Gregory Zikos - Chief Financial Officer.

Noah Parquette - J.P. Morgan Fotis Giannakoulis - Morgan Stanley Frank Galanti - Stifel Steve Williams - Citi Donald McLee - Berenberg Capital Markets.

Thank you for standing by ladies and gentlemen and welcome to the Costamare Conference Call on the Third Quarter 2018 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial 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 that this conference is being recorded today, Thursday, October 25, 2018. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide number 2 of the presentation, which contains the forward-looking statements.

And I would now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir..

Thank you and good morning, ladies and gentlemen. During the third quarter the company delivered profitable results. Seasonality combined with concerns about demand growth and trade tensions have resulted in a softer market both in terms of charter rates and asset prices. We have however, charted in total 25 ships during the quarter.

This includes the agreement to install scrubbers of five Post Panamax container vessels subject to an increase in the current charter hire and further extension of the original charter tenor for three years.

We recently acquired with equity two 1996-built 8,000 TEU sister container ships which were chartered to Maersk for a fixed period of two and a half years. We are currently in discussions regarding the debt financing of those ships.

Finally on the financing side, we have concluded with a leading financial institution on pre and post-delivery basis the debt finance for the five 13,000 TEU new buildings chartered to Yang Ming for 10 years. The vessels are expected to be delivered between the second quarter of 2020 and the second quarter of 2021.

Moving now to the slide presentation, on Slide 3 you can see the highlights of our third quarter. Our adjusted EPS for Q3 was $0.09. Over the last quarter we have charted in total 25vessels. We maintain a strong balance sheet with 40% leverage. Regarding the market we added fleet of 2.6% in the order book start of less than thirty percent.

On Slides 4 and 5, you can see a summary of our recent chartering activity. At the top of the page you can see the five MSC ships whose charter was extended till 2026 and 2027 as a result of the scrubber installation. Moving on to Slide 6, you can see the sales of scrubber of two older vessels as well as our dividend payments.

On Slide 7, you can see the third quarter 2018 results. During the third quarter of this year the company generated revenues of 91 million and adjusted net income of 10 million. Based on the above the third quarter adjusted EPS amounts to $0.09.

Our adjusted figures take into consideration the following non-cash items, the quarterly revenues, accounted gains and losses from asset disposals, prepaid lease rentals and other non-cash charges. On Slide 8, we're showing the revenue contributor for our fleet.

99% percent of our own contracted cars comes from first class charters like Maersk, MSC, Evergreen, Yang Ming, Cosco and Hapag Lloyd. We currently have 2 billion in contracted revenues and the remaining times are the duration of about 3.9 years. As you can see on Slide 9, as of the end of this quarter we cash of 155 million.

We are conservatively managing our balance sheet having brought our net debt from 1.7 billion in 2013 to 900 million as of today, which represents a net debt to equity ratio of about 71%. Over the past six years we have raised funding of close to 800 million for new business.

Our estimated levels calculated as per our refinancing agreements is in the region of 40%. Under the last slide we were discussing the market. Regarding charter rates there has been a softening in the market. The idle fleet stands at the level of 2.6%. The order book remains at low levels of less than 50%.

As already mentioned in the past, we are actively looking for new transactions in this market environment. This concludes our presentation and we can now take questions. Thank you. Operator we can take questions now..

Thank you. [Operator Instructions] And your first question comes from the line of Noah Parquette with J.P. Morgan. Please go ahead..

Great, thanks. I just want to ask following up on the ships that you're putting scrubbers, do you have any more discussions ongoing with other charters for similar situation.

And with the Yang Ming vessels, will those have scrubbers as well?.

Yeah. Hi, Noah. Look, there are - there are currently ongoing discussions with other charterers for ships in the water with long-term charters and also there are discussions with the Yang Ming as well.

So as long as there is a long-term charter and the deal makes sense for both parties on a commercial basis, of course we are willing to cater to our client's needs..

Okay and then with the existing arrangements, I want to just make sure I understand it correct there. You guys put in the CapEx and then you're getting repaid or is the charter a funding part of it or how does that - really that work..

Yeah, the way it works is the following. Those ships they have an original time charter expiration, some of them in 2023 and some of them in 2024. Upon the scrubber installation, which is expected to be by the end of 2019, the charter will be paying an additional charter hire, but the original delivery date which is 2023 and 2024.

From now we've already agreed an extension for three more years, which goes to 2026 and 2027 at a new rate, which also include some calculations regarding the scrubber amortization. So the whole scrubber investment will be amortized over the extended charter period.

Is this clear?.

Yeah, no, I got that's - that's great thanks. And then I want to ask, one of the arguments like kind of the bullish arguments on containers in 2020 is that the higher cost - fuel costs may cause the fleet to slow down. Do you guys see room for that to happen now, I mean how are vessel speeds, how have they been on the balance 11? Thanks..

Well, generally vessel speeds, I mean compared to the past they have come down now. It is run scenario that the slow steaming will be increased farther, but I cannot predict from now.

I mean, these sort of regulations kick in and done in 2020, but those will be in place for quite some time going forward, so I cannot predict what the situation is going to look like, but I agree with you that long possible scenario is that ships may slow down further, which - regarding the supply and demand dynamics this is something positive for the ship owners, correct..

Okay, that's all I have. Thank you..

Thanks..

Next question comes from the line of Fotis Giannakoulis with Morgan Stanley. Please go ahead..

Yes, hi, guys and congratulation on this charter extension. I want to clarify Greg whether the extension rate is higher than the current rate of $43,000 and $42,000 respectively. These vessels were chartered at a much higher or originally chartered at a much higher rate environment and I was wondering if the extension is better..

Yes, those ships today - you're right. They're getting 42,000 and 43,000 and to this amount an incremental target kind of payment will be paid as soon as the scrubbers are installed and then for the extension, I'm afraid I cannot go into more detail for commercial reasons.

But I can tell you that they will fit at the extension period together with the new pre agreed rate mix, the commercial sense, both for the charters and also for us.

But I'm afraid I cannot go into more detail, but it is definitely a charter rates which makes sense for both parties and it is, I guess win-win wish situation for both the charterer and customer..

Thank you, Greg. Can you also describe how is the deal flow that you see out there right now to make acquisitions, obviously the market since early summer has softened.

I wonder whether you see more deals available, what type of deals do you see, the second hand acquisition or potential larger deals with long-term contracts and what kind of competition do you see right now compared to earlier this year..

Yes, first of all there is activity, there is also activity in the new building market and we recently had some new building projects especially for smaller and bigger vessels. Also as you rightly mentioned the market has softened recently and this applies both to charter rates and to asset value. So there is activity.

There are deals for second hand ship with or without charter, also for older vessels and as an example; we've done extensions to old ships 1996 built. However, with - back to back with the two and a half charter to Maersk.

So there is activity and the competitions - as I'll compare this competition to the competition we used to see back in 2007, 2008, there's a huge difference.

But today there is definitely much less competition, there is not a lot of layers to the container ship sector that have the financial means to fund either new buildings or second hand ships with long term charters. So there is competition, but it is definitely limited compared to the competition we used to see some years ago..

And can you explain to us, why is this softening taking place the last couple of months? Is this something that worries you, is it the seasonality, is it the concerns about some slowdown in the trade or the impact of the tariffs? How do you see the market developing the next year or year and a half?.

Yeah, I think first of all the situation there, I think it's pretty much a mixed bag, I mean more or less all the factors you mentioned. There is definitely seasonality and the last two quarters of the year traditionally they're not the strongest quarters for container shipping.

At the same time you look at the supply and demand dynamics and some specific trade for it Asia to Europe, this trade which is the biggest one and this is trade where all the larger ships are being employed. The demand there is not as strong as was expected.

At the same time ships are being delivered throughout the year, so it is at this point in time supply and demand, it is seasonality and also trade tensions that generally do not have the sentiment in container shipping.

However, I have to say that in Trans-Pacific, up to now we have seen a positive trend in demand, which is also reflected in those rates. You can argue that part of it is because of front loading because before the new tire is kicking [ph] from the beginning of 2019, but as of now we see great growth in the Trans-Pacific to be quite healthy.

And I have to add something here, regarding our vessels I have to say that we have five 11,000 TEU ships and those ships they are most commonly used in Trans-Pacific trade which is quite comfortable for those vessels. We recently chartered to a couple of those at 28,000 per day for a short period.

We could go for a longer period, but because we feel comfortable about the supply and demand dynamics going forward and especially for those vessels and how many ships like those are currently in the market, we decided to go for a shorter period.

So all although we don't focus the market, I have to say however that we don't feel negative regarding the potential of those vessels and the supply and demand dynamics over the coming quarters..

Thank you, Greg.

One last question about your growth strategy whether you are in a growth mode right now and what is your acquisition capacity? I see in your balance sheet you have $112 million of liquid cash, although you've rarely dropped below $100 million, are there sources of potential capital that you have in mind? Is this an environment that you are looking to grow and how do you view your cost of capital relative to the industry both in access for - to commercial bank and other sources of funding?.

Yeah, so first of all because cash flow balance of 155 million, 154 to be exact and take away the stick of cash which is both [ph] the figures 30 million, so I mean it's not 120 million our liquid cash capacity today. We have access to commercial bankers and we've shown this by funding the new buildings.

We raised it for 12 years; two years free and 10 years for delivery and we are we are in the process of financing the older ships as well. So our growth strategy, I mean we're not going to be growing for the sake of growing in order to create volume.

The decision needs to make sense and in this environment especially over the last couple of months that we've seen asset values dropping. We may be more active depending of course on the transactions that we see in front of us. Now, our cost of capital and any comparative advantage, yeah, generally we tend to have a competitive cost of capital base.

Take for instance the commercial bankers, the fact that we never had to restructure, we never did anything as per covenants over the last 40 years or so, we never did any covenants since the company went public and even after the Lima crisis and the fact that we never give any traffic to our lenders.

So this track record definitely helps in securing debt up terms that make sense. And those - I have to stress here that commercial bank year-do-date is available for shipping and also for us container shipping.

It may be true that the balance have to come more [indiscernible] which is a healthy signal, but bank debt is available today for clients that was consider to do the top tier clients in the sector..

Thank you very much, Greg..

Thanks..

The next question comes from the line of Ben Nolan with Stifel. Please go ahead..

Yeah, hi, this is Frank Galanti on for Ben..

Hi, Frank..

Hi, so the vessels that come off contracts over the next two years or so, have you guys considered installing scrubbers on them to make them more competitive for a long-term charter?.

Normally we would install scrubbers when we an agreement with the charterer, so if the ship is let's say relatively smaller without a long-term employment, it would be a bit awkward to have an agreement with the charterer to install scrubber of those vessels.

In container shipping contrary to some other shipping sectors the fuel expense is a positive course to the charterer, so whatever type of investment we decide to do regarding scrubbers, I think this needs to be on the basis of a commercial agreement with the charterer who will be taking all the benefit of the scrubber installation.

So the long story short, if it is a ship coming out of charter over the next months and without a long-term or a medium term employment and without an agreement with the charterer regarding the payback period of this investment, we wouldn't be installing scrubbers..

Okay, that makes sense. And then a couple of balance sheet question, so you have a couple preferreds that are going to become callable soon, just want to see how you guys are thinking about those and how they fit within the capital structure versus debt or growth CapEx in the next say a year or so..

Yes, first of all our CapEx commitments to start on that are pretty manageable because as you've seen we have funded the Yang Mink vessels attractive terms, so there are no CapEx commitments without the debt funding already in place. Now, you're right that a couple of the preferreds are callable - also will be callable over the next year or so.

We're considering all the options, of course one of them is to call them, but then it's going to be also a decision of where do we allocate our capital and whether it makes sense to call - call it like type of instrumental part of this and at one point in time.

But we do have the flexibility and this is something to consider especially next year when 75 [ph] preferred is becoming a subject of call..

Okay. Yeah, that's all I had. Thank you..

Okay. Thanks..

Next question comes from line of Chris Wetherbee with Citi. Please go ahead..

Hi, it's Steve Williams on for Chris. Thank you for taking my question..

Hi..

I just want to follow-up on some of the questions that you've already received on scrubbers, so just real quick, I know you aren't really providing a lot of details on how that would - on the rates.

But I'm just wondering if overall, generally speaking, do you think that installing scrubbers would meaningfully impact the returns you expect to get on those vessels and just become the unit economics of those Post Panamax vessels?.

Look, the fact that we have - that we have extended today in 2018, the charter contract on a forward basis from 2024 to 2027, the charter rate which we feel make sense. I see it's a positive thing. Definitely. Now from the scrubbers, we don't make money out of the installation of the scrubbers.

This is something that we're doing after the charterers' request, but the fact that we can find an agreement with the charter where we are sort of extending the charter cover. And we are also receiving some type of incremental cash from day one after the scrubber installation. I think it's definitely a positive.

Those ships that 2015 built, so the expiry of the 2015 and 2014 built, so originally their time charter was expiring when they would become 10 years old. And now it would be expiring when those are becoming 15 years old. So we definitely consider this to be a positive, however, the same applies for our clients..

Got it, thank you. And also just generally speaking, when you're thinking about charter renewals, I know you have quite a few vessels with charters expiring either by the end of this year or sometime in next year.

So when you're thinking about that and taking into account the overall macro environment and how it impacts the container market, re you - when you're engaging in discussions with the charterers', how are kind of like trade - the recent trade discussions kind of impacting those just - your discussing with charterers' that coming into play?.

I think that more simply, if it's - if it is a low charter environment like the one we're experiencing today, most probably we would decide to go for a shorter period, like a shorter period could be in six to nine months or should about to a year.

And then in terms of what we discuss, for example, for the 11,000-TEU ships which are new buildings delivered a couple of years earlier, which for the Cape Akritas, as we show, we started for 28,000 for a short period, although we had offers or although there was interest from liners to go for longer period.

We decided that based on like where the market is very unfeeling confident about the earnings potential of those vessels. We've felt that it was the proper thing to do was to charter for a shorter period and then release it.

At the same time, when we are repaying your loans and you have low leverage like - the leverage we have in those vessels, you have more flexibility in order to decide and determine new chartering strategy..

All right, thank you very much for taking my question..

Thank you..

Next question comes from the line of Donald McLee with Berenberg Capital Markets. Please go ahead..

Hey, guys, just stick with those scrubbers for a bit.

Could you talk maybe about the cost involved and what's the expected timeline for completion?.

Well, the cost, it depends on the type of the scrubber, but I would say for a large containership vessel, it could be - and up to 6 million, the total cost. But it depends. So now the installation it depends again but it could be like four to six weeks, but it depends, I mean, and then you'll have to look at sort of each case individually.

So the cost it is the cost of buying this equipment of - for installing, there maybe someday some additional daily operating expenses, it is the cost of funding and it is also the dry docking cost or the whole hire [ph] during the installation periods..

Okay.

And then just in terms of timeline, I'm assuming it's before 2020, but if don't - I'm not sure how much clarity you gave around if that CapEx that's going to sit with you guys or it's going to be kind of amortized to the charter? But if I had to model that CapEx, directly on your cash flow statement, how should I look to unwind that through 2020 or is it ahead of that?.

Look, if you want to adopt the generic approach about how to amortize scrubbers, I think the proper thing to do would be to amortize it over the entire charter period via-a-viz the proper thing to do..

Okay and then switching gears to do the S&P purchase.

Could you talk a bit about what you thought was attractive, because those assets are I believe 20 plus years old and then they have charters that will expire into a post IMO 2020, well, maybe what your long-term strategy for those vessels and what prompted - was the rationale behind the purchase?.

Yeah. So, those ships, they are 1996-built, so today they are 23 years old, they have a 2.5 year charter, so there will be - up on the charter expiry that will be 25 years old actually.

We have chartered them to Maersk, which is a first vessel charterer and we look at the physical condition of the vessel, our expected cash outflows for the operating expenses will be charger higher and the potential of financing.

We are in discussions regarding the funding of those vessels overall and without chartering any - any further chartering activity of those vessels I mean, in a more conservative scenario. We feel that the economics made sense. Now, in the past we had to shift for some trading up until the age of 30 or like 35 years old.

I cannot claim that these what we count on all those vessels, but conservatively without chartering it would have looked in the economics factor is only with 30 month charter period..

Okay.

And did you guys give - are you able to give any color on what the CapEx was for those vessels?.

I'm afraid not, but when we're going to be - the next quarterly results call we may be announcing the financing of those vessels. I guess you may be getting an idea about this sort of actual CapEx.

But I can tell you that, although the older vessels if there is misconception, older vessels can provide very good returns and can also be financeable as long as there is a proper technical management and also a creditworthy charterer..

Okay.

One more just on where you guys sit and how's your view change on counterparty risk from the liners over the past 12 months? There's been a bunch of - a couple of headwinds that have emerged, rising fuel cost for the liners, all the tariffs overhang, so how comfortable are you guys there?.

Look, we have a slide with a pie chart showing the composition of our charterers, where the consolidated cash flows to be - come from. And we thought those management feels very comfortable regarding their credit quality today..

All right, that's all my questions, I'll turn it over. Thank you..

Thank you, Donald..

Next question comes from the line of Michael Webber with Wells Fargo Securities. Please go ahead..

Hey, good morning, guys. This is Sam on for Mike. So, you guys talked a little bit about the fleet and when I look at the - there's a couple of charters vessels in your fleet that's at the age and kind of profile MSC vessels that are going to be in some of those scrubbers.

Do we expect that this is the type of deal for others vessels in your fleet and have you noticed or foresee at distinct point where other charters and I think start engaging more aggressively to get those installations completed..

Yes, we are currently in discussions with other charterers' as well for scrubber installation and those discussions are to do with both of these investments. And probably this investment cost is going to be allocated between the charter and the owner during the tougher tenure, so there are discussions as we speak.

And I think that should we find a solution which makes sense for both parties going to be a win-win situation both for the charterer and for the owner..

Great and then you touched on this a little bit, but can you talk a little bit more about the timing mechanics of the actual installations and whether or not there's going to be incorporate into existing dry dock schedules or if there's anything to come into new dry docks, like, what is the timing look like for that?.

It depends on the vessels and also on this specific dry docking schedule of which vessel individually. For those ships that you know we're discussing, we would expect to have these scrubbers, of course, prior to the first half January 2020 and most probably during the third and fourth quarter of 2019..

Okay. Great.

And then just taking a quick step back I guess, you're looking at demand dynamics across vessel sizes, how like - what is your perspective on looking at your future fleet and replenishing some of your older smaller vessels, do you see that need to maintain that fleet for the specific trades? Or how you're looking at your fleet going for in next couple of years?.

Look, we don't know the - like - I mean, if you look at our sched list, you will see that we have pretty much all the sizes from like 1,500-TEUs, including 14,000-TEUs because this is together with your capital. So like we have pretty flexible.

We focus - we mainly focus on how much we buy a vessel was this - what's the vessel's physical condition and its capacity, founding quotation. And we first tried to power our downside risk and then of course was one to make sure that there would be cautious upside for our shareholders, that we don't analyze any vessel type with any type of trade.

We have a view for some ships especially I mean, as you've seen all the new building transaction was done mainly for larger vessels. So we tend to focus on larger new building deals, without when however that even numbers make sense that we wouldn't be doing as more as we did new buildings.

So we are pretty much flexible as long as we feel comfortable with the assets and its earnings potential..

Okay, great. That's all from me guys. Thank you..

Thank you..

And I would like to pass back to Mr. Zikos for closing remarks..

Thank you for dialing-in today and for your interest in Costamare and we're looking forward to speaking with you again at our Q4 results conference call. Thank you..

Thank you. That does conclude our conference call for today. Thank you for participating. You may now disconnect..