across all sizes, though declines have been less acute in the larger sizes, while on a relative basis, availability is still lower.

Contracting has slowed from the 2021 record high, but has remained robust in 2022 with 2.6 million TEU of new vessels ordered. As of start of January, the order book stands at 912 units of $7.3 million TEU equivalent to 28% of total fleet capacity. Interestingly, only 11 rather small units were scrapped in the full year 2022 with the same number of ships being demolished just in January, 2023. It is expected that demolition volumes will pick up further in 2023, 2024, driven by softer markets and upcoming environmental regulations.

Overall, we expect older, less efficient vessels with larger carbon footprints to be hit most in the container segment due to the higher than industry average bunkers consumption of container vessels, but also the fact that containers transport to a large extent consumer goods where increasingly Scope 3 emissions become the focal point by consumers and manufacturers alike. Going forward, the magnitude and timing of further softening in the market will be determined by trends in port congestion, trade volumes and fleet growth, but the market is generally expected to continue to return to more normal market levels, potentially around historical averages. At the same time, windows of increased market tightness could emerge from the potential for further disruption and ongoing efficiencies.

Turn to Slide 12, we have exercised our Right of First Offer for four vessels, two of which have already been delivered to the Partnership, and the remaining two will be delivered by the second quarter of 2023. We retain the Right of First Offer in two more LNG carriers currently under construction in Hyundai in South Korea and delivering in 2023 and 2024.

In addition, Capital Maritime has contracted an additional seven LNG carriers at Hyundai with deliveries from 2024 to 2026. As these find employment in 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 16 latest generation LNG carriers with a diversified portfolio of charters. Basis the strong LNG market fundamentals we anticipate that two-stroke latest generation LNG carriers like the ones we own and its potential dropdown candidates will constitute very attractive assets going forward. As we maintain financial flexibility, seven unencumbered vessels and strong cash flow generation we believe that CPLP is strategically positioned to take advantage of such growth opportunities while continuing to return cash to unit holders through distributions and unit buybacks.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Omar Nokta with Jefferies. Please proceed with your question.

Omar Nokta

Thank you. Hey Jerry, thanks for the update. I just wanted to ask -- I just wanted to ask about the platform as you see it now. You’ve obviously got the mix of container ships and LNG carriers, all for the most part on long-term contracts. After you take delivery of the final container ship here in the LNG vessel in the next few months, how are you seeing the business developing going forward? Do you look for more assets to buy? I know you mentioned the Capital Maritime vessels. So do you look to be acquisitive still, do you harvest the cash flow that you now have? Do you monetize some of the ships? How are you thinking about all of that from a platform perspective?

Gerasimos Kalogiratos

I think once we are closer to completing these acquisitions, because this was a substantial -- yet another substantial acquisition, I mean total cost of around $600 million. We would try to balance growth, as we have said in the past with growth. So I think we outlined in the past that we will try to return to our unit holders about a quarter to, 20% to 25% of our free cash flow in the form of unit buybacks and distributions and use the rest to look for more acquisitions.

I think the LNG segment is particularly interesting. Long-term fundamentals there are very strong. The nature of the industry that is industrial counterparties, long-term charters, they can vary from anywhere between three to five years, but more often than not around 10 to 15 years. They fit very much our business model, which looks for cash flow visibility. So I think this is an interesting segment where we also have let’s say, access through the Capital Maritime vessels.

So I think we will continue to focus on that. Of course, there is the expertise on the container side and potentially also other types of assets if they were very accretive, so we will keep our eyes open. But in a way, the low-hanging fruits after we are closer to completing the current acquisitions would be to look at the LNG carriers.

Omar Nokta

Got it, makes sense. Thanks Jerry for that. And then just as a followup, as you discussed the Akadimos obviously, a big ship Eco design, one of the better ones and bigger ones out there. You mentioned you expect the rate to be higher than what it’s getting now. But what does the charter appetite look like now for -- in terms of, I guess, duration? Is that something you think you could be able to fix on a multiyear basis?

Gerasimos Kalogiratos

It is a market influx and hence, in a way, it’s more difficult to predict where we will come off. When the market moves, there’s uncertainty on both sides, charters as well as owners and so it is more difficult to -- for people to commit on very long-term right now. And I think also from the owner side, we’re also trying to understand where the market is going to land or stabilize. It doesn’t -- as I have tried to convey in my prepared remarks, this doesn’t feel like a market that is going to crash below historical averages, at least definitely not in the short-term.

It seems like a market that, of course, has come off a lot, but from very high levels. It feels that it’s going to stabilize closer to more normalized historical average levels. Now exactly where this is going to be, and I think we will know in a couple of quarters. So if I had to guess, I think the deal range in terms of duration will be closer, it will be between one to three years and less likely to be five years or more. But again, it’s all a question of numbers and returns, and because this is really a live one in the sense that this is now that we are starting to engage with charters, I think we can have really a better picture within the next couple of months.

Omar Nokta

Okay. Thank you. Yes, so not obviously five years plus, but it looks like one to three years. And do you think that there would be -- just based off of and as you mentioned, the market somewhat influx, everyone is looking to assess how things are, do you see risk of idle time in between when the vessel rolls off contract and when it redeploys or is there enough interest for us to kind of deploy fairly quickly?

Gerasimos Kalogiratos

Never say never in shipping, but I think it’s extremely unlikely. No, it doesn’t feel like -- that’s what I was trying to convey, it doesn’t feel like this type of market. This is a market where there is interest. It comes in ebbs and flows. You might see the market a little less active one day, but then you see charters coming back and picking up good tonnage. So no, I wouldn’t expect any material idle time in this market.

There is interest, but again, as I tried to describe in my prepared remarks, the previous market, given how strong it was and how tight it was, any type of ship would find employment. It was almost indifferent, the speed consumption profile, the reefer capacity or the carbon footprint of the ship. I think going forward, we will see a lot of differentiation. So ships like the Akadimos that are modern ships with eco characteristics will attract much more interest, while the very old ships that found very good employment in the previous two years, they, I think they will see increasingly more idle time. And if I had to guess, we will see increasingly more of these vessels being scrapped. So sorry, that’s a very long answer, but no fire, no idle time of that sort.

Omar Nokta

Great, thanks Jerry. That’s very helpful. I’ll turn it over.

Gerasimos Kalogiratos

Thank you, Omar.

Operator

Thank you. Our next question is from Liam Burke with B. Riley Securities. Please proceed with your question.

Liam Burke

Thank you. Good morning, Jerry. How are you today?

Gerasimos Kalogiratos

Hi Liam, I’m well. How are you?

Liam Burke

Good, thank you. I guess I have to ask a question about your Cape Agamemnon. I know that rates are kind of off now, but is that a source of cash for you or are you just happy to keep it in the spot market?

Gerasimos Kalogiratos

Well, we have been saying now for some time that this is a noncore asset, and this very much remains there the case. The Cape Agamemnon in the fourth quarter and a TCE of just short of $10,000 per day and had also 10 days of unscheduled off hire due to repairs. So it’s not, by any means, given also the size of our fleet and the type of our ships, any material -- doesn’t have a material contribution to the overall Partnership.

However, the reason that we are sticking with the vessel is that there are expectations of better markets ahead, both charter markets as well as SNP [ph] markets. So hopefully, we can find a better time to exit this vessel compared to now. So I think there’s no reason for us, there’s no pressure for us to simply divest the ship for the sake of divesting. So we’ll wait it out. I think we have proven over the years that we are astute players when it comes to the SNP [ph] market. We divested a number of container ships over the last couple of years at very good prices. Hopefully, we can -- when we decide to sell the Cape Agamemnon, we can do it at a better valuation.

Liam Burke

Fair enough. From looking at your drop-down opportunities, they’re all in the LNG carrier space. Obviously, the container business, as you mentioned earlier, rates have softened, but still relatively high from historic levels. Is this a conscious effort to move more to the LNG side or are you still going to look at the container space once you’ve taken the ones that are on order?

Gerasimos Kalogiratos

We like the LNG space, both because of the market fundamentals as well as because of the typical more lengthy profile of the charters that are on offer. So that fits our business model quite well. Also, the fact that these are effectively dual fuel ships that can -- that are built to use LNG as fuel and makes them more future-proof compared, for example, to older container ships.

So there are many advantages being in the LNG space. However, this does not mean that we would not look at other assets that have good cash flow visibility. I think the reason that you have exclusively LNG assets on Page 12 of the presentation is because these are offered by Capital Maritime. They are there and they fulfill all this -- they tick of these boxes. But would we look at other assets? Yes for sure.

Liam Burke

Great, thank you, Jerry.

Gerasimos Kalogiratos

Thank you, Liam.

Operator

Thank you. There are no further questions at this time. I’d like to pass the floor back over to Mr. Jerry Kalogiratos for any closing comments.

Gerasimos Kalogiratos

Great, thank you. Thank you all for joining us today. Have a good day.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.