Capital Product Companions L.P. (NASDAQ:CPLP) Q1 2023 Outcomes Convention Name Might 5, 2023 10:00 AM ET
Firm Members
Jerry Kalogiratos – CEO
Convention Name Members
Omar Nokta – Jefferies
Ben Nolan – Stifel
Liam Burke – B. Riley Securities
Operator
Thanks for standing by, and welcome to the Capital Product Companions’ First Quarter 2023 Monetary Outcomes Convention Name. We’ve got with us Mr. Jerry Kalogiratos, Chief Government Officer of the corporate. At the moment, all contributors are in a listen-only mode. [Operator Instructions] I have to advise you this convention is being recorded at the moment.
The statements made in at the moment’s convention name that aren’t historic info, together with our expectations concerning money era, fairness returns and future debt ranges, our potential to pursue development alternatives, our expectations or targets concerning future distribution quantities, capital reserve quantities, distribution protection, future earnings, capital allocation in addition to our expectations concerning market fundamentals and the employment of our vessels, together with redelivery dates and constitution charges, could also be forward-looking statements as corresponding to outlined in Part 21E of the Securities Change Act of 1934 as amended. These forward-looking statements contain dangers and uncertainties that would trigger the said or forecasted outcomes to be materially completely different from these anticipated. Except required by legislation, we expressly disclaim any obligation to replace or revise any of those forward-looking statements, whether or not due to future occasions, new info, a change in our views or expectations to evolve to precise outcomes or in any other case. We assume no accountability for the accuracy and the completeness of forward-looking statements. We make no prediction or assertion concerning the efficiency of our frequent models.
I might now like handy the decision over to your speaker at the moment, Mr. Kalogiratos, please go forward.
Jerry Kalogiratos
Thanks, and thanks all for becoming a member of us at the moment. As a reminder, we’ll be referring to the supporting slides accessible on our web site as we undergo at the moment’s presentation.
Because the finish of the fourth quarter of 2022, we have now accomplished a variety of vital transactions for the partnership, together with the supply of 13,000 TEU newbuilding eco container vessel and one newest era LNG provider, each with long-term employment in place. As well as, we secured new employment for one in every of our container vessels from roughly 2 years, which is predicted so as to add $34.Four million of gross income to our backlog. With this fixture, our subsequent interval constitution expiration doesn’t come earlier than the primary quarter of 2025. Moreover, we had been paid in full one in every of our leasing agreements, which now leaves us with a complete of 10 vessels unencumbered.
Turning to the partnership’s monetary efficiency. Web revenue for the primary quarter of 2023 was $10 million. Our Board of Administrators has declared a money distribution of $0.15 per frequent unit for the primary quarter of 2023. The money distribution can be paid on Might 12 to frequent unitholders of file on Might 8. We continued buying models below a unit buyback program. And in the course of the first quarter of 2023, we repurchased roughly 129,000 frequent models at a mean value of $13.57 per unit. Lastly, the Partnership’s constitution protection for each 2023 and 2024 stands at 96%, with the remaining constitution length corresponding to six.Eight years, together with the ultimate newbuilding container vessel anticipated to be delivered to the partnership in the direction of the top of the second quarter of 2023.
Now turning to Slide 3. Complete income for the primary quarter of 2023 was $81 million in comparison with $73.Four million in the course of the first quarter of ’22. The rise in income was primarily attributable to the income contributed by the two newbuilding container vessels and the LNG provider Asterix I and the beforehand introduced improve within the each day fee earned by 2 of our LNG carriers, partly offset by the sale of two container vessels in July 2022. Complete bills for the primary quarter of 2023 had been 44 — sorry, $45.1 million in comparison with $40.2 million within the first quarter of 2022. Voyage bills for the primary quarter of 2023 elevated to $3.Eight million in comparison with $3.6 million within the first quarter of final 12 months because of the improve within the common dimension of our fleet. Complete vessel working bills in the course of the first quarter of 2023 amounted to $19.Three million in comparison with $16.7 million throughout the identical interval in 2022. The rise in vessel working bills was primarily because of the web improve within the common variety of vessels in our fleet and the rise within the working bills of sure of our vessels in view of scheduled upkeep and one-off repairs.
Complete expense for the primary quarter of 2023 additionally embrace vessel depreciation and amortization of $19.2 million in comparison with $18.Four million within the first quarter of 2022. The rise in depreciation and amortization was primarily attributable to the online improve within the common dimension of our fleet, partly offset by decrease amortization of deferred drydocking prices.
Normal and administrative bills for the primary quarter of 2023 amounted to $2.Eight million in comparison with $1.5 million within the first quarter of ’22. The rise basically and administrative bills was primarily attributable to the rise within the amortization related to our fairness incentive plan.
Curiosity expense and finance prices elevated to $23.7 million for the primary quarter of ’23 in comparison with $10.Three million for the primary quarter of final 12 months. The rise in curiosity expense and finance value was primarily attributable to the rise within the partnership’s complete common indebtedness and the rise within the weighted common rate of interest to six.1% from 3% in the course of the first quarter of ’22.
The partnerships recorded a web revenue of $10 million for the quarter in contrast with web revenue of $25.1 million for the primary quarter of final 12 months. Web revenue for the primary quarter of ’23 additionally contains an unrealized web lack of $2.Three million, ensuing from the rise within the U.S. greenback equal of our euro-denominated bonds issued in October ’21, partly offset by the change within the honest worth of the related cross foreign money swap agreements not designated as an accounting hedge and introduced below different expense revenue web. Web revenue per frequent unit was $0.49 for the primary quarter of ’23 in comparison with $1.26 within the first quarter of final 12 months.
On Slide 4, you possibly can see the small print of our working surplus calculations that decide the distributions to our unitholders in comparison with the earlier quarter. Working surplus is a non-GAAP monetary measure, which is outlined absolutely in our press launch. We’ve got generated roughly $36.Three million in money from operations for the quarter earlier than accounting for the capital reserve. We allotted $33.Four million to the capital reserve, a rise of $2.Four million in comparison with the earlier quarter because of the elevated debt amortization ensuing from the drawdown of the Itajai Specific and the Asterix I services, partly offset by the compensation in stuffed with one in every of our leasing services. After deducting the capital reserve, the adjusted working surplus amounted to $Three million.
On Slide 5, you possibly can see the small print of our steadiness sheet. As of the top of the primary quarter, the companion’s capital amounted to $642.9 million, a rise of $4.5 million in comparison with year-end 2022. The rise displays web revenue for the primary quarter of ’23 and the amortization related to the fairness incentive plan, partly offset by distributions declared and paid in the course of the interval within the complete quantity of $3.1 million, the repurchase of frequent models for an mixture quantity of $1.Eight million and different complete lack of $1.7 million ensuing from the rise within the U.S. greenback equal of our euro-denominated bonds issued in July 2022, partly offset by the change within the honest worth of the related cross-currency swap settlement we designated as accounting hedge.
So complete debt elevated by $254.7 million to $1.55 billion in comparison with $1.Three billion as of year-end 2022. The rise is attributable to a $5.9 million improve within the U.S. greenback equal of our euro-denominated bonds as of quarter finish, the drawdown of $108 million below a brand new financing association to partially finance the acquisition of Itajai Specific in January 2023 and the drawdown of $184 million below sale and leaseback transaction to partially finance the acquisition of Asterix I in February ’23, partly offset by debt repayments of a complete of $43.2 million.
It is very important word right here as soon as once more that following the compensation of an extra facility in the course of the first quarter, we retained 10 out of our present fleet of 22 vessels unencumbered, which could possibly be a possible supply for extra liquidity sooner or later. For instance, if we had been to tackle debt at 50% to 55% of the honest market worth of those 10 vessels, we may increase extra liquidity to the tune of $200 million. Complete money as of the top of the quarter amounted to $99.Eight million, together with restricted money of $11.2 million, which represents the minimal liquidity requirement below our financing preparations.
Turning to Slide 6. The LNG provider Asterix I used to be efficiently delivered from Hyundai Heavy Industries on February 17 by the partnership and start the 7-year constitution with Hartree. Hartree maintains the choice to increase the constitution by an extra 2 years. The acquisition was funded by a mixture of a $12 million money deposit paid in 2022, $184 million drawn below a brand new sale-leaseback transaction and $34 million of money paid on supply.
The sale and leaseback transaction has a time period of 10 years repayable in equal quarterly installments, and the partnership retains the choice to repurchase the vessel at a predetermined worth after the primary anniversary of the association, together with a purchase order choice of $96.5 million on the expiration of the lease in February 2033.
On Slide 7, we offer an outline of the acquisitions introduced in June 2022. Of these, the Manzanillo Specific and the Itajai Specific have now been efficiently delivered to the partnership along with the LNG provider Asterix I they usually have commenced their 10-year charters with Hapag-Lloyd which maintains three 2-year choices to increase the related charters. The final of the three container vessels to be named Buenaventura Specific is at the moment below development at Hyundai Heavy Industries Korea and is predicted to be delivered to the partnership in mid-June 2023.
Shifting to Slide 8, you possibly can see our debt maturities by 12 months. As you possibly can see, we have now eradicated all maturities by 2025 and wouldn’t have any vital maturities earlier than 2026, when our first $150 million euro bond turns into due. As of the top of the primary quarter of 2023, 29% of our debt was mounted at a mean weighted fee of 4.5%, and the remaining floating debt is topic to a weighted common margin as of quarter finish of two.43% over LIBOR or SOFR.
Shifting to Slide 9. The partnership contracted income backlog — the Partnership’s contracted income backlog now stands at $1.89 billion with over 63% of contracted revenues coming from LNG property with a extremely diversified buyer base of seven charters.
Turning to Slide 10. The partnership’s remaining constitution length quantities roughly 6.Eight years, whereas constitution protection stays at 96% for each 2023 and 2024. It is value noting right here once more that after the brand new constitution of the Akadimos, our subsequent interval constitution expiration doesn’t happen earlier than the primary quarter of 2025.
Turning to Slide 11, we evaluation the LNG market. International LNG demand, which expanded considerably in 2022 is predicted to proceed its regular development in 2023 as nicely. Regardless of the short-term seasonal strain that has been seeing the LNG provider spot market in latest months with wholesome fuel inventories in Europe, particularly weighing on market sentiment, the typical spot fee for 160,000 cubic TFT unit stood at round $50,000 per day. That was by the top of April, which is the bottom degree since July 2022. The time period constitution market stays although at very agency ranges with 1 12 months time constitution fee for 170,000 cubic 2-stroke vessel standing at extra $175,000 per day, offering robust proof of structural tightness.
Longer-term charges for durations in extra of 5 years additionally remained agency and are considerably greater in comparison with the beginning of 2022 because of the shortage of obtainable vessels in addition to rising newbuilding costs and rates of interest. The LNG fleet order e book stands at 50% of the entire fleet with 326 vessels at the moment on order. CPR capability stays restricted with the primary accessible and supply 12 months for brand new orders being 2027. Newbuilding costs proceed to rise and at the moment exceed $255 million to $260 million per vessel. Newest stories embrace the Four vessel newbuilding order on the Korean CPR for supply all through 2027 at round $263 million. If one was so as to add the price of capital for the predelivery installment and supervision prices, the supply value is nearer to $285 million to $290 million.
On Slide 2, we evaluation the container market. Container delivery market has began 2023 on a softer word after weakening from file highs all through the ultimate few months of ’22. Freight charges have continued to melt since final 12 months amid faltering demand brought on by financial headwinds, value of residing strain and extra retail inventories in key areas in addition to lowered port congestion, though constitution charges have seen will increase since February 2023. The Clarksons constitution fee index stood at 112 factors on the finish of April of this 12 months, up by round 121% in comparison with the 2010, 2019 common and 2x greater than the 2019 common.
Container spot freight ranges have softened on most commerce lanes with the SFI index standing at round 1,000 factors, down 80% from the beginning of 2022 peak, however 23% greater in comparison with the 2019 common. In response to weaker charges, operators have employed a variety of measures to handle capability from clean sailings and decrease speeds to rerouting some ships on backhaul legs. Indicatively, in 2023, the typical field it velocity was down 3.4% in comparison with the 2022 common.
Contracting stays strong, albeit at decrease ranges than the 2021 file. The order e book stands at 916 models of seven.5 million TEU or about 29% of complete fleet capability. 26 models of round 50,000 TEU have been scrapped up to now on this 12 months however demolition volumes are prone to be greater going ahead with impetus from softer markets and upcoming environmental laws. And with that, I am completely satisfied to reply any questions you’ll have.
Query-and-Reply Session
Operator
[Operator Instructions] Our first query comes from the road of Omar Nokta with Jefferies.
Omar Nokta
Jerry, thanks for the updates. I simply needed to perhaps ask how are you fascinated about issues strategically proper now? You have acquired the container ship that was arising for renewal, you mounted that on a fairly strong contract. You have acquired the LNG fleet that is absolutely contracted. How are you pondering now concerning the enterprise as it’s at the moment? What are your high priorities?
Jerry Kalogiratos
So I believe the highest precedence is to complete with the present acquisition that we have now introduced final 12 months, the $600 million acquisition of the Four vessels. We’ve got 1 vessel to go the final 13,000 TEU container vessel to be delivered ex yard in mid-June. However past that, I believe that we proceed to seek out the LNG phase notably fascinating. I believe this can be a multiyear up cycle for contemporary era 2-stroke vessels. The basics are robust, be it the elevated provide of the commodity going ahead by way of liquefaction capability, power safety issues, the position that LNG can be anticipated to play by way of the power transition. I believe all these are going to favor the LNG trade long run. And along with that, we, after all, just like the long-term profile of the LNG constitution construction. We’ve got the fitting of first refusal on sure LNG carriers. We’ve got, I believe, mentioned this over the previous couple of quarters. And I believe as soon as we’re achieved with the present acquisitions, we’ll look once more as to what we will do within the house. So I believe in all probability the second half of the 12 months is when you need to count on to listen to extra from us by way of concrete development plans going ahead.
Omar Nokta
Bought it. After which perhaps, clearly, you spent a number of concentrate on LNG, a number of alternatives with multiyear development for that phase by way of simply the commerce after which the fleet wanted for that. How are you pondering nearly containers in the meanwhile? As a result of there’s clearly been a — we’re on this probably — it is powerful to quantify or say the place we’re available in the market as a result of you’ve got liners which can be, as you talked about, are taking many measures to attempt to help freight charges. And but they proceed to be lively on the lookout for vessels on contract as you had been capable of safe your ship at a fairly first rate fee for two years. What do you suppose — are there alternatives which can be creating within the containership house? Is it too early? Is there — what is going on on with ship values? Is there a chance within the S&P market to reap the benefits of shopping for vessels maybe cheaply after which perhaps securing them on contracts. Is there any alternative that you simply see there? Or is it nonetheless too early?
Jerry Kalogiratos
I believe it is nonetheless early within the sense that the mud has not settled down. As you stated, we have now seen constitution charges fall after which additionally get well over the past couple of months to the tune of anyplace between 15% to 25% relying on the dimensions and sort of ship and dates, which is kind of vital. Once more, working example is the constitution that we managed to safe. Clearly, it is not what it could have been if we had been fixing final 12 months, but it surely’s nonetheless an above, as an instance, cyclical common fee with a first-class account. So the demand appears to be there. And I believe each house owners in addition to liners have been caught a little bit without warning as to how the market has developed. Let’s have a look at how issues fare. I believe within the medium time period, we’re fairly optimistic as a result of the regulatory impression by way of the — particularly environmental laws, I believe, are going to have an effect on the container market could also be greater than others given the truth that lots of the clients of the liners have gotten more and more extra delicate to Scope Three emissions. Along with that, after all, you’ve got ETS right here, purely you, EXI, all this, I believe, will improve demand for contemporary ships and can power older ships to both gradual steam and fairly certain that a variety of vessels will head to the scrap yards because of a mixture of a worse market probably in addition to the regulatory framework. So I believe we nonetheless must see the mud settle with regard to the order e book in addition to the regulatory impression earlier than one makes a transfer. It is nonetheless perhaps a little bit early. However I am assured there can be alternatives, particularly for house owners which have fashionable fleets and liquidity to reap the benefits of them.
Omar Nokta
That is an excellent overview. And perhaps only one closing one. You talked about the 10 ships that you simply personal proper now, debt free, and also you used the instance of probably levering up 50% as a supply of money in the event you needed. Is that type of the way you’re fascinated about that? Do you propose to refinance these? Any sense of timing to take action? Or do you suppose you may monetize them as another choice?
Jerry Kalogiratos
I believe we’re in no hurry. Successfully, what I used to be attempting to spotlight is that having a variety of unencumbered ships on the steadiness sheet offers you a whole lot of flexibility. It’s a liquidity lever. It’s a signal of monetary power and adaptability. We do not know. We have no plans. I believe at this level, we have now loads of liquidity. And if something, it will improve going ahead, given the money circulation era of our present fleets. If there may be an acquisition that’s accretive and is sensible for us to tackle extra leverage, then we will pull that lever. However there are not any fast plans.
Operator
Our subsequent query comes from the road of Ben Nolan with Stifel.
Ben Nolan
Jerry, I’ve acquired a pair right here. I am a little bit shocked to listen to concerning the potential of including incremental vessels subsequent 12 months, given rates of interest are – you guys are paying greater than 6% on your debt and on the identical time, the unit costs is down fairly considerably. It looks as if on a relative foundation that may — even simply paying down debt may be a greater use of capital. Are you able to perhaps speak me by the way you’re fascinated about that?
Jerry Kalogiratos
I believe we will hopefully obtain a greater return than a 7% return if we purchase property. And I believe we have now been capable of obtain a lot better than that up to now. So the repaying of the debt is a short-term resolution for extra money. And I believe we’re getting an honest return from that. Do not forget that on the identical time, we will put up money at 4%, 5% curiosity revenue. So it is not an enormous saving, however it’s a saving of two%, 3%. So that is additionally why the place we’re doing it whereas we do not have the fast use of the money. However I am hopefully assured that we can put that fairness to good use and obtain greater returns than that if and after we purchase extra vessels. On the buyback facet, we have now elevated the bottom considerably. It’s difficult. Liquidity has dried up. It has halved successfully over the past couple of quarters. However we have now been on the market for a while, having purchased a complete of type of 1 million models over time. So a money outlay of about $13 million, and we will certainly proceed doing that. That is at the very least the plan for now.
Ben Nolan
Okay. So circling again to the returns that you simply’re capable of get, traditionally, within the latest years, you had, I do not know, value of debt of perhaps 3% and your money on money returns if you had been shopping for or dropping down an asset or 10%, name it. So assuming that your value of debt has gone up by 300 foundation factors, is it honest to imagine that the required return, provided that fairness threat premium of 6%, 7% is now 12%, 13%, like that is the type of cash-on-cash return that you’d want to have the ability to get?
Jerry Kalogiratos
It’s positively greater than it was earlier than. However I believe previously, we have now achieved returns nearer to the — and once I’m saying previously over the past 4, 5 years by way of acquisitions and nearer to the mid-teens. When you have a look at sure transactions which have successfully closed by way of shopping for, chartering after which promoting, a few of them are nicely in extra of that. So hopefully, we will replicate that.
Ben Nolan
Sure. I used to be simply speaking about like unlevered money on money. However definitely, the again finish of these transactions is fairly necessary to driving the worth. The final one comes up on a regular basis. There’s nonetheless the caption the ultimate of the dry bulk vessels in any case these years that we have talked about promoting for a very long time. asset values are a little bit bit greater. I do not know, is it’s now the time do you suppose?
Jerry Kalogiratos
Sure. Once more, it is — the Kenon has been a drag within the sense that it would not match with the enterprise mannequin. And it has been additionally — it had additionally sure unscheduled repairs final quarter and better that is constructed into this quarter. So it earned on common round 4,400 per day. So it actually underperformed. So we’re — sure, I believe it is not for the shortage of conviction. It is — we’re simply attempting to optimize the sale, however I believe we’ll do it at an opportune time. I do know we have now talked about it quite a bit, however we’re simply attempting to optimize the exit.
Operator
Thanks. [Operator Instructions] Our subsequent query comes from the road of Liam Burke with B. Riley Securities.
Liam Burke
Jerry, you’ve got — I imply, contract protection that extends pretty considerably. Wouldn’t it be — do you ever think about simply shifting extra money from the buybacks to unit payout and up the unit payout, or an MLP.
Jerry Kalogiratos
So we have now stated that we are going to revisit the unit distribution after we full the acquisitions. The — the best way that we see returning capital to unitholders is clearly the mixture of unit buybacks and quarterly distributions. The — after all, the rate of interest rises have type of modified the long-term ahead outlook in addition to our potential to earn incremental money. the choice that I believe the Board must take within the second half of the 12 months can be whether or not persevering with to persevering with this 2-pronged strategy between unit distributions and unit buybacks is the fitting means? And what’s the ratio between the two. So far as I am involved, I believe unit buybacks are inclined to make extra sense at this level as a result of it is not solely returning capital. However importantly, the — the acquisitions are fairly accretive given the NAV dislocation that we have now mentioned just a few occasions previously.
Liam Burke
Okay. Nice. And we’re taking a look at an LNG order e book persevering with to develop after which spiking within the subsequent a number of years. Does that — how does that have an effect on your view about including property on the long run?
Jerry Kalogiratos
I believe that is — in the event you look actually on the demand that can be coming on-line for LNG transportation and by this in a position on the subject of LNG carriers. And the robust desire of charters for 2-stroke vessels that will in all probability push steam ships and that to a sure extent, TFDE vessels in a 2-tier or 3-tier market and probably a few of the — particularly the steam ships into the scrap yard. You may see — you possibly can in a short time paint an image the place the LNG delivery market may be in deficit by 2027. So the basics of the LNG market are distinctive, each of them by way of the demand and the provision issue. And that is with out even speaking concerning the impression of laws. Once more, in the event you have a look at the potential impression of EU ETS or PLU and, after all, CXI and CII on older know-how ships. There can be a considerable impression. And since many of those vessels can be buying and selling into the European Union because the AU has develop into a really vital participant within the LNG market. This was not the case 2 years in the past. All it will create incremental demand for two strokes era ships and make older steamships and to a sure extent, the FTEs extra out of date. So I believe there may be — regardless of that headline quantity, I believe that is going to be a very good marketplace for some time.
Operator
Women and gents, that concludes our question-and-answer session. I will flip the ground again to Mr. Kalogiratos, for any closing feedback.
Jerry Kalogiratos
Nice. Thanks, and thanks all for becoming a member of us at the moment.
Operator
Thanks. This concludes at the moment’s convention name. You could disconnect your traces presently. Thanks on your participation.
