CubeSmart Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 25, 2023

There are 4 speakers on the call.

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Synergy Maritime Holdings Corporation Conference Call on the Q1 Ended May 31, 2023 Financial Results. We have with us Mr. Stamatis Sontinis, Chairman and CEO and Mr. Stavros Kivtakis, Chief Financial Officer of Synergy Maritime Holdings Corp. At this time, all participants are in listen only mode.

Operator

There will be a question and answer session. Please be advised that this conference call is being recorded today Thursday, May 25, 2023. The archived webcast of the conference call will soon be made available on the Synergy website, www.synergymaritime.com. Many of the remarks today contain forward looking statements based on current expectations. Actual results may differ materially from the results projected from those forward looking statements.

Operator

Additional information concerning factors that can cause the actual results to differ materially from those in the forward looking statements is contained in the Q1 ended May 31, 2023 earnings release, which is available on the Synergy website again, www. Synergymaritime.com. I would now like to turn the conference over to one of your speakers today, the Chairman and CEO of the company, Mr. Stamatis Antonis. Please go ahead, sir.

Speaker 1

Thank you, operator. Hello. I would like to welcome everyone to our conference call. Today, we're presenting the financial results of the Q1 of 2023, while we're also pleased to announce the distribution of another cash dividend. As we discussed in our previous earnings call, during the Q1 of 2023, we went through adverse seasonality in the Capesize market.

Speaker 1

The Baltic Capesize Index averaged approximately $9,100 per day and obviously this affected our financial performance considerably. We attribute this market weakness mainly to the tail end of the COVID restrictions in China. However, following China's official reopening in March, we have seen a strong rebound in industrial activity as well as vessel shutter rates for Capesizes. The overall fundamentals are quite encouraging for the remainder of the year. Notwithstanding the weak Q1, our Board of Directors has declared another regular cash dividend of $0.025 per share, which brings our total dividend distributions since the beginning of 2022 to $1.30 per share or approximately $1.55 per share when including the shares of United Maritime at the current trading price.

Speaker 1

I will now provide some financial highlights and our CFO, Stavros Giftakis will provide further analysis later in this call. As I mentioned earlier, the average BCI for Q1 was approximately a mere $9,100 per day, but our daily timeshatter equivalent outperformed this figure once again by approximately 20%. Our Q1 net revenues amounted to $18,000,000 our EBITDA was $8,200,000 dollars and we had a net loss of $4,200,000 The decrease from last year's corresponding figures primarily reflects the decline in the daily time charter equivalent from approximately $19,300 last year to about $11,000 per day this year. However, we expect that our financial performance will improve significantly along the recent rise in the Capesize charter rates. Specifically, in the Q2 of 2023, based on our actual fixtures to date, we expect to achieve a time charter equivalent of approximately $18,850 per day.

Speaker 1

Consistent with our track record, this represents a premium to the average Baltic Capesize Index recorded so far in the current quarter. I will now provide an update on our current fleet commercial developments. During the Q1 of 2023, we delivered the tradership and goodship to the new owners pursuant to our agreement to sell them for an aggregate price of approximately $36,000,000 recording an accounting gain of about $8,100,000 We're currently looking at Capesize acquisition opportunities to partially replace the tonnage we sold and to further reduce our fleet's average age. Furthermore, following the decision to repurchase the championship from its sale and leaseback arrangement, we secured a new long term time charter agreement for a period of 24 to 30 months. Under the new terms, the vessel will earn a premium to the Baltic Capesize Index and the scrubber profit sharing scheme will be significantly improved resulting in higher profitability.

Speaker 1

Additionally, we also agreed to extend the time charters of night ship and gymyship for periods between 11 15 months at substantially the same terms as before. The repeat business with our charters is a testament of our excellent commercial relationships and of our solid technical and operational capabilities. Out of our 16 Capesize vessels, the scrubber fitted ships are 9. We get the majority of the scrubber benefit on 5 of those ships. I remind everyone that we did not pay for any of the installations of scrubbers on any of our ships.

Speaker 1

Lastly, looking beyond specific features, over the past weeks we have taken the opportunity to convert some of our vessels index linked charters into fixed rates using the conversion option. At the moment, we have fixed approximately 25% of our remaining calendar days for 2023 at a level of about $20,500 per day. Moving on to other financing transactions. During the quarter, we continued our focus in optimizing our capital structure and to that end, we completed 3 refinancing transactions for a total amount of $53,800,000 that led to the release of approximately $15,000,000 in liquidity. Stavros will go into the specifics of this transaction shortly, but I wanted to point out the importance of balancing our capital requirements between shareholder returns and fleet renewal over the next years and we believe we have the appropriate liquidity for both.

Speaker 1

Last but not least, so far this year, I have already purchased Synergy shares in the open market approximately $750,000 at an average price of about $5.17 per share. Given the wide discount of our share price to Synergy's intrinsic value, I intend to continue purchasing shares over the next months, always keeping in line with our internal trading policy and restrictions. I remind everyone that I have never sold any of my Synergy shares. I will now pass the call to our CFO, who is going to discuss our financial results before I return to discuss our market update. So, Stavro, please go ahead.

Speaker 1

Thank you, Smati. I would like to welcome everyone from my side as well to our earnings call. Let us start by reviewing the main highlights of our financial statements for the Q1 ended March 31. Net revenue for the quarter was equal to $18,000,000 reflecting a decrease from the net revenue $29,700,000 in the same period of 2022. This was the result of the seasonally softer earnings environment, which inevitably impacted our results.

Speaker 1

At the same time, our EBITDA was equal to 8,200,000 dollars below the $12,800,000 in the same quarter last year, while we recorded a net loss of $4,200,000 versus a net profit of $3,700,000 in the Q1 of 2022. However, with freight rates having already increased more than 80% compared to the first quarter average, we are confident that our bottom line will improve going forward. This is also backed by our successful freight hedging strategy for the rest of 2023 as discussed earlier by Stamatis. Moving on to our balance sheet, our cash at the end of the Q1 may have been reduced compared to the previous quarter, but remained satisfactory at $20,500,000 or approximately $1,250,000 per vessel. This despite the $4,500,000 payment of the dividend for the Q3 of 2022, which took place in the Q1 of 2023 and the repayment of $8,000,000 of our only outstanding convertible note.

Speaker 1

At this point, it is worth noting that since the end of the Q1, we have completed 3 new refinancing transactions, which have added approximately $15,000,000 of extra liquidity. I will come back with more details on this in a moment. As regards to debt outstanding, this stood at $226,000,000 at the end of the first quarter, translating to a modest loan to value ratio of 47%. After the refinancings, the ratio has just marginally increased to 49%. Finally, total shareholders' equity amounted to $220,000,000 as of December 31, 2023, practically unchanged from the end of 2022.

Speaker 1

Let me now add some more details about our recent refinancings. During April, we managed to refinance 3 of our vessels through 2 sale and leaseback agreements and the new sustainability linked loan. The first new sale and leaseback agreement is with the Japanese leaseback for an amount of $19,000,000 for the NYSE. With the new agreement, the vessel was sold and chartered back on a bareboat basis for a 6 year period. We have continuous options to repurchase the vessel following the 2nd anniversary of the bareboat charter, while at the end of the 6 year bareboat period, the ownership of the vessel will be transferred to Synergy at no additional cost.

Speaker 1

The interest margin of the facility is 120 basis points lower than the one of the previous financing. The 2nd sale in leaseback facility was agreed with another Japanese lessor for an amount of $19,000,000 and was utilized to partly refinance a loan facility with a Greek bank secured by the lordship and 2 other vessels. The lordship was sold and chartered back on a bareboat basis for a period of 4 years 5 months, while we have continuous options to repurchase the vessel following the 2nd anniversary of the bareboat charter. At the end of the bareboat period, we have a final purchase option at 7,800,000 dollars The new interest margin is 50 basis points lower than the previous financing. The 30 financing was performed through a loan facility with Danish Finance, an existing lender of the company.

Speaker 1

In particular, we amended and restated the existing facility with these lenders secured by the fellowship and premiership to refinance a same leaseback agreement for the championship. The amended facility includes a new charge of $15,800,000 secured by the championship, while a sustainability adjustment mechanism was introduced in respect of the underlying interest rate of the entire facility. The new tranche has a 5 year term and the interest rate is 2.65% over 3 months term SOFR, which can fluctuate by 5 basis points based on certain emissions reduction thresholds. This is our 5th vessel financing and tailing a sustainability element and we are glad to contribute on multiple fronts to the industry decarbonization efforts. With the additional liquidity rates from these transactions, we are equipped to encounter any market conditions, while also being able to exploit an opportunity that may arise in the next quarters and ultimately create value for our shareholders.

Speaker 1

Through this series of transactions, we also managed to reduce our interest rate margin in a period of successive Central Bank interest rate hikes. Moving on and before returning the call back to Samatish, I would like to remind that Synergy has declared already $23,400,000 in cash dividends since the beginning of 2022 and has concluded some $35,500,000 in securities repurchases in the same period. Synergy is committed to continue prioritizing shareholders rewards, utilizing our effective corporate and commercial strategies and the management has faith in the prospects of the company in the Capesize market. This and the sharp disconnection between our trading price and the fair value of synergy are the main reason for me joining Stamatis in his open market purchases earlier this year. This concludes my review.

Speaker 1

I would now turn the call back to Samatidis, who will discuss the market and industry fundamentals. Samatidis? Thank you, Stavros. Q1 was a disappointing quarter for the Capesize market with the usual seasonal factors playing their role and notably the tail end of the COVID restrictions in China. The average BCI rate for Q1 was a mere $9,100 per day.

Speaker 1

Net Capesize fleet growth in the quarter was 1.9% year on year, but when accounting for the unwinding of port congestion, the effective growth in ship supply was much higher. To a large extent, this reflects the front loading of new vessel deliveries for the year, while congestion has now reached very low levels. Supply growth for the balance of 2023 is expected to be considerably slower and according to Clarksons, total 2023 Capesize fleet growth is expected to be around 2%, which has already taken place within the Q1 of the year. The improvement in vessel earnings that has occurred since March is quite encouraging and a clear indication of the favorable market balance. Let's now move to a discussion of the high level demand and supply picture.

Speaker 1

Regarding Capesize vessel demand, iron ore and coal ton miles are expected to grow by around 2% 4%, respectively, in 2023 with growth being sustained at similar levels into 2024. Bauxite seaborne trade, which has also emerged as an important source of demand in the recent years, is expected to grow about 5% in absolute terms. The long term decarbonization and organization trends lend support to increasing bauxite trade and aluminum consumption is expected to keep growing robustly. 1 particular point I wanted to make is that the port inventories in China of iron ore have fallen to multiyear lows. So we believe we may face a 20,000,000 to 30,000,000 ton restocking process in the next months that can play a very significant role in the next quarters.

Speaker 1

Regarding the general economic environment, it should be noted that in 2022, we saw stalling industrial production driven by high inflation, rising input costs, rising interest rates and China being in lockdown for almost a third consecutive full year. During 2023, we are already starting to see a reversal of these trends. And although this is a slow process, I'm confident that overall demand is going to be quite healthy. Moving on to vessel supply, the outlook for the Capesize sector remains very encouraging. The limited newbuilding activity over the last few years has kept fleet growth at very low levels.

Speaker 1

Going forward, most estimates point to 2% fleet growth for 2023 and marginal growth of 0.3% for 2024. Along with the limited fleet growth, the progressive slowdown trend due to the loan regulations is expected to reduce effective fleet supply and that will support further the freight rates. Once again, the Capesize order book as a percentage of the active fleet is currently in one of the lowest points within the last 3 decades. Once again, we firmly believe that Synergy is in a great position to deliver higher returns in this environment despite the challenging Q1 of the year. We have remained consistent with our pledge to reward our shareholders through capital distributions and we will continue doing so based on the expected strong markets during the next few years.

Speaker 1

On that note, I would like to turn the call over to the operator and answer any questions you may have. So operator, please take the call.

Operator

Thank you,

Speaker 1

sir.

Operator

And the questions come from the line of Tate Sullivan from Maxim Group. Please ask your question.

Speaker 2

Hello, Thomas. Hello, Travis. Thank you. How are you?

Speaker 1

Hello, Tate. Have a good day. How are you?

Speaker 2

Good. Good to hear from you. And on the whole lot very active on the financing front and to summarize, is it diversifying lenders or moving away from lenders that were less flexible on terms on expiring facilities? What would you summarize as the overall strategy? Was it mainly to add your lenders, please?

Speaker 1

Hi, Tate. This is Davos. Look, for different I mean, the free refinancings, they were done basically for different reasons. The championship, the sale in leaseback of Cargill was coming to an end in November. So we took a proactive stance there, which was mainly commercially driven because we wanted to improve the terms of the chartering and the terms of the scrubber benefit.

Speaker 1

So basically, we took the decision to repurchase the vessel a bit earlier and we're supported by 1 of our house banks, the MSIP Finance, which catered also for lower interest expense. Now on the 2 financings, which were done through the sale and leasebacks in Japan, strategically, we want to do more financing with Japan because they offer both flexibility and reduce cost at sizable advances. So it was, I mean, firstly, to improve the financing terms. The secondly, to release some liquidity in order to be able, firstly, to take advantage of any opportunities to grow or renew the fleet. And secondly, to have ample liquidity to face any market conditions.

Speaker 2

Great. Thank you. And yes, I mean meaningful debt reduction in the Q1, but then you adding the added extra liquidity this quarter? And Stavatosis, can you with the market backdrop, I mean encouraging with the supply already coming into the market, but then I think the rates have declined somewhat recently. I mean is there any short term factors that you can point to that hopefully should go away that should help it start to rebound to reflect the positive supply demand dynamic?

Speaker 1

Well, yes. What happened is that everybody had a lot of high expectations for the Chinese reopening. But I'm afraid these did not live up to their initial expectations. So we're seeing some of that hike to deflate. However, as I mentioned previously in the call, we are seeing multiyear lows into the iron ore port stock inventories, and that means that China will be forced or we expect China to restock that at a certain point soon.

Speaker 1

And that's going to lead into increased voyages towards China. So we have full confidence that the Chinese infrastructure investment is going to continue. We will see that restocking taking place. And generally, we're very optimistic in the short term and in the second half as well. So it's a temporary thing what we're seeing now.

Speaker 1

It started off with the best possible expectations. I think that has kind of deflated now, but I think we will see a strong rebound in the market in the next 2 months.

Speaker 2

And then with most of the supply growth already taking place, I mean ships coming out of the new build out of the yards, I assume. Have new build prices started to decrease or are yards seeking bids for new Capesize orders not

Speaker 1

at this point? On the contrary, we don't see any newbuilding Capesize vessels being ordered And the reason is multiple. First of all, you have a very high spread between a 10 year old or a 5 year old ship as compared to a new building. So it doesn't make any financial sense. At the same time, all the shipyard slots are pretty much taken by containers, LNGs and tankers.

Speaker 1

So there's no open slot until well into 2026. So even if someone was completely crazy and wanted to place a newbuilding order today, you will still have to wait 3 years before you take delivery of that ship. So having said all that, we don't really see any problems arising from any newbuilding order book in the near future.

Speaker 2

Thank you. Sabra, going back to the balance sheet, just my last question, please. Is any what are the shortest term maturities after all the recent refinancing out of the $223,000,000 of total debt roughly, if you have it?

Speaker 1

We don't have any balloon coming up for the next 18 months. We have only the Delco remaining payment on the convertibles, which is $3,200,000 in the 4th quarter, but this is, I would say, a tiny mini balloon there. And then next facility, which is coming up for refinancing is in 18 months and it's an Alfa Bank facility, which is very well covered by the value of the assets. So there shouldn't be any issues there.

Speaker 2

Thank you very much.

Speaker 1

Thank you, Tate. Thank you, Tate. Have a good day.

Operator

We are now going to proceed with our next question. And the questions come from the line of Christopher Skay from Arctic Securities. Please ask your question.

Speaker 3

Hello, gentlemen. Thank you for the presentation.

Speaker 1

Thank you. Good afternoon. Good afternoon. So

Speaker 3

in terms of chartering strategy, I think you did quite a nice job of converting the spot linked vessels to the rate of $200,500 for the remaining remainder of the year. So I think that looks very decent, at least how the market is looking right now. But going forward, what do you expect in terms of the market in the second half? And what do you see as sort of catalyst in the short term? I mean, because we've all been waiting for the market to go from strength to strength, but we haven't seen that lately.

Speaker 3

So how do you think about that?

Speaker 1

That's actually a great question, and that is evident more on the smaller sizes. I mean, on the Panamax and the Supramaxes, that has deflated a lot and due to other events. And I'm afraid that this has been driving the Capesize market not significantly, but it has started to drive the Capesize market quite a lot when people have now the opportunity to split cargoes, especially short haul cargoes from coal in the Far East and all that, and that has been affecting Capesizes a little bit. I think it's going to normalize in the near future. I think the biggest catalyst for us will be the restocking of China with iron ore that has decreased down to 3 year lows, if I remember well.

Speaker 1

We haven't seen such low inventories since the first half of twenty twenty one. So that is going to drive the market higher. And overall, I think demand will continue to be healthy, but the catalyst in the market is not going to come so much from demand, it's going to come from supply. We have seen since the beginning of the year the implementation of 2 major new regulations and that's the EXI and the CII. But effectively, nothing really has changed in the day to day life of the shipping company.

Speaker 1

Yes, everybody has been recording speeds and has been recording CO2 emissions and all that. But from a regulatory point of view, nothing has really happened. The ships are actually going with the same speed and we haven't seen the anticipated speed reduction as it was predicted last year. I see right now vessels ballasting from east to west with speeds like 14 knots. And I'm wondering why would someone ballast their ships at 14 knots?

Speaker 1

It doesn't make any sense. So people still do that. I'm pretty sure that the next few months we will see vessels starting to slow down as we end the recording year for the CII. And generally, there is talking of China with iron ore and all that. I think that this is going to drive market higher.

Speaker 1

And obviously, when the grain corridor in the Black Sea is going to reopen, that is going to absorb a lot of Panamaxes back there. So we will see a healthier market in the Panamaxes and we will not see split of cargoes for the Capesize. It's only a matter of time to see all that. So this is going to happen. It's a multifaceted thing here.

Speaker 1

But the most important thing is that we have a very, very given supply of ships. We have no new buildings coming in. The fleet is aging. So one way or another, this is going to start making an impact into the market.

Speaker 3

Thank you. And are you looking to take on more term coverage? Or what rate levels do you need to see in order to enter into 1 year or 2 year time charter?

Speaker 1

Well, the answer is yes. We tend to play that a little bit short term. If you ask me in hindsight, we would have done or we should have done more Q1 last year, but we all had different expectations. Everybody had different expectations. So we still over performed the BCI, but not to the extent that we wanted.

Speaker 1

I think that we're going to start making a little bit more cover in the following quarters. If we feel that we see spikes in the market like we saw a few weeks ago, we're going to take advantage of that. But I wouldn't bet on anything maybe cover Q1 of 2024 as well. But with the predictions that we have in the market on the demand and supply, I wouldn't really want to be so much locked in for Q2, 'twenty four and onwards. I think that we're going to see a major rebound in the market then.

Speaker 3

I totally agree. Thank you guys and have a great day.

Speaker 1

Thank you. You too,

Operator

We have no further questions at this time. I will now hand back the conference to Mr. Stamatis Antones for closing remarks.

Speaker 1

Well, everyone, thanks for attending our call today. As I said, the Q1 had a significant weakness, which is well behind us. Rates in Q2 have already been trading at almost double as what we experienced in Q1. So obviously, things will look much, much better in the Q2 call, which is going to be in about a month and a half from today. So thanks for or 2 and a half months from today, sorry.

Speaker 1

So once again, thanks for attending our call and looking forward for more positive things to come in later in the year. Thank you, Raj. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you very much.

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