Safe Bulkers Inc. (SB) CEO Polys Hajioannou on Q1 2022 Results – Earnings Call Transcript

Safe Bulkers Inc. (NYSE:SB) Q1 2022 Earnings Conference Call May 26, 2022 9:00 AM ET

Company Participants

Loukas Barmparis – President, Secretary and Director

Konstantinos Adamopoulos – CFO and Director

Polys Hajioannou – Chairman and CEO

Conference Call Participants

Eli Winski – Citigroup

Ben Nolan – Stifel

Chris Robertson – Jefferies

Magnus Fyhr – H.C. Wainwright


Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss the First Quarter 2022 Financial Results. Today, we have with us from Safe Bulkers, Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; and Chief Financial Officer, Mr. Konstantinos Adamopoulos. [Operator Instructions]

Following this conference call, if you need any further information on the conference call or the presentation, please contact Capital Link at (212) 661-7566. I must advise you that this conference is being recorded today.

Before we begin, please note that this presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, concerning future events, the company’s growth strategy and measures to implement such strategy, including expected vessel acquisitions and entering into further time charters. Words such as expects, intends, plans, believes, anticipates, hopes, estimates and variations of such words and similar expressions are intended to identify forward-looking statements.

Although the company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, changes in the demand for dry bulk vessels, competitive factors in the market in which the company operates, risks associated with operations outside the United States and other factors listed from time to time in the company’s filings with the Securities and Exchange Commission.

The company expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company’s expectations with respect thereto or any change in events, conditions or circumstances on which any statement is based.

And now I pass the floor to Dr. Barmparis. Please go ahead, sir.

Loukas Barmparis

Good morning. I’m Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the first quarter of 2022.

Let’s start our presentation on Slide 3. Certain general comments, our 2022 quarter profitability exceed first quarter of — of 2021 profitability by $15 million, reaching net revenues of $77.7 million and net income of $36.4 million. We delevered our balance sheet year-over-year by more than $200 million, reducing our debt to comparable levels for our fleet’s scrap value. We used — enlisted EUR 100 million 5-year unsecured non-amortizing bond with a fixed coupon of 2.95% and maintained significant liquidity and capital resources of $298 million.

We have redeemed in April 2022 more than 1/4 of our 8% preferred shares, improving our weighted average cost of capital. Furthermore, we have a significant cash flow visibility with over $400 million of charter contracts. At the same time, we continue to focus on fleet renewal and expansion with 8 Phase 3 newbuilds on order and 42 vessels on the water with an average fleet age of 10.4 years.

In May, we took delivery of our first Phase 3 Kamsarmax class MV Vassos and have also expanded our Capesize fleet to 7 vessels. Our financial strength enables us to declare a dividend of $0.05 per common share, noting that at the same time, we are renewing our fleet with secondhand and Phase 3 newbuilds ahead of the competition.

Allow me now to guide you through the company’s key investment highlights as presented on Slide 4 and 5. Safe Bulkers is a top 10 pure dry bulk vessel owner in Panamax segment with a heritage of 60 years plus track record experience and central management led by Polys V. Hajioannou. With a strong company balance sheet fundamentals, ample liquidity, leverage at comparable levels to fleet scrap value and secured cash flows from reliable counterparties, we have executed with 8 Phase, Tier III newbuilds. Our fleet expansion and renewal ahead of peer competition and ahead of the expected impact to the environmental regulations of 2023 onwards.

We took delivery of our first Phase III newbuild a few days ago. We have $463 million of secured contract revenues, 25% of our fleet is contracted for more than 1 year, our fleet average charter period duration is about 1.2 years and we have an additional yearly revenue capacity of about $20 million plus from our 17 scrubber-fitted vessels due to the inherent fuel price differential. Our 42 vessels fleet is 85% comprised of Japanese vessels with superior modifications and commercial and operational upgrades, which caused a substantial premium both in chartering and resale value. The order book remains at 20 years low, and market fundamentals are positive for the remaining of 2022. We believe that the company is well positioned for the long run with an environmental-based advantage.

Moving to Slide 5, we highlight certain key figures to create values. All numbers presented are as of quarter end. And more specifically, our liquidity and capital resources are at $359 million, consisting of $166 million in cash and $193 million in undrawn available revolving reducing credit facilities in secured commitments. Furthermore, we have contract revenue of $426 million net of commissions from our noncancelable spot and period time charter contracts.

Our CapEx were $243 million in relation to this 9 Phase 3 newbuilds, the fact of which we took delivery a few days ago. And we had $409 million of outstanding consolidated debt, including our EUR 100 million unsecured bond issued in February 2022. Our fleet scrap value of $395 million is in the last column on the right, and is calculated on the basis of our fleet aggregate light weight tons and scrap rate of $662 per lightweight, again as of quarter end. On top of our liquidity and capital resources, we had as of quarter end, an additional borrowing capacity in relation to 5 unencumbered vessels and 7 newbuilds upon their delivery.

Moving on to Slide 7 and the dry bulk market. We present the development of the CRB Commodity Index, which currently stands at a 5-year high with further upside potential. The index reflects basic commodity future prices, for example, energy, agriculture, precious metals and industrial materials, which represent a leading indicator for shipping.

As a result of the ongoing Russia-Ukraine war, we have witnessed a rapid surge in prices during 2022. The updated forecast of IMF in April following the Russia-Ukraine war sits the global GDP expected growth of 3.6% from — for 2022 which is lower by — from a 4.4% previously and at 3.6% for 2023, which again lower from 3.8% previously. In addition, the global protection for inflation started at 5.7% in advanced economies and 8.7% in emerging markets and developing economies. The Chinese GDP growth over the first quarter of 2020 was 4.8% despite the new domestic COVID-19 lockdowns and the Russia-Ukraine war. The forecasted global dry bulk ton-mile demand is expected to increase by 2.2% in 2022 supported by the industrial materials like iron ore, coal and agricultural, while the expected dry bulk net fleet growth starts at 2.1% for 2022, which means that the squeeze in the supply of vessels may well be a realistic scenario.

Let’s go to Slide #8 to have a good look on present charter market conditions. As shown on the top graph, the Capes market for this year-to-date continues to be healthy. Capes lately have been volatile, driven by the commodities dynamics, which got analyzed. The forward freight agreement curve, present in red color is about $30,000 to $35,000 for 2022. Similarly, for Panamax in the lower part of the graph, the FFA carries about $25,000 to $30,000 for 2022. The prevailing commodities market, coupled with strong supply fundamentals are likely to support the freight market throughout 2022.

On Slide 9, we present our scheduled order book deliveries. In this positive charter market environment, we have 1 more delivery in 2022 following the delivery of our first phase — our first Kamsarmax [Indiscernible] vessel a few days ago, 5 in 2023 and 2 in the first quarter of 2024. In the same slide, in the bottom graph, we also present a record low order book for the forward years for Capes and Panamax vessels. The supply fundamentals are strong as we witnessed a historically low order book and the shortage in shipyard capacity, which is mainly covered by other sectors’ orders, mainly containerships and tankers.

Turning to Slide #10. We focus on intrinsic value of our company due to appreciation of our investments, which is about $150 million. Before this business cycle, as part of our fleet renewal strategy, we have invested in 9 newbuilds of the newest design compliant with the IMO regulation for CO2 and NOx emissions. Further, we have acquired 3 Panamax and 3 Capes secondhand vessels built in Japanese shipyard. The average acquisition price of our 9 newbuilds was about $32.5 million as compared with the current average market value of about $42.5 million. For the 6 secondhand vessels, the average price was $25.9 million as compared with the current average market value of $31.9 million. This timely stream of investments has appreciated by about $125 million. Furthermore, the company has previously invested in scrubber technology to 17 — for 17 of its vessels.

The surge in fuel prices in the last months, which is more evident in today’s market, has pushed the very low sulfur fuel oil versus a high sulfur fuel oil differential at high levels, which translated to increased revenues for the scrubber-fitted vessels. Presently, the Hi-5 in Singapore stands about $280 per ton. And according to the future market, the balance for 2022 stands at about $190 per ton. The scrubber-fitted post-Panamax spends about 7,500 metric tons per year, pushing the implied scrubber gain potential to about $24 million per annum, in aggregate, for our company’s 17 scrubber-fitted vessels. As a result, this intrinsic value of the company is calculated at $150 million approximately.

Let’s summarize company’s and market takeaways in Slide 11. Safe Bulkers has a strong upside with newbuild program and secondhand acquisition with ample liquidity and capital resources, which favors opportunistically the expansion and strong balance sheet with leverage comparable to fleet scrap value, future visibility of contracted cash flows. We reward our shareholders with a sustainable dividend policy coupled with our fleet renewal strategy. At the same time, the market has strong fundamentals. With limited dry bulk fleet expansion for the next couple of years and new and forthcoming environmental legislation that set new standards for shipping, we believe that Safe Bulkers will be in the forefront of environmental-based competitiveness with newbuilds ahead of competition, upgrades in existing fleet, use of biofuels and research for alternative fuels.

Now let me pass the floor to our CFO, Konstantinos Adamopoulos, for our financial overview.

Konstantinos Adamopoulos

Thank you, Loukas, and good morning to everyone. Let me start with our quarterly financial highlights on Slide 13. During the first quarter of 2022, we operated in an improved charter market environment compared to the same period of 2021 with low interest expense and increased revenues, which also include earnings from scrubber-fitted vessels. Our quarterly net revenues stood at $77.7 million versus $62.5 million last year. Net revenues increased by 24% compared to the same period in 2021, mainly due to the increased TCE rate as a result of the improved market, which was also assisted by the additional revenues and by our scrubber-fitted vessels.

We had a TCE of $21,352 compared to a TCE of $15,567 during the same period in 2021. The net income for the first quarter of 2022 reached $36.4 million compared to $21.3 million during the same period of 2021. Our daily OpEx stood at $5,722 compared to $4,702 last year and a daily OpEx, excluding dry-docking and predelivery expenses stood at $4,923 versus $4,350 last year. Vessel operating expenses increased mainly affected by increased dry-docking expenses, which include low-friction paints application for upgrading the vessels’ environmental performance, increased provision of technical services and increased crew repatriation expenses due to the COVID-19 pandemic.

The aggregate figure for our OpEx and G&A for the first quarter of 2022 was $7,242. This includes all dry docking and predelivery expenses and all director and officers’ compensation. Our adjusted EBITDA for the first quarter of 2022 increased to $46.9 million compared to $34.6 million for the same period of 2021. Our adjusted EPS for the first quarter of 2022 was $0.24, calculated on a weighted average number of 121.6 million shares compared to $0.14 during the same period in 2021, calculated on a weighted average number of 103.4 million shares.

Let’s conclude our presentation on Slide 14 with our quarterly operational highlights for the first quarter of 2022 compared to the same period of 2021. We were able to enter into several favorable time charters, substantially deleveraged our fleet and improved our liquidity. As a result of our performance, the company’s Board of Directors decided to declare a $0.05 dividend per common share. In February 22, we successfully issued the 5-year unsecured non-amortizing bond in the amount of EUR 100 million, guaranteed by Safe Bulkers, which pays a coupon of 2.95% on a semiannual basis.

We would like to emphasize that the company is maintaining a healthy position — cash position of around $141.5 million as of May 22, and an additional $156.6 million in RCF and secure commitments. The combined liquidity of a little less than $300 million that provides us with significant firepower. Furthermore, we have contracted revenue from our non-cancelable spot and period time charter contracts of around $463 million, net of commissions. And additional borrowing capacity in relation to 7 newbuilds upon the delivery and 6 existing [Indiscernible] vessels. Our press release presents in more detail our financial and operational results.

And now we are ready to take your questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Chris Wetherbee with Citigroup.

Eli Winski

This is Eli Winski on for Chris. Maybe we could talk about the updated outlook on the bulk market given some of the geopolitical issues going on here. So just a couple of things. Obviously, you guys spoke a little bit about the Russia-Ukraine side, but maybe you can talk about how your business specifically is changing to account for the changes in the market right now. And what you think — obviously, I understand you don’t have a crystal ball, but what the market could look like towards the end of the year and maybe into the following year.

Polys Hajioannou

Yes. The updated market conditions is that we have entered the second quarter with a healthier market than we had in the first quarter, which underperformed because we had also the — after Chinese New Year, we had the break of the war in February between Russia and Ukraine, which had the negative effect and also the prolonged COVID lockdowns in Shanghai area in China. So this has muted the market for much of Q1. So the recovery started in May, a bit later than other years, and the market is improving from that point on.

Now the Ukraine war will change the dynamics of the market in that we would lose the exposure claims from Ukraine, which around $50 million a year at least for the foreseeable future. And then we will have a problem with sanctions cargo from Russia, that people cannot load on their ships. So the joint effect of losing these 2 countries will be around 100 million tons. And this impact can be replaced by other countries, but without that, the whole amount will be replaced by the rest of the world. Of course, the ton mile effect will be covering part of this loss because whatever is substitute from other countries will come from longer distances.

We’re seeing cargoes now from Australia being carried to — personal cargo to Egypt or to places far away that they used to be supplied from Black Sea. So initially, there is a benefit on ton miles. But later on, I think will be shortage on — especially on grains. To the contrary, we see increased movement of coal because of the conflict. All the environmental issues will be postponed and are postponing. Countries, especially in Europe, have to rely more on coal supplies for the foreseeable future.

So the sanctions in a way is delaying the carbonization of the market indirectly, of course. And there is a benefit from extra coal demand on countries like Europe. So overall, the picture is unclear how it will be developed. But there are plus and minus from this equation. And if we add on this COVID fear in China with the recent lockdown of about 7 weeks there, we believe that Chinese government will follow stimulus packages for their economy in the months to come to recover this loss of productivity and loss of production slowdown they had because of COVID. So this should be positive for iron ore trade and trade into China.

Eli Winski

Got it. So just a quick clarification, you said out of Ukraine, that’s a loss of 50 million tons a year. Is that what you were saying, 50 million tons?

Polys Hajioannou

No. 40 million to 50 million tons, it’s the amount that every year we were expecting to see from Ukrainian exports.

Eli Winski

It’s a little net effect of 100 million tons given the sanctions in Russia?

Polys Hajioannou

Yes. Together with Russia it’s around 100 million, yes. This, of course, in other countries will cover a good part of it, but not the whole lot. So ton miles will increase because other countries are further away from the receiving countries like North Africa, Egypt and Middle East. So in part will be covered by the ton miles, the loss of cargo. But the quantities won’t be there. And this — I think we will see this shortage of — or shortages in the second half of the year.

Eli Winski

Got it. And then so on a time charter basis, I understand that you guys were up year-over-year, but it’s down sequentially. Now obviously, you have the typical seasonality in that, but it’s lower than what typical seasonality has historically been. So was that just because of some of the headwinds that were — that hit 1Q specifically? Or was there another reason there that we should be thinking about?

Polys Hajioannou

Q1, always slow. Always slow. The average we achieved in Q1 is still satisfactory, over $21,000. It was a bulk. You have to remember that also we have a number of dry docks during this quarter. I’m reasonably optimistic for the next few quarters, but there will be a lot of headwinds from various source so we may have — at the moment, we may have a very strong market in one basin and very low market in different basins. So we wait to see the new trends and the new routes that will be created out of — so long this war will last.

Eli Winski

Got it. One more for me. So what is your contracting strategy here for the rest of the year and into 2023? I think you guys are 78% for the full year. What does that look like to increase that number throughout the rest of this year?

Polys Hajioannou

For the rest of the 2022, we prefer to work mainly in the spot market. If we can find charters that they could take us well into 2023, we will go for 1-year charters, taking us past the first quarter of Q1 of ’23. For the bigger ships, the Capesize bulk carriers, at the right time — in the market, we prefer to try and fix for 2- or 3-year charters. It’s a lot easier to find 2- or 3-year charter on the Capesizes than on the Kamsarmaxes because the forward curve is always undervalued on Kamsarmaxes. Once is sometimes is more fair on the bigger ships. So where possible, the bigger ships, we will be going for 2- or 3-year charters and the smaller ones up to 1-year charters.


Our next question comes from Ben Nolan with Stifel.

Ben Nolan

As you were talking about or as you discussed, the — your outlook for the dry bulk market and just how you see things playing out. I’m curious how you think about maybe where you envision the company in the next 3 years. You’ve been pretty active ordering new vessels and upgrading the fleet and you now have a dividend. But based on sort of how you see the dry bulk market playing out, what — how would the company maybe look differently 3 years from now if things were to go the way that you’d hope they would?

Polys Hajioannou

Yes. Look, I believe that the modern shipping company has to be in the game, active around all cycles and have competitive vessels, modern vessels and be able compete in the market. For example, we recently took delivery of our Phase III, Tier 3 newbuild last month, which we fixed a good $7,000 or $8,000 above the spot market at the time of modern Kamsarmaxes. So the ship achieved $35,900 for a — 2 laden leg’s trip of a round duration of 4 months, whilst at the time that modern Kamsarmaxes were earning $28,000 a day. Reason being that is a very economic ship, burning very low amount of fuel per day.

Now with these ships that we are getting delivery — we started taking delivery and by — in the next 18 months, we will have 9 new ships in the fleet. We are reducing the average age of our fleet by 2 years. So in 2 years’ time, the average age of the fleet will still be 10 years old. At the same time, we will try and buy a few younger ships, more than secondhand ships, not older than 10 years old, 8, 10 years old. Recently, we bought 3 Capesize bulk carriers and we are working on something more. We believe that these are ships that could still be fixed in the next 18 months at good charter rates for 2-, 3-year charters with very minimal downside risk on the residual value.

So we will combine the order book with some selective acquisition, especially on the bigger ships. And I believe that the engines of the future is not yet decided and the type of fuel that we will burn in the next decade is not decided. And we cannot predict now whether this is methanol or LNG or anything else. So for the time being, we go for the best ships we can get from reliable shipyards, offering us low consumption. These vessels are burning 6, 7 tons of fuel per day less than comparable modern ships. At the time when fuel cost is approaching $1,000 a ton. This is a price — $900 to $1,000 is the price of VLSFO today in the Far East.

So by keep renewing our fleet and new ships joining the company, we shall remain a modern company in the next 3 years — 3, 4 years. And by that time, I believe we will decide where will be wise to invest the liquidity we will create from the — generated from the revenues of the company to what — to which type of engine, type of vessel we’ll be able to invest this money, what new type of engine and type of fuel we will decide to invest. At the moment, we don’t have a clear picture. We have an idea, but all these things are changing every other month.

So to be honest with you, we want to have all the options open before we commit ourselves into the long-term plan. So we will stay with whatever best design we have in front of us now. And we will wait to see what happens on the technology front, on the environmental front and try with — in between investments in environmental feature like paints like maybe rotors, maybe docks, maybe other things that technology is offering to us to try and become even more environmental-friendly company.

Ben Nolan

Okay. But you do still expect your in-growth — to take advantage of the market and to be able to continue to grow the company as compared to maybe using this as an opportunity to really increase dividends substantially or something like that?

Polys Hajioannou

The dividend to increase is the easy part. This — you can always do it. The difficult part is to have the dividend sustained in the long run and to grow it in the long run. Not to go up and down and give it out in one go when you don’t know how much money you will spend on the new technologies and how much investment you would do. So we have selected the growth plan, the renewal plan, the deleverage plan. And we reinstated last quarter a dividend, which is not, of course, the largest in the market because we combine it with other actions, but we want to believe that what we are doing here is creating value for our shareholders in the long run. So we’re not — we are focusing on what creates value for shareholders in the long run.

Ben Nolan

Yes. Yes, that’s right. All right. And then lastly for me. I know you guys have historically been primarily Panamax class — Panamax, Kamsarmax, Post-Panamax, sort of midsized-focused. Although there’s — recently, you’ve been adding some to the Capesize business. Is that an area where you see a level of focus such that you can get some of the, I don’t know, critical mass to be able to grow that side of the business, maybe not to as much as you are in the other area, but maybe weighted a little bit more equally?

Polys Hajioannou

Yes. No. Look, I mean, since all our new ships are Kamsarmaxes and post-Panamaxes, it’s logical to try and do on the secondhand something that is on a different sector to spread out the risk and have more diversification. And we selected the bigger ships because we believe that there are opportunities from time to time. There are ups and downs in the market which is affecting prices as well. So you can have a low 2 or 3 months. This may get — you may get a cheap deal from a seller on the Capesize bulk carriers and then the market may recover after 6 months. And I believe that with the COVID restrictions of China, that there will be enough stimulus action taken by Chinese government to increase the production in China and do investments that help their economy.

So for the reason we say we don’t need to risk more in investing same sector, the order book of Capesize is very low. We have seen that scrap value is appreciating and these are ships of [$26,000], [$27,000] steel which expires only by — scrap value has been increased by [$4 million] or [$5 million] in the last 12 months. And it gives the company also an extra labor of that market when our investments are on the medium sector of Kamsarmax to Post-Panamax. So that’s why there is an acquisitions have been on Capesize bulk carriers. We don’t intend to go to smaller ships despite the lucrative trade ways. Because I think already the prices in that sector sometimes are more expensive than even a Capesize.


Our next question comes from Chris Robertson with Jefferies.

Chris Robertson

So you talked a lot about the younger end of the fleet here with the new buildings as well as some of the latest second hand acquisitions, but could you talk a little bit about the older end of the fleet in terms of kind of sales and investment strategy here? And — or any incremental upgrades necessary ahead of the new IMO regulations this year that would require some dry docking or off-hire in the remaining quarters?

Polys Hajioannou

As far as we are concerned now, the older part of the fleet, which is — we have 6 vessels built between 2004 and 2006 are all Japanese shipyards, and they appear to equivalent so they are pretty much there for the next few years. Of course, we are not very, very much interested to trade these ships until they are scrapped. And our history has shown that in the past, we used to be selling ships at around 10-year mark. And these days around 16, 17 years mark. But I believe, overall, the aging of the fleet and the average type of older vessels around are ships that they cannot comply with regulations after 2024.

And these ships, they need to make big investments — big environmental investments and big improvement to stay in the — in business. So I think all this will be very positive for the market, not because the ships will be delayed in making their pace, but because many charters will not prefer to fix these vessels because of the penalties that we’ll be facing in various ports in the world with all the emission charges and all these things that will hit the industry in the next few years.

So I think all this provides a far better, let’s say, horizon for the much younger ships and especially those that consume very low quantity of fuel oils. And also, we have seen a certain part of the fleet we will need to slow down to achieve emissions at their acceptable levels. So I think overall, whilst we — our older ships are all built in Japan, we believe in general, the market will have a problem in that respect. And maybe Loukas, you can give more detail.

Loukas Barmparis

If you may consider at about — I mean as we have ordered 9 ships already which are Phase 3 and we have, from a previous ordering, from the previous cycle about — I mean I think 11 eco ships. Altogether, this is a new — I mean the relatively younger segment in our fleet is about 50% of our vessels. The other, let’s say, 50% mostly includes Japanese vessels, which relative to Chinese at that era are substantially more efficient and can easily comply. So always, I think, what we should expect is that the problem relies on heavier vessels, larger vessels that, as Polys said just before, will have to face the competition.

I mean from — in terms of our strategy, we continue to upgrade our fleet continuously during dry dockings, doing what is necessary and monitoring also very carefully the environmental performance of our fleet to achieve better environmental ratings as we go ahead. So I think this is a very successful, if not so, low-cost project because our fleet is, as we said before, it’s quite — it’s Japanese and relatively more efficient. And I think that at the end result, we end up with a very good performance in the next 2 years.

Of course, any discussion of a new fuel that will — it is a question of, let’s say, the next generation. I mean after I think 2025 or 2027, probably, because we don’t have even today any fuel that is suitable or has been proven that is suitable for [Indiscernible] and global fueling of the fleet.

Chris Robertson

Yes. There’s certainly a lot of technological uncertainty here. My second question is related to the Series C preferreds that you redeemed. So it looks like around 35% is still outstanding. I know you had mentioned fleet renewal, some deleveraging focus and things like that. But how are you thinking about the remaining Series C preferreds?

Polys Hajioannou

Look, it’s not our priority. After such a big payment we have in the first quarter, I think it’s not our first priority to redeem more preferred shares. It’s a good class of shares to have on the balance sheet. So we’ve done our part. If the strong market continues for another couple of years, we may consider again, but at the appropriate time. But as you know, we have the expansion as well, we have the deleverage also in our plans and we have dividends also in our plan. So I mean we’ve done the preferred part for this year, I think, and we’ll see what happens later on and how strong the market will be in ’23 and ’24, if there is excessive liquidity to redeem some more of those shares.

Loukas Barmparis

Overall, the company is looking very closely the leverage, which is the debt part, not the equity part. And if you consider that right now, we have reached a level where the leverage is comparable to our debt — to our scrap value. This is one of the most important characteristics that we would like to maintain in the future. So we don’t want to see our leverage increasing substantially more compared to the scrap value of the vessel. So this is the level that we feel quite comfortable.

At the same time, the — I mean to the extent that we are able to do additional period time short charter contracts that gives us the visibility of our cash flows, this — and as we said, this exceeds $400 million at this stage, I think this makes a very good company for anyone who would like to invest because you invest in a low leverage company with substantial contracted revenue with the dividend. And of course, which is sometimes we tend to ignore these — the new vessels, which are coming much earlier compared to 2025, the Phase 3 vessel coming to our books until 2024.

Polys Hajioannou

Also, we tried at any given time to utilize the reserves of the company as best as we come for the benefit of the shareholders. So in the first quarter of this year, we have also the opportunity to draw a bond in the Greek market with a coupon of less than 3%, which is a very attractive coupon. And with this, we use part of it to redeem preferred of 8%. So whenever we have certain opportunities and we can save money and create value for shareholders, we will be investing in things like that. So you say that we paid around $40 million, and the saving is 5%, it’s around $2 million a year. It’s only the differential of the 2 interest rates of preferred and the bond we issued in February.


[Operator Instructions] Our next question comes from Magnus Fyhr with H.C. Wainwright.

Magnus Fyhr

My question is related to how your chartering strategy and financing strategy that have changed with recent events in Ukraine and inflationary pressures building. I think you answered the first question earlier. But just on the financing side, you did the $100 million euro bond and I’m just curious with interest rates moving up, are you taking any proactive approach to fix some of that debt? Or most of your debt is fixed or a significant portion is fixed? So I was just curious if you have changed anything with inflationary pressures building?

Polys Hajioannou

Yes. Look, I mean, as we reduce our debt, we have less worries about inflation, but — that is keeping us. And when we raised the debt and we fixed our coupon at 2.95% with the bond, we decided to cash the benefits we have on the preferred — on the swaps at that time. Because at the same time, it’s one of our priorities to deleverage the fleet. Already the loans we have is down to around 30% of our assets, and we intend to reduce it even more.

So there will be a point that we will be delivering — taking delivery of new buildings without adding finance on some of them. So we will be using liquidity to pay the [Indiscernible]. So we don’t feel we need to hedge because already now the interest rates have risen to a level that you see a flat curve. You see a curve across the 2, 3, 5 years that is flat. And I don’t think that this will keep going up.

Maybe in the next 12 months, we see some increase and some pressure. But thereafter, I think the war, I mean, there’s no one in this world to keep going forever. And the rest of the world as well as Russia will realize that we all pay the penalty for this war and for these sanctions that we have now apart from the huge humanitarian loss and the people who are losing their lives in Ukraine. So the sooner things stabilize and the sooner things are back to normality and maybe sanctions are normalized, the better will be for all of us, I believe.

And I don’t see interest rates going to 5% or 6% in the next 1 or 2 years. I see them going, of course, to 3%. But okay, if you are deleveraging at the same time, the risk is minimal on the effect to the company. So with the reduced needs for financing and with the issuance of this bond, I think we are well covered to fight that storm, if there is one storm — if there is a storm in the end with interest rates. It’s more worrying us the effect of raising interest rates to wealthy economies and to a recession and hitting a recession in the western economies than the actual interest cost of our activities. So we are more worried about the net effect to wealthy economies out of this interest rates than to our company.

Magnus Fyhr

All right. Just one last. I mean you have one of the lowest operating costs in the industry. Is there anything you can do there to maintain that? And with inflationary pressures building as well? Or is that kind of a small cost of your overall operational?

Polys Hajioannou

No, it’s not a small cost. And to be honest with you, I’m not very happy at all with the numbers because we are shipowners, we do the job the last — me, I do it the last 35 years, and the company in the last 60 years. And I don’t remember a phase that we have so many things hitting us at the same time. Whether that — it’s not only inflation, as you’ve said, but it’s mostly the rise of energy, the cost of fuel, the cost of producing something, coupled with the war — with the side effects of the war that is increasing the cost of transporting spare parts from Europe to the Far East and especially launches would have some heavy lift spare parts that we usually carry for dry dockings, and we have been using for it mainly heavy lift aircraft liners like most of them were belonging to Russian air fleet, this big airline.

So this has doubled or tripled the cost of transportation of spare parts. At the same time, we have been hit by expanded COVID in China, with all the restriction of making crew changes in Chinese ports or in other ports, which is keeping us also from that effect. And the increased dry docking costs, the cost of environmental improvements on low-friction paints we are using on all our ships, which is an effect — it has a huge effect on the OpEx. But on the other hand, we have a huge benefit from increased revenues because we reduced consumption by using low-friction paints, which means that the ships will be saving fuel, and we will get this as extra revenue on time charter rates of the ships.

All these things are you pay now to receive later, but if — so it appears on the OpEx now because we are painting even the older ships with this type of paints which is costing a lot to apply them and also the cost of paint itself. And the benefit will be shown in the following quarters. So I know it’s looking a little bit rough at the moment. But I can assure you that we monitor every detail of it and the [Indiscernible] investment adds to the cost.

So indeed, I expect our OpEx to come down in the next quarter, but not by a huge margin because all these investments will continue to be taking place.

Loukas Barmparis

I mean we basically — we expense certain investments, certain upgrades — environmental upgrades have been expensed not appreciated. So this will increase — has increased the operating expense.


And I’m not showing any further questions at this time. I would now like to turn the call back over to management for any further remarks.

Loukas Barmparis

Yes. We would like to thank you for attending this conference call, and we’ll be happy to discuss again with you in our next quarter financial results. Thank you very much, and have a nice day.


Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.

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