Capital Product Partners L.P. (NASDAQ:CPLP) Q1 2023 Earnings Call Transcript May 6, 2023
Operator: Thank you for standing by, and welcome to the Capital Product Partners’ First Quarter 2023 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. [Operator Instructions] I must advise you this conference is being recorded today. The statements made 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 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 the completeness of forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand the call over to your speaker today, Mr. Kalogiratos, please go ahead.
Jerry Kalogiratos: Thank you, 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 fourth quarter of 2022, we have completed a number of significant transactions for the partnership, including the delivery of 13,000 TEU newbuilding eco container vessel and one latest generation LNG carrier, both with long-term employment in place. In addition, we secured new employment for one of our container vessels from approximately 2 years, which is expected to add $34.4 million of gross revenue to our backlog. With this fixture, our next period charter expiration does not come before the first quarter of 2025.
Furthermore, we were paid in full one of our leasing agreements, which now leaves us with a total of 10 vessels unencumbered. Turning to the partnership’s financial performance. Net income for the first quarter of 2023 was $10 million. Our Board of Directors has declared a cash distribution of $0.15 per common unit for the first quarter of 2023. The cash distribution will be paid on May 12 to common unitholders of record on May 8. We continued acquiring units under a unit buyback program. And during the first quarter of 2023, we repurchased approximately 129,000 common units at an average cost of $13.57 per unit. Finally, the Partnership’s charter coverage for both 2023 and 2024 stands at 96%, with the remaining charter duration corresponding to 6.8 years, including the final newbuilding container vessel expected to be delivered to the partnership towards the end of the second quarter of 2023.
Now turning to Slide 3. Total revenue for the first quarter of 2023 was $81 million compared to $73.4 million during the first quarter of ’22. The increase in revenue was primarily attributable to the revenue contributed by the 2 newbuilding container vessels and the LNG carrier Asterix I and the previously announced increase in the daily rate earned by 2 of our LNG carriers, partly offset by the sale of 2 container vessels in July 2022. Total expenses for the first quarter of 2023 were 44 — sorry, $45.1 million compared to $40.2 million in the first quarter of 2022. Voyage expenses for the first quarter of 2023 increased to $3.8 million compared to $3.6 million in the first quarter of last year due to the increase in the average size of our fleet.
Total vessel operating expenses during the first quarter of 2023 amounted to $19.3 million compared to $16.7 million during the same period in 2022. The increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet and the increase in the operating expenses of certain of our vessels in view of scheduled maintenance and one-off repairs. Total expense for the first quarter of 2023 also include vessel depreciation and amortization of $19.2 million compared to $18.4 million in the first quarter of 2022. The increase in depreciation and amortization was mainly attributable to the net increase in the average size of our fleet, partly offset by lower amortization of deferred drydocking costs.
General and administrative expenses for the first quarter of 2023 amounted to $2.8 million compared to $1.5 million in the first quarter of ’22. The increase in general and administrative expenses was mainly attributable to the increase in the amortization associated with our equity incentive plan. Interest expense and finance costs increased to $23.7 million for the first quarter of ’23 compared to $10.3 million for the first quarter of last year. The increase in interest expense and finance cost was mainly attributable to the increase in the partnership’s total average indebtedness and the increase in the weighted average interest rate to 6.1% from 3% during the first quarter of ’22. The partnerships recorded a net income of $10 million for the quarter compared with net income of $25.1 million for the first quarter of last year.
Net income for the first quarter of ’23 also includes an unrealized net loss of $2.3 million, resulting from the increase in the U.S. dollar equivalent of our euro-denominated bonds issued in October ’21, partly offset by the change in the fair value of the relevant cross currency swap agreements not designated as an accounting hedge and presented under other expense income net. Net income per common unit was $0.49 for the first quarter of ’23 compared to $1.26 in the first quarter of last year. On Slide 4, you can see the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release.
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We have generated approximately $36.3 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $33.4 million to the capital reserve, an increase of $2.4 million compared to the previous quarter due to the increased debt amortization resulting from the drawdown of the Itajai Express and the Asterix I facilities, partly offset by the repayment in full of one of our leasing facilities. After deducting the capital reserve, the adjusted operating surplus amounted to $3 million. On Slide 5, you can see the details of our balance sheet. As of the end of the first quarter, the partner’s capital amounted to $642.9 million, an increase of $4.5 million compared to year-end 2022. The increase reflects net income for the first quarter of ’23 and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in the total amount of $3.1 million, the repurchase of common units for an aggregate amount of $1.8 million and other comprehensive loss of $1.7 million resulting from the increase in the U.S. dollar equivalent of our euro-denominated bonds issued in July 2022, partly offset by the change in the fair value of the relevant cross-currency swap agreement we designated as accounting hedge.
So total debt increased by $254.7 million to $1.55 billion compared to $1.3 billion as of year-end 2022. The increase is attributable to a $5.9 million increase in the U.S. dollar equivalent of our euro-denominated bonds as of quarter end, the drawdown of $108 million under a new financing arrangement to partly finance the acquisition of Itajai Express in January 2023 and the drawdown of $184 million under sale and leaseback transaction to partly finance the acquisition of Asterix I in February ’23, partly offset by debt repayments of a total of $43.2 million. It is important to note here once again that following the repayment of an additional facility during the first quarter, we retained 10 out of our current fleet of 22 vessels unencumbered, which could be a potential source for additional liquidity in the future.
For example, if we were to take on debt at 50% to 55% of the fair market value of these 10 vessels, we could raise additional liquidity to the tune of $200 million. Total cash as of the end of the quarter amounted to $99.8 million, including restricted cash of $11.2 million, which represents the minimum liquidity requirement under our financing arrangements. Turning to Slide 6. The LNG carrier Asterix I was successfully delivered from Hyundai Heavy Industries on February 17 through the partnership and commence the 7-year charter with Hartree. Hartree maintains the option to extend the charter by an additional 2 years. The acquisition was funded through a combination of a $12 million cash deposit paid in 2022, $184 million drawn under a new sale-leaseback transaction and $34 million of cash paid on delivery.
The sale and leaseback transaction has a term of 10 years repayable in equal quarterly installments, and the partnership retains the option to repurchase the vessel at a predetermined price after the first anniversary of the arrangement, including a purchase option of $96.5 million at the expiration of the lease in February 2033. On Slide 7, we provide an overview of the acquisitions announced in June 2022. Of those, the Manzanillo Express and the Itajai Express have now been successfully delivered to the partnership together with the LNG carrier Asterix I and they have commenced their 10-year charters with Hapag-Lloyd which maintains three 2-year options to extend the relevant charters. The last of the 3 container vessels 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.
Moving to Slide 8, you can see our debt maturities by year. As you can see, we have eliminated all maturities through 2025 and do not have any significant maturities before 2026, when our first $150 million euro bond becomes due. As of the end of the first quarter of 2023, 29% of our debt was fixed at an average weighted rate of 4.5%, and the remaining floating debt is subject to a weighted average margin as of quarter end of 2.43% over LIBOR or SOFR. Moving to Slide 9. The partnership contracted revenue backlog — the Partnership’s contracted revenue backlog now stands at $1.89 billion with over 63% of contracted revenues coming from LNG assets with a highly diversified customer base of 7 charters. Turning to Slide 10. The partnership’s remaining charter duration amounts approximately 6.8 years, while charter coverage remains at 96% for both 2023 and 2024.
It’s worth noting here again that after the new charter of the Akadimos, our next period charter expiration does not occur before the first quarter of 2025. Turning to Slide 11, we review the LNG market. Global LNG demand, which expanded significantly in 2022 is expected to continue its steady growth in 2023 as well. Despite the short-term seasonal pressure that has been seeing the LNG carrier spot market in recent months with healthy gas inventories in Europe, in particular weighing on market sentiment, the average spot rate for 160,000 cubic TFT unit stood at around $50,000 per day. That was by the end of April, which is the lowest level since July 2022. The term charter market remains though at very firm levels with 1 year time charter rate for 170,000 cubic 2-stroke vessel standing at excess $175,000 per day, providing strong evidence of structural tightness.
Longer-term rates for periods in excess of 5 years also remained firm and are significantly higher compared to the start of 2022 due to the scarcity of available vessels as well as rising newbuilding prices and interest rates. The LNG fleet order book stands at 50% of the total fleet with 326 vessels currently on order. CPR capacity remains limited with the first available and delivery year for new orders being 2027. Newbuilding prices continue to rise and currently exceed $255 million to $260 million per vessel. Latest reports include the 4 vessel newbuilding order at the Korean CPR for delivery throughout 2027 at around $263 million. If one was to add the cost of capital for the predelivery installment and supervision costs, the delivery cost is closer to $285 million to $290 million.
On Slide 2, we review the container market. Container shipping market has started 2023 on a softer note after weakening from record highs throughout the final few months of ’22. Freight rates have continued to soften since last year amid faltering demand caused by economic headwinds, cost of living pressure and excess retail inventories in key regions as well as reduced port congestion, although charter rates have seen increases since February 2023. The Clarksons charter rate index stood at 112 points at the end of April of this year, up by around 121% compared to the 2010, 2019 average and 2x higher than the 2019 average. Container spot freight levels have softened on most trade lanes with the SFI index standing at around 1,000 points, down 80% from the start of 2022 peak, but 23% higher compared to the 2019 average.
In response to weaker rates, operators have employed a range of measures to manage capacity from blank sailings and lower speeds to rerouting some ships on backhaul legs. Indicatively, in 2023, the average box it speed was down 3.4% compared to the 2022 average. Contracting remains robust, albeit at lower levels than the 2021 record. The order book stands at 916 units of 7.5 million TEU or about 29% of total fleet capacity. 26 units of around 50,000 TEU have been scrapped so far in this year but demolition volumes are likely to be higher going forward with impetus from softer markets and upcoming environmental regulations. And with that, I’m happy to answer any questions you may have.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from the line of Omar Nokta with Jefferies.
Operator: Our next question comes from the line of Ben Nolan with Stifel.
Operator: Thank you. [Operator Instructions] Our next question comes from the line of Liam Burke with B. Riley Securities.
Operator: Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Kalogiratos, for any final comments.
Jerry Kalogiratos: Great. Thank you, and thank you all for joining us today.
Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.
