Oct 24, 2013
Executives
Gregory G. Zikos - Chief Financial Officer
Analysts
Michael Webber – Wells Fargo Fotis Giannakoulis- Morgan Stanley Brandon Oglenski - Barclays Ken Dexter - Bank of America Ben Nolan-Stifel Nicolas
Operator
Thank you for standing by ladies and gentlemen and welcome to the Costamare Conference call on the Third Quarter 2013 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 24, 2013. We’d like to remind you that this conference call contains forward-looking statements.
Please take a moment to read slide number two of the presentation, which contains the forward-looking statements. And I will now pass the floor to your speaker today Mr.
Zikos. Please go ahead sir.
Gregory G. Zikos
Thank you and good morning ladies and gentlemen. During the third quarter of the year the company delivered positive results.
In accordance with our newbuilding program, we accepted delivery of the fifth and sixth 9,000 TEU newbuild containership vessels out of a series of ten. Both vessels commenced their charters.
This addition to the fleet, together with the newbuildings already delivered and the remaining four vessels currently on order and subject to charters, will contribute in excess of $1.3 billion of contracted revenues throughout the duration of their charters. Regarding the transactions, together with our partners, York Capital, we ordered two 9,000 TEU vessels to be delivered by the end of 2015.
We are participating in each of the two contracts with a 49% stake. Despite continuing challenging market conditions, our re-chartering risk is minimized.
The charters for the vessels opening in 2014 account for approximately 3% of our 2014 contracted revenues. Finally, on October 1st and on October 8th, we declared a dividend of $ 0.36 per share on the Redeemable Perpetual Preferred Stock and $ 0.27 per share on the Company’s common stock respectively.
Consistent with our dividend policy, we continue to offer an attractive dividend, which we consider to be sustainable based on the size of our contracted cash flows, the quality of our charterers and the prudent management of our balance sheet. And now let’s move to the slides of the presentation.
On slide three we are providing a summary of our recent transaction mentioned earlier. We delivered two 9,000 TEU newbuild containership vessels out of a series of 10.
We are now have four remain vessels on constructions, two of them are expected to be delivered by the end of this year and two in the first quarter of 2014. At the same time, the recently ordered newbuilds will be delivered over the end of 2015.
In August we completed our preferred share offering. The company enjoys to the capital market on very competitive terms.
Finally in October, we declared dividend for both . On the next slide you can see the third quarter 2013 results versus same period of 2012.
During the third quarter of 2013, the company generated revenues of 110 million, EBITDA of 69.5 and net income of 20.4 million. For the same period of 2012, the revenues amounted to 95 million and [inaudible] 54 million and 12.5 million respectively.
Considerably with our previous press releases, we feel that the EBITDA and net income figures this will be for the following items. First, the accrued charter revenue and the retiring discrepancy between revenues received and the revenues accounted for based on a straight-line amortization schedule.
Secondly, the gains or losses resulted from derivatives and thirdly, the gains or losses resulted from other disposals. Adopted from the above, the third quarter EPS amounts to $0.38 versus $0.31 for the same period of last year, and the third quarter EBITDA to 77.49 million versus 62.5 million for the same period of last year.
Overall the company generated strong results during the quarter based on solid fundamentals. On slide number 5, we are showing the revenue contribution for our fleet.
Our revenues come from first class charters. More than 90% of our composite cost comes from Maersk, MSC, Evergreen and COSCO.
As you can see on the right hand side, we currently have charters with all of the top six charters, but have operated in the past with most of the lining companies which are in the top 20 list. Slide six provides information on our cash flow, charter coverage but also the significant building growth of the company.
We have today 2.6 billion contracted revenues, while the TEU-weighted average remaining time charter durations of the fleet is approximately 5 years. We have pretty much eliminated the near term rechartering risk and as you can see in the bottom chart, our fleet charter coverage exceeds 70% over the next three years.
As the new building shift in the water, that will generate significant revenues or the estimated annual revenues of approximately 150 million and EBITDA of approximately 119 million upon delivery of all vessels, up 39.7% from 2012 full year revenues and EBITDA respectively. Moving onto the next slide, slide seven is dealing with theoretical re-chartering risk that company would face in 2014.
The long story shorts here, based on our budget assumption the company’s today, has a 2014 cash EBITDA of 369 million. The four ships coming out of charter during the remainder of the year ended 2014 are re-charted at the same rate.
You can’t see the cash sensitivity. For a 70% rate being equal to a 30% discount on our 2014 re-chartering.
The cash effect is above 14 million, which goes up to 530 million for 60% discount. If we go one step further and assume that the ships coming out of employment during the year, and bit prior to 1995 are sold for demolition; assuming a scrap price of $400 per ton, cash proceeds of $38 million more than offset the cash shortfall.
In order to assess the company's re-chartering risk, some initial focus on cash, since this is what is servicing the company's debt obligations. And cash available for distribution is what is paying dividend and allows for further growth.
Based on the above, we do believe that the dividend we offer today is very attractive, based on its quality and sustainability. Moving on to the next slide, on slide eight we discussed our balance sheet management.
The debt repayment is smooth, evenly spread in the coming years and is not back loaded, ensuring no refinancing risks. The distributable cash flow is not artificially enhanced.
The loan portfolio is 80% hedged at a weighted average rate of 4%, which adds to the cash flow visibility. Liquidity as of the end of the quarter stands at 175 million in cash equivalence.
At the same time, we have unencumbered vessels and a moderate leverage. We consider the company to be in a competitive position with a comparatively stronger balance sheet, which together with our joint venture agreement with York, will allow us to make attractive acquisitions in developed market.
And moving now to the last slide, on last slide we are discussing the market. The current order book stands at around 21%, at 3.6 million TEUs.
From a historical perspective the order book is at low levels. It is heavily stood however towards larger vessels.
85% of the order book is for [inaudible] 5000 TEUs. On the demand side, although year-to-date there is growth in Asia, Europe, across Pacific and across Atlantic grades, this is not enough to absorb the capacity available in the market.
As the result books rates have been dropping. [inaudible] has come up to 2.6% of the total fleet.
Charter rate and asset values continue to be at historical low levels. As mentioned in the past, we think we are well capitalized and deliver superior returns in such a volatile and lower asset value environment.
Thank you very much. This concludes our presentation and we can now take questions.
Operator?
Operator
Thank you. (Operator Instructions) And your first question comes from the line of Michael Webber at Wells Fargo.
Michael Webber – Wells Fargo
Good morning guys how are you?
Gregory G. Zikos
Hi, Mike how are you?
Michael Webber – Wells Fargo
Good, good. Just wanted to touch on a couple of operational issues and questions and then some bigger picture stuff.
First and foremost around the vessels from the JV with York, I don’t believe this has been disclosed. Can you talk about your thought process around chartering those and then what indications you might have of interest there and period rates, things like that?
Gregory G. Zikos
So you talk about the newbuildings or the vessels?
Michael Webber – Wells Fargo
The new buildings with York, the ones that can be operated.
Gregory G. Zikos
Yeah, okay because the second time those have been chartered.
Michael Webber – Wells Fargo
Right.
Gregory G. Zikos
We put the order end of July of this year. Those vessels will be delivered, they are scheduled to be delivered at the end of the 2015.
So there is still time. We feel quite comfortable with the specifications of the vessels with the asset size and with the acquisition cost.
We are not in a time to charter them and to arrange funding, but we feel quite comfortable and happy with investment now. Regrettable today, I cannot give you more color on the chartering because it’s not concluded yet, but rest assured we will try to make sure that we deliver superior returns to our investors.
Michael Webber – Wells Fargo
Got you. And maybe we have backing away from just those specific vessels and kind of looking at the market as a whole.
You’re kind of comp today versus a couple of years ago, would you say that returns across the space are starting to come in just in terms of kind of day rates falling a bit faster than kind of than asset value just based on spec investment? And where would you kind of pin point where market level returns are right now on a long-term basis or where IRs are right now?
Gregory G. Zikos
Look those I mean, let me go back a couple of years. In the past those vessels could be order for a price in the region of 95 million.
So starting from there we have brought them in today’s environment at a significantly lower construction cost, because this is a market. And as a rule of thumb, you have a better deal when you are buying lower and chartering lower vessels the opposite.
And let me remind you that at the peak of the time, those vessels were older at price of above 100 million, 110 million or even 120 million. So starting from the acquisition cost, I think the basis is there in order to have good transaction now.
Of course we want to make sure the quality of the counterparty meaning the charterer and the charter rate will be short so that we can arrange good funding.
Michael Webber – Wells Fargo
Yeah.
Gregory G. Zikos
In order to further returns.
Michael Webber – Wells Fargo
Right. Okay, now that’s helpful and obviously we’ve seen your counterparts in the market too working and doing new deals.
And it seems like there an overall returns interest, which you kind of suspects but now that’s helpful. From an operational perspective, you guys came in ahead of budget on cost.
It looks like sort of – model. Can you may be talk about what’s kind of, what’s helping you guys write down OpEx on a sequential basis, as I believe it’s the last three quarters in a row where you guys are coming below budget.
And is that just a function of replacing some of the older assets and the fleet that have been degraded?
Gregory G. Zikos
Now, this depends on which quarter you are comparing, but generally as the rule of thumb, the age of the fleet has been gone down. And now the assets, however is that we have some of our ships managed by V.Ship where we have an agreement with V.Ship, Greece.
And we try to be as competitive as we can in operating expenses. So, if you look at our fleet at an average level, our vessel is let’s say 10 years old, 5,500 TEUs and it is running below $6,500 per day including close to 25 vessels which have (inaudible) flat.
So overall, these running costs are quite competitive. Now for next year and if your question is referring to what’s the way forward and how about we close the budget, from next year when we’re going to be devising the budget, we are going to have like further discussions.
We told the monitors (inaudible) and then we are going to providing you with new budget, but we try to be as comparative as we can. And another and because it lies the in some of our vessels, we have some euro dollar exposure.
Now that dollar has recently depreciated it is 1.37. From our side we have been gradually shaping this exposure at below 1.3 exchange rate, we say minimize our operating expenses.
Michael Webber – Wells Fargo
Got you. That's helpful.
So you are revising the budget for 2014, for Q4 we can use something pretty similar to what we saw in Q3 that should be any major changes there?
Gregory G. Zikos
Well I don't know. I think unless we revise the budget, I’m not sure it would be wise to use the latest results.
But let us get back to (inaudible) because we are now in the process of finalizing our 2014 operating expenses.
Michael Webber – Wells Fargo
Okay, all right. Fair enough and just one more and then I will turn it over.
Just kind of the bigger picture Greg. I mean you talked about weak day rates and then the soft environment and certainly the markets over supplied.
And when you think about the amount of money that's coming in the space now both from third party owners and from container lines, it’s kind of going after eco class assets to really drive down that dollar first of all cost. How do you think about return in this environment?
And is that measured, it seems like it's certainly measured in years and not quarters this point. But just kind of your bigger, bigger you take on this market and whether or not this influx of weaker capacity is pushing at a recovery by year or two?
Gregory G. Zikos
I think we have mentioned it in the part that we’re not in the business of predicating the market, but we do have a view. But the way the company is run, we make sure that the downside we have the cash on the side.
And then we try to realize some upside, but regarding the market, we have seen charter rates coming under pressure also for bigger side vessels. So, which had in the past better compared to the smaller vessels.
So, the amount of (inaudible) half TEUs is quite compared to where it was like three or six months ago. So the charter market is definitely stressed.
We talk about finding much rates in the range of 8,000 per day. We’ve seen asset value for the versus coming down substantially especially bearing in mind the latest transactions.
Now whether this is going to last for the couple of quarter or more, I’m afraid I don't want to predict, but let's not forget that we are in the downcycle for five years. There is no much room for charter rates especially for (inaudible), which are to-date.
So I am not sure whether we are at the bottom of the market, but we’re definitely have been at an extremely lower level.
Michael Webber – Wells Fargo
Okay. All right and that's all I’ve got.
Thank you for the time Greg. I appreciate it.
Michael Webber – Wells Fargo
Thank you.
Operator
Our next question comes from Fotis Giannakoulis, Morgan Stanley.
Fotis Giannakoulis- Morgan Stanley
Yes, hi Greg and thank you. I want a follow-up on, Mike’s question about the earning capacity of the newbuildings.
Shall we expect, I know that you cannot comment on the rate that you are expecting, but shall we expect very similar returns to the newbuildings that you are taking delivery right now.
Gregory G. Zikos
Yeah well our goal would be to have a better returns compared to the, you know, to previous transactions. And those should normally be better deals, because we bought the same assets instead of 95 million at 81 million.
So the rate is going to be lower, but at the same time the deal you know, you’ll have an asset which you bought at the low levels of the market. So there is more upside.
So as I said I cannot predict and it wouldn’t be wise for me to predict any returns or EBITDA yields or charter rates or duration, but you know, from our point of view we would try to do better compared to the previous deal’s returns.
Fotis Giannakoulis- Morgan Stanley
If I remember well the previous ones they were giving close to 13 % on levered yield, you think that the recent transactions in the market are moving around the same levels?
Gregory G. Zikos
Yes, but the yield is the one indicator. You need to see where the yield is coming from meaning who is the charterer and what is the value of the of the charter providing that yield.
And also what is the tenure of the return actions. So the 13% comes from the fact that you know, we got 95 and we chartered close to 41-42,000.
This was where the 13% comes from. We would look again at the EBITDA yield, which is sheltered but also the quality of the charter and the funding we can get in the duration of the contract is also, you know important factors in calculating, in evaluating the whole packet.
Fotis Giannakoulis- Morgan Stanley
Can you remind us where that market stands today, and for a vessel that has a good contract of more than 5 years, how much debt you think you can get and what are the spreads that are available in the market and particularly that are available to your company?
Gregory G. Zikos
Okay, let me start by saying that in end of 2011 for newbuildings, for 5 of those we got 80% leverage. And all in a cost of debt sheds which was in the region of 4% or 4.7%.
Now, I’m not sure what would be the capacity of the banks today or the willingness to lend today. But I think, and from our side we never like overpromising, but I think that 70- 80% leverage it is something that we would look at assuming that the charterer is a bankable name and of course it is something we’re going to take care of.
Fotis Giannakoulis- Morgan Stanley
And I want to ask you, according to the agreement with your capital, you have the flexibility to invest between 25 and 49% on this acquisition. If you chose to put the maximum amount of 49%, why is that?
And what did you see in these transactions that made you go to the maximum amount?
Gregory G. Zikos
Yeah it’s two things. First of all from a structural point of view, our agreement with York it is a true joint venture where both parties are contributing amount of equity which is substantial.
So we are not in the business of managing other people’s money by buying assets. We are sort of in the business of putting our equity work and co-investing, because we see some additional benefits with a private equity investor.
So this is why we will not put below 25% in any transactions. Now why we put 49% in those deals, because we believe in the asset and the size of the acquisition cost and the potential of those deals.
And so this is why we put maximum amount of equity and we don’t have any cash complaints. So now it doesn’t mean that any transaction going forward we are going to be putting 49%.
If it is a, it means there is sort of newbuilding order, we may have a smaller participation , but up to now we put 49% because we felt that economics of the deal, we have in mind to justify that.
Fotis Giannakoulis- Morgan Stanley
And Greg, I want to ask about the preferred that you issued and if you can explain us what was the rational of this preferred equity? And on the top of that you filed very recently a shelf mix, shelf.
What is the purpose of this mix shelf? Is there a sort of additional equity in the future?
Gregory G. Zikos
Look, first regarding the preferred we did, it is a new sort of funding. We did end of July and we raised 50 million at a coupon of --.
This is a true --without any set of options, which is, which can be regained to, I think the company wishes to do so after year five without any financial governance and without any other restrictions. So with shelf their transactions and the we got from the market.
We’re probably the most comparatives ones offer to a shipping company. And it is a new sort of funding as I said, which opens up a door for if in the future we feel that without project that they are returns justify an equity cost of 7.6% or sort of close to that range we would do it again.
Now regarding the shelf, the shelf will find its fuel in housekeeping purposes. If you ask me whether we have today any intension to raise funds either common or preferred, within the next week, I can tell you that we do not have any sort of intension.
Very simply the previous help have been exhausted. So, we have put in place for 300 million, which can be utilized over the next three years.
And asset is normally those type of discovers why the range of instruments which could be debt raise could compatible, it could be common, it could be lot of things. But we don’t have any intensions of raising common or deferred predict.
Fotis Giannakoulis- Morgan Stanley
Let me ask you another question regarding the preferred, given the thought that you have access to this preferred equity at less than 8% cost and debt at around 4% total in cost. Shall we expect that any future growth should come through preferred expenses given the thought that that gives an average cost of capital of around 5%?
Gregory G. Zikos
Yeah look, of course it depends where the market will be for the preferred and where the interest rates will be. And the reason to do it end of July is because we have taken the view that interest rates will be going which to some extends it turns out to be the right decision.
But the preferred it is something we would definitely look out again. If there is a market that allows us this opportunity definitely.
Now of course the preferred is something that to use as equity and it has a cost metal -- or generally it is the other component and there I will rely on commercial banks or on sort of other type of structures that provide debt at the levels which we find attractive.
Fotis Giannakoulis- Morgan Stanley
And there is a, you have a some vessels which are still debt free including one 8,500 TEU vessel which is quite modern. When you think it will be time to use this debt capacity.
I assume you can get more than $50 million debt out of this vessel. Why this vessel has been debt free for such a long period of time?
Gregory G. Zikos
Yes first of all this is a free vessel and one of them, you’re referring to --- TEUs, which is a 2010 build. Now this vessel we put the order in the yard and we didn’t find, because we didn’t have a fixed employment which would be going in the years in order to amortize the debt.
So, we play it safe and it reminds -- today. Now, normally we would get the best trends from the banks if you charter the vessel for the long period with this long charterer and in that case you could ask for the best second terms they could be offering.
Now we haven’t raise debt on today, because we don’t need it today and the terms might not be optimal, because these vessels don’t have a long-term charter. But in any case even in charter free value.
I think -- or whatever the number is, but these are assets that can be monetized. However, monetizing those assets should be done right way and not in hurry not under pressure.
If there is something, which we feel justifying, raising additional debt, which can be then used as equity for other transactions, then we would consider it, but --. We haven’t found ourselves in a situation where we couldn’t raise a debt on a deal on the standalone basis.
Fotis Giannakoulis- Morgan Stanley
And my last question, it has to do with the market, overall market obviously we are in a very weak chartering market, which is a little bit irreverent for you from your chartering perspective. Your vessels are covered but from the acquisition perspective, we haven’t seen a lot of acquisition, given the capacity that there is under JV agreement.
I know this is on page nine on your supply demand balance that you show that demand exceeding supply in 2014, thus this mean that the 2014 will be a year that you’re expecting to see recovery for charter rate? And how long the acquisition window will be open for you before asset price they start to moving higher?
Gregory G. Zikos
Okay, let me start from our joint venture with York. Now this is a joint venture was signed and this time agreement end of May.
So it’s not a long time since we’ve been on this together. And the total acquisition we’ve done – close to 30 million, plus two newbuildings of a total value of 160 million.
So it may not sound like a huge amount, but I think for the next I think this is a something that make sense. Now because we have this capacity in place and because we have this platform available, doesn’t mean that we can -- transaction for the sake of volume.
And let’s not forget that we have a two year investment period and both -- we have 100% returns oriented. So the returns are not there, we’re not going to be building down our internal benchmarks.
Now going to the -- presentation, the --, sorry this is what they believe, from our side we refrain from making any prediction on the market -- and established one. Even brokers may have a different view in order to show what you know , but from our side, I can tell you that we have never relied on the broker saying that the market is going to go I mean 2014.
So we’re going to ask to buy things today and certainly in 2014, because we’re going to be making, I mean I wish it was --. So, on a case-by-case basis first of all -- acquisition evaluate what is our downside, what is our equity at risk.
And as long as we feel comfortable for that then we know we can oppose the transaction to an extent where there is also some upside for us. We don’t spend an enormous amount of time trying to predict where the market’s going to be next year or in two years time.
We may have view but we tend to focus on economics and on the numbers of which particular transaction. And if the market recover sooner than what we expect, then we may have more upside.
But on the other hand, we may leave somebody on the table, because we may have started long. But in any case as long as we have our downside covered, we feel pretty comfortable.
Fotis Giannakoulis- Morgan Stanley
Would you mind sharing this your view with us, at least your best estimate about when will this market be turning around?
Gregory G. Zikos
Well I don’t know, look we know this much. So the question is when is the global GDP going to have a growth of 3% or 4% or 5%.
And whether the China will continue growing at rates which are above today’s rate whether we are going to be seeing the 10% growth rate in China we use to see. I don’t know, but what I can say is that we have a five year within this down market.
It’s very high technical industry. The question is not if the market will turn, the question is when the market will turn just not forget the supply and demand.
So if there are a couple of only short the market then prices comes down extremely fast and very, very easily and distinguish in the past. So we don’t be surprised if we know this happens sooner or later, but I am afraid I am not in a position to give you a more specific time frame.
Fotis Giannakoulis- Morgan Stanley
Okay. Thank you very much for your answers.
Gregory G. Zikos
Thanks.
Operator
Our next question comes from Brandon Oglenski of Barclays.
Brandon Oglenski - Barclays
Hey, Greg good afternoon or good morning.
Gregory G. Zikos
Yeah hi, good morning.
Brandon Oglenski - Barclays
Just following of that conversation there and thanks for all the details you’ve provided so far but what’s the risk here that the industry is just ordering the way the upside? I mean we’re seeing new order activity really ramp up here.
You guys obviously out in the market, a lot of your peers are as well. Is that kind of dilute the potential upside in ’15, ’16 when things could look a lot better to your point?
Gregory G. Zikos
Look the order book today stands at 21% of the total fleet. And there are not a lot of deliveries between 2016 and today.
Of course in 2016 it sort of depends on how many quarters I want to report from now until the end of 2014, which I cannot predict. But overall as we look it on a historical perspective and around 20% order book is not a huge number.
Let’s not forget that a typical market 2007 we had an order book or 2008, beginning in 2008 we had an order book which had close to 60% of the fleet in order. So I think it mainly has to do with demand compared what the order book going to be like in two years time.
But the way it stands it today, it’s not something which is to scaring people away.
Brandon Oglenski - Barclays
Well I guess it sounds like there is a little bit of shift in strategy, because the last couple of years you were really focused on renewing the asset on the Costamare balance sheet. Is that still a focus as well as we said at this low asset value territory?
Are you looking at renewing more vessels as you did in the past?
Gregory G. Zikos
I think we’ve done like the substantial fleet we scrap all the vessels. We have renewals of vessels and we are putting new building orders.
I think that today the way we look at transactions, we look at returns. I think the returns are there.
And if downside -- there is some upside. We would be doing either a 16 year old chip like in the past with or without charter at the same time, we would be doing a new building.
So it is not mainly about renewal, it is about optionality and returns. Now a with newbuildings it’s two things, you tie up some capital for a couple of years and you have some funding cost, but then you make up 5, 7 or 10 years of cash flow stream secure which, you know, can be the backbone of your fleet and kind of funds in substantial part of your operations as in the case of Costamare.
With -- vessels you may buy a ship close to 15 years old. You may charter it for a couple of years and then you may find yourself operating this vessel for the next 5 or 10 years when you realize extremely good returns.
So it’s two different types of transactions, which can both generate returns. I think that theoretically the best thing would be to do both.
But it is not up to us which transaction we give up and it is not up to us which transaction we will finally win and execute.
Brandon Oglenski - Barclays
And I guess from a longer term perspective with that in mind and with the JV now, what is the growth strategy for Costamare? How large would the management like to see the company?
And is it more focused on this more diverse by JV growth or is it core balance sheet as well. What is more in terms of how we can think about?
Gregory G. Zikos
Well, the goal either go through the joint venture or a standalone basis has never been to be big, in a manner you know, x number of vessels and how annual growth of so much percent every year in terms TEU or assets value or whatever. The goal is to be profitable and to be able to realize a double digit returns.
That’s the goal. So at the pick of the market we should consider whether we should be disposing of some assets and probably returning one of dividends to our shareholders because we cannot find any better use for the funds.
At the low market like today we are trying to expand opportunistically, but in a cyclical market like shipping you can’t have a pre-defined growth rate. Now, because we have operations in place, you know we wouldn’t like to go to a very small number of ships, but assuming a minimum number of operations, I think that could be defined as type of goal strategy.
Brandon Oglenski - Barclays
Okay, guys. I appreciate it, thank you.
Gregory G. Zikos
Sure.
Operator
Your next question comes from Ken Dexter of Bank of America.
Ken Dexter - Bank of America
Greg, good afternoon, good morning here, but on your agreement, I just want to read this quick for a second, why do you limit yourself to 49% on each vessel? And is it full ownership, if you buy ten vessels you can own 4 of them or are you just owning a minority of each of those vessels as you go on, again just understanding how ultimate ownership ends out.
Gregory G. Zikos
Yeah, look the way the agreement is structured or need specific transaction, if it is newbuilding we have two months within which to state whether we want to go north of 25% or not. And when there is a second hand boat, we have one month to sort of state whether we want get 25% or up to 49%.
So our percentage can vary from transaction to transaction and we have one or two months to declare our options depending on whether it is a second hand vessel or a newbuilding. Now, but since 49% or even 30 to 35% it is a substantial amount of the equity, especially if someone doesn’t mind it’s part of joint venture where the ship owner may have a much smaller equity stake.
Now the 49% is something, and in any case all the decisions are unanimous. So whether this 30 or 40 or 49% or 25%, both partners need to decide together if it’s, well the vessels will be disposed off, re-chartered, refinance and whatever has to do with the operation of the vessels.
So the percentage does not preclude us from having to agree another thing. Now the 49% of the same time makes our balance sheet more flexible, because we don't have to consolidate there.
So we may be getting on our sort of the EBITDA, the gain or losses under the equity pick up a method on our P&L. Consolidating budgets that the percentage of the profit and loss on every single transaction depending on our ownership stake, without having to consolidate the full asset and the liabilities following that asset on the balance sheet.
So I think that gives us a lot of flexibility.
Ken Dexter - Bank of America
But, so you don't see that as a detriment. You really think that you are going to get some of the parts valuation credit or the return on equity credit through that consistent minority investment?
Gregory G. Zikos
Yes.
Ken Dexter - Bank of America
Okay. When you were looking over on page seven, do you sell, do you plan, I mean are there thoughts on selling to scrap or was that kind of just an example.
I just want to understand maybe more on your thoughts I think you are getting to this with the last couple of questions in terms of, I think I’ll stop there and then I'll jump up in the next one go ahead?
Gregory G. Zikos
I think this is also for the sake of the example and to sort of reinforce the argument that we don't have any re-chartering risk in 2014. So we normally operate vessels in the past we have operated vessels for 20, 25, 30 or 35 years sold.
We scraped the vessels and the decision to scrape it or not has to do with the physical condition of the asset with earnings potential with a loan outstanding and whether we think that this vessel can generate additional returns or not. So the reason we put together is to say that look this is how the charter increase can, this is the cost EBITDA effect if all the new charter in terms of so much discount.
But in any case, (inaudible) even if we scrap all the vessels but that will discount this is more than offset by the scrap value of the asset, but it's not the intention to sell these vessels
Ken Dexter - Bank of America
Yeah and I guess my follow on to that and just my last one. Just thoughts on market moving to the larger vessels only in the mid-sized vessels how do you feel in terms of those assets on the balance sheet I guess going forward as it very moves to the larger lower cost.
I think you were kind of alluding to this earlier, I just want to make sure I understood the answer there?
Gregory G. Zikos
Yeah look we have ships on our balance sheet we have -- vessels. And we know that the vessels today, the fees that they don't have a bright future and that their earnings potential can be quite limited after the extension of the --, because this is purpose built asset.
What we do, -- when we brought the vessel we try to buy they are must be at historically lower levels. We have started then so that our residual risk is minimized.
Those vessels have been gradually repaying the debts so the expiring of charter party, we don't expect to have any weak payment due. So even if you buy an asset, which turns out to be not the best in market conditions in five or 10 years time, it is sort of buy at low levels, charter it, amortize at good and we don't find ourselves in a weak position.
So we have some vessels coming out of charter in 2016 and we have some of them coming out of charter in 2015. Whatever is chartering ready for those vessels, we internally in our internal cash flow and budgeting.
Models it’s not something that is going to have the company financially now to sort of a meaningful extent.
Ken Dexter - Bank of America
Okay. Wonderful.
I appreciate the time Greg.
Gregory G. Zikos
Thank you. Thanks Ken.
Operator
The next question comes from Ben Nolan with Stifel.
Ben Nolan-Stifel Nicolas
Greg thanks. Yeah I had a couple of questions sort of related to maybe some of the earlier questions --- as it relates to market then also as it relates to the -- .
I noticed that in the fleet list, it doesn’t look if there is been a new charter associated with that. I just curious that’s obviously relatively modern, relatively larger asset.
First of all is there a reason that it hasn’t been put on a longer term charter? And then secondly could you may be talk to the willingness among the liners for that type of 8,000 to 12,000 TEU type vessel for putting, taking assets in on long-term basis.
Are you seeing the same level of interest for that? What sort of the duration it's been kicked around among liners for the moment for that type of ship?
Gregory G. Zikos
Yeah, the -- this is a vessel which we have the 2010 build and the -- TEUs whose charter party has expired. Now the market today for this type of vessel delivery in the water is weak.
So we don’t want to rush and to charter that vessel, especially for a long period at the rate which is definitely below historical average levels. Now to further this is -- asset and then we don’t have to serve this debt or we don’t have to -- commercial management it’s helpful.
But we’ve seen the market lately -- two months. For those types of vessels there is lot of demand from line of companies.
So we seek the way to beat and we’re not in a – to decide, because first of all we don’t want to leave mind on the table and at the same time we don’t have to have the charter today, because there are now debt obligations attached to it. Now, the second part of your question answer most of it is it, the market today for the 8,500 TEU vessel is very weak.
This we are in a, we’re not in the peak season we are in the fourth quarter of the year, which is traditionally slow. So we will seek a wait and we will try to come up with best possible alternative.
We could go for a shorter period with a time charter, which could be very low or it will feel that charter rate – we can go for --. We’ll see, but I’m afraid that today I’m not in a position to give you safe indication on the charter reservation.
Ben Nolan-Stifel Nicolas
Okay that’s helpful. And then may be somewhat related but with respect to say the vessels that you have ordered as part of the joint venture, could you may be speak to sort of, clearly I think that along the way you’ve been in discussion with minors for potential charter and maybe it’s not anything eminent, but certainly have a feel for where the liners are thinking.
Is there a reasonable market for long-term charters these larger eco ships? And if so is there, are we thinking five year terms or is there even 10 year terms being thrown around the market right now?
Gregory G. Zikos
There is interest for those vessels today. Those vessels will be delivered in 2015.
So there is interest today for chartering those vessels upon delivery, from various line of companies and we are in the process of discussing those offers. But it would be a bit premature now to give any indications or sort of any estimates.
And also commercially I don’t think it will be a right thing to do.
Ben Nolan-Stifel Nicolas
Okay, yeah I know. I can appreciate that for sure.
My last question has to do with some of the second hand assets and as part of the joint venture you acquired a few fleet earlier in the summer. But we’ve heard a lot of noise that the private equity has began to be much more active and acquiring sort of the at a smaller handy class little more vantage containerships.
I think there is an idea that given gearing and lower drafts and that sort of things that they’re little more insulated. Have you seen an increase in that level of competition for second hand assets?
And if so, I think is it, how does that change your thinking on moving on the second hand side versus new building?
Gregory G. Zikos
Yeah look those are pretty simple message -- during summer of this year. The value today for those vessels is up.
And to some extent for smaller extent the asset values may have come up a bit, which is 100% justified from the charter rate. So there is not a correlation there.
Now there may be people who are willing to pay a premium or to pay above what we consider as a fair value market of an asset because they may have cuts available, because they may have their view on market recovery. From our side, the fact that we have the platform in place it’s not going to make us compete for transactions where we think that the prices are not logical all in all are not justified but where charter rate update.
So there might be a lot of capital available also for second hand container vessels, but we’re going to compete for the transactions and that's the point where we think it make sense for our shareholders. Otherwise we are not going to compete in order to increase volume or size.
Because let's not forget that being the bigger or the biggest around does not mean that this company is the strongest one or the most profitable one. So we are not going to be competing on -- transactions.
Ben Nolan-Stifel Nicolas
Okay. That's very helpful.
I assume I gets to an answer to my question and I appreciate it sir. I mean that's it for my questions.
Thanks a lot.
Gregory G. Zikos
Thank you.
Operator
(Operator Instructions) This concludes the question-and-answer session. I would like to turn the conference back over to Mr.
Zikos for any closing remarks.
Gregory G. Zikos
Yes, thank you very much for being here with us today. We appreciate your interest in Costamare.
These are challenging times for container shipping, but we hope that over the next couple of quarters we are going to able to come up with the transactions that will hopefully generate good returns for our shareholders. Thank you.
Operator
Thank you. That does conclude our conference for today.
Thank you all for participating. You may now disconnect.