Danaos Stock: Undervaluation And Strong Returns Ahead (NYSE:DAC)

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Danaos Corp. (NYSE:NYSE:DAC) CFO, Evangelos Chatzis, joined Value Investor’s Edge Live on 16 June 2022 to discuss the current containership leasing markets and capital allocation priorities going forward. DAC has been a massive winner from the ongoing supply chain crisis, but they have taken the long-term view with very responsible moves including comprehensive refinancing, massive deleveraging, and fixing their fleet onto medium- and long-term contracts to lock in sky-high rates. DAC also has benefited from a significant investment in Zim Integrated Shipping (ZIM), which they have partially monetized over the past six months.

Despite executing in near-perfect form, DAC stock has been stagnant the past few months and has now fallen back to negative territory y/y. This position is one of our top ideas at Value Investor’s Edge, and we were very encouraged by the recent authorization of a $100M share repurchase program. DAC short interest has increased this summer and now looks to be a coiled spring ahead of what’s expected to be multiple years of consecutive earnings blowouts amidst surging free cash flows. Our current fair value estimate at Value Investor’s Edge is $125/sh, which implies around 80% upside to recent trading ranges.

This interview and discussion of the underlying containership markets is relevant for anyone with container shipping interests or investments, including firms such as Atlas Corp. (ATCO), Costamare (CMRE), Euroseas (ESEA), Global Ship Lease (GSL), Matson (MATX), Navios Partners (NMM), Textainer Group (TGH), Triton Intl (TRTN), and Zim Integrated Shipping (ZIM).

Topics Covered

• (0:00) Intro/Disclosures
• (1:45) Update on overall containership leasing markets.
• (6:00) What is the market missing when selling off all these stocks?
• (8:15) Any restrictions with the share repurchase program? Available now?
• (10:15) Why $100M for the repurchase program (vs. more or less)?
• (11:30) Why not just take the company private?
• (14:15) Review of stock price vs. enterprise valuation.
• (17:45) Newbuild strategy and overall approach?
• (21:45) Target charter durations?
• (24:15) Planned leverage for newbuild assets?
• (27:30) When might more newbuilds be added?
• (33:30) Likely economic return from newbuild transactions (ROE, etc)?
• (36:15) Any potential for secondhand vessel purchases?
• (37:30) Potential for more vessel sales? Forward sales?
• (42:30) Dividend policy: potential for a special div or near-term raise?
• (44:45) Any changes to ZIM divestment policy?
• (46:00) Charter nuances with HMM extensions, CMA CGM options, etc.
• (49:00) Repurchase lock-up? Q2 reporting timeline?

Full Interview Transcript

J Mintzmyer: Good morning, everyone. Welcome to Value Investor’s Edge Live. We’re recording on the morning of June 16, 2022, at about 8 a.m. Eastern Time. Today we’re hosting Evangelos Chatzis, the CFO of Danaos Corp.

A reminder, before we begin our discussion today, nothing on the call constitutes official company guidance or investment recommendations of any form. I currently have a long position in Danaos Corp., stock symbol DAC. Hi, good morning, Evangelos. Thanks for joining us today.

Evangelos Chatzis: Good morning, J. Thank you for hosting us.

JM: Yes, absolutely. We’ve had a busy week here. We’ve done a lot of interviews across the sector, and what a volatile time for all stocks, and especially for the containership ones. So we’re happy to have you on the line, and hopefully talk a little bit more about the business and some of the recent developments.

EC: By all means.

JM: Yes, absolutely. So we’ll start out broadly, and then, of course, we’ll get to, I think what a lot of folks will want to talk about, which is of course capital allocation, and the recent share repurchase. But let’s start off big picture first and work our way there.

So broadly starting out, can you talk a little bit about the container ship leasing market? I know the freight rate market, we’ve seen a lot of seasonality, some of the rates are coming off a little bit. But what about on the leasing side of the business that you’re dealing with? What have you seen the last few months?

EC: Yes, I mean, containership charter rates haven’t been affected to-date. Of course, you have to bear in mind that there aren’t that many ships available to be charted prompt. So the few ships that open up, maybe three, four, six months down the road there, you can charter them pretty quickly, at equivalent rates to what was attainable in Q1, let’s say.

What we have seen however, is liner companies, post the war in Ukraine, and all the uncertainty that ensued with the energy crisis and inflation, and all these other things that the markets are responding already to all these things, charterers are not as keen as they were to fix forward 12 to 18 months, which was the case previously. So there hasn’t been a lot of charting activity over the past, let’s say, three, four months. But whatever is prompt, it’s fixed at for good periods and at good rates. And that’s where we are today.

JM: Yeah, certainly, I mean, we’ve seen that you put out a press release earlier this year, and you had forward fixed around a dozen vessels. And some of those didn’t even open, I think until 2023, or even into a little bit of ‘24. As I recall, some of those extended all the way out to 2028.

EC: Correct.

JM: Pretty significant.

EC: Yeah, this is not happening now. But we have a ship that was on a six months market rate status, which is expiring in October, which has already been extended for three years, at a very good rate equivalent to what was. So charter vessels that open up in the near term, you will always fix them because liners need them. I don’t think people at this point are willing to sort of book forward as much as they used to before and I think once the situation with the war and inflation and the effects of all that on demand clears up, I think activity will resume.

Also China was closed for a prolonged period. And that also doesn’t help. So we need to get back to some sort of normality. And probably, then we’re going to see a spike, because all of the activity that will be deferred to that point.

JM: Yeah, it definitely makes sense. It seems like there’s a lot of waiting and seeing on for both sides, right. The liners are reticent to sign a very long term extension at this point. And there’s not really any ships available anyways, right. So it’s not really even a pressing matter until, what next spring, next summer for most of these ships?

EC: That is correct. I mean, we have now ships opening up, Q3, Q4, next year. So as you said, it’s not a pressing matter. And it’s not a concern at this point.

JM: I mean, one of the interesting things that we’ve seen in the stock market is, of course, everything is falling, right. But we haven’t seen a lot of discretion in the market between the stocks with immediate spot exposure, whether that’s a liner company, right, or whether that’s even a different industry like dry bulk, right, versus a company like yours, which is 100% contracted out this year, very high percentage contracted out next year. You have charters that run all the way to 2028. What do you think about that? Is that — does that surprise you at all? What do you think the market’s really missing here?

EC: Unfortunately, it does not surprise me. Because I guess this is sort of herd mentality in the good sense of the term, right. So people, when it comes to shipping, we’ve seen that many times before, tend to move in one direction without giving merit to particular companies. And so on and so forth. So if it sell, it sell across the board.

And actually — and we’ve always been saying that share repurchase program is always opportunistic by nature, of course. And we were nudged quite a bit, if that’s the right term, to put together a share repurchase program. And obviously, when your sale price is cheap, in relative terms, when if you think that saturate mentality is going to push your sale price lower, for reasons that I don’t understand, because we’re the same company we were three months ago, even stronger now I’d say, then is the right time to initiate such a program.

So yes, the market is very volatile. Unfortunately, people don’t always distinguish good apples from bad apples. But this also presents opportunities.

JM: Yeah, certainly. I think anyone who owns the stock, of course, it depends on emotionally, psychologically, it depends what when you bought it, when your cost basis was, but if the stock’s going lower, and the business value and the business setup has not changed, then obviously that creates more opportunity as you mentioned. Since you mentioned the share repurchase, I guess we’ll segue kind of right into that. So you announced it early Tuesday morning. Are there any sort of restrictions with that? When can you start to use it if you wanted to?

EC: Oh, we can start using it immediately. And we will use it when we will consider it appropriate. We will monitor the share price and we will act accordingly. There is no — there are no restrictions or other bells and whistles attached to it. It’s up to the discretion of the management to execute on it when it considers it appropriate.

JM: One of the concerns or something that I’ve heard and we’ve kind of discussed a little bit is there’s these periods, they call like blackout periods between like maybe when a quarter is over and before the results are reported things like that, one of the concerns is that in such a volatile market like this, there might be a case where there’s a blackout period or such of a month or more. And that’s when the stock is extremely volatile. Does that apply to this? Or is there any sort of program that can help mitigate that?

EC: Well, we could do a 10-5b-1, I think — unless I’m mixing up the terminology here, where you have a specific program on the basis of which you can trade, regardless of the window. We haven’t activated yet. I think for the time being we’ll keep it simple. And we’ve seen the process, how we deal with it. This is obviously not going to be done overnight.

We have the authorization in place. And I don’t believe that the trading windows — they’re not that big anyway. Blackout windows will affect our ability to execute on the program efficiently.

JM: So when we think about the $100 million sizing, what brought you to that decision? Why $100 million and not $50 million or $200 million? Or was there a specific — I mean, it’s a nice round number. Was there any other thoughts behind that?

EC: Oh, there was discussion within the Board, as to what the appropriate quantum is. $50 million was too little, $150 million sounded as a bit too aggressive. We don’t want to hurt the float, as we’ve said time and again before. We want to maintain the good liquidity trading characteristics that the stock has. So I think $100 million was the consensus that it was the sweet spot. It’s a decent number. And at the same time, it doesn’t really — we don’t believe is going to hurt the free float and the trading of the stock.

JM: As the insiders interest right now, I believe it’s around 44%. And when a repurchase goes forward, if it does, we hope it does it, it would be extremely accretive to everybody to repurchase at these prices. As that goes forward, the insider interest goes higher.

EC: Yes.

JM: What’s the, I guess — I mean, I don’t know, I put myself in John’s shoes a little bit. And I just wonder at these insane prices what’s stopping a take under, or take over, as it were. Take under or what someone else might call it?

EC: I mean, obviously, there is alignment of interest. We’ve said that time and again, with John having his percentage. And it’s the right time of when to implement such programs. One could always argue about it. On the other hand we want to be a public company, we care about the trading of the stock. We want access to public equity, and debt. We’ve recently tapped the public debt markets. And we want to have a diversity of — when sourcing capital in order to accommodate future needs, which at some point will start increasing as we continue building our order book and renewing our fleet. So yeah.

JM: Yeah, you hope for better valuations in the future. No, it makes sense, I look at the valuations, and it just depends. I mean, at this point if you look at the stock price, and you compare it to — and you can even just compare it, and you know this better than I do, Evangelos obviously, as the CFO, but I mean, you can just look at the backlog of EBITDA that you have already set. And you can look at a residual demolition value of the older ships, and you get to a value that’s higher than your enterprise.

It’s, I mean it’s…

EC: I know. Trust me, I’ve done this math, I’ve done the math. And it’s disheartening that we’re trading where we are. But we’re — I mean, the insiders are long term holders. And as you said, looking at a price on your screen, to a certain extent, it’s psychological. But if you believe in long term value, and you can be patient and you’re certain you’re doing the right things, then it’s that much better.

And then hopefully, our investors will see through that, and will go hand in hand.

JM: Yeah, it’s been a very interesting market. One quick note before we move on, and I don’t know if this is something that would fit nicely in one of your future presentations or not. But one thing I really noticed in the last few years — and I mean, it’s really in the stock market in general, but a lot of people in the stock market, only look at the share price, right? They only look at the equity component.

But when somebody buys a house, they don’t say that they buy a house for $0.5 million, and maybe they put $100,000 down. They say I’m buying a $0.5 million house. They don’t say I’m buying $100,000 house, right? And when the house goes up in value from, $500,000 to $600,000 and their equity goes from $100,000 to $200,000 they say, oh, my house went up 20%, right, it went from $500,000 to $600,000. They don’t say my equity went from $100,000 to $200,000. Like it’s a stupid way of looking at things.

And yet, with a stock like Danaos Corp., you have a stock that went from $10, it was actually like $4 or $5, but it went from, say, $10, to all the way up to $107. Now we’re in the $70s, but your enterprise value hasn’t even moved. I mean, year-over-year, your enterprise value is actually down. So I don’t know if there’s a way to illustrate that better in your presentations or whatnot. But it seems like there’s a disconnect from folks who look at your stock and think it’s expensive, or think that it’s way higher, when in reality — does that make sense, when I’m saying Evangelos?

EC: Oh, of course it does. Of course, it does. Makes perfect sense. And we’re generating a lot of cash, we’re considerably, we’re considerably paying down debt, right. And as you said, enterprise value is not moving. So I mean, we do have — in our deck we do show enterprise value. But that’s a good point. I’m going to — I’ll have to think how I make the point more forcefully in future presentations.

JM: This is interesting, because obviously, your backlog has increased, you added some vessels last year, and vessels that turned out very well for you, right, the joint venture acquisition. You brought the Alpha series of vessels, the ZIM shares have been very economic for you. I’m sure there’s been a lot of improvements that have happened, right. And so that

EC: If you have an EBITDA contract backlog of, let’s say, $2.2 billion, $2.3 billion, and on top of that you have half a $0.5 billion or more than that, $700 million in cash and ZIM stock, which we consider liquid instruments. And your enterprise value is what 2.3, 2.4, I think it’s a pretty compelling. The numbers speak for themselves.

JM: Exactly, exactly. So that’s why — I guess that’s why I’m really glad that the Board and yourself and the management came around to a share repurchase. And I hope you use it vigorously. Because I mean, this is pretty incredible. It’s a pretty low risk proposition to invest in your own company, right. So just, I hope, use it as vigorously as possible. Hopefully, I know you said 150. Maybe it was a little high at this moment. But if the stock price stays at these levels, that’s a massive value accretion to every metric possible.

EC: Yes, agreed.

JM: So we’ll move on a little bit, because I do want there’s — a lot of other capital allocation to talk about. You talked about the fleet renewal and eventually adding ships and that sort of thing. You and I talked a couple of weeks ago about some of the economics of the new builds. But I want to get that on for more folks here. I think there was a few misconceptions from your quarterly conference call. There was, at one point, a note by John, but I think he was — I think it was just a misunderstanding. But he said something about like having no leverage on the new builds. And I just wanted to kind of flesh that out a little bit, what’s sort of the strategy with the financing and chartering of these new builds.

EC: Of course, the new builds will be financed. Actually, in terms of getting the best possible financing terms, if anything, is the new buildings that are going to get them, right, and we’re very conscious about securing competitive financing arrangements. And so the new builds will be financed. Actually, we are sort of deleveraging at this point, using all the cash that’s coming in, in order to deliver much of the older fleet. And this is work in progress.

We’re mindful of overall leverage, which at this point, net debt-to EBITDA, it’s below one. It’s going to be closer to 0.5 by year end. We don’t intend to remain at those levels. Obviously, this is going to go up. And it will be a function of financing for the new buildings. And of course, if the market turns, and the market softens and EBITDA falls to three years’ time, we’ve said we don’t want to be above three times net debt to EBITDA through the cycle.

So we are mindful of corporate leverage. And but definitely, new buildings will be financed. What John said, just to make it clear is that we have not yet secured charters for the six ships because it is our view that we will maximize returns, if we wait it out a bit, and we, I believe within the next months, probably within the year, we will ultimately fix the ships. And we will get a better outcome, we would get — we have fixed them concurrently with the signing of the contracts.

John said that we can afford to do this because we could, even in a worst case scenario, we could fund them all by equity anyway, right. So we’re not going out on a limb ordering 20 ships, without the charter that — if we cannot charter them then their financing would be a problem. But for this ship, we can afford to be more opportunistic. And that’s what was said. It was not said that we do not intend to finance new buildings.

JM: Okay, yeah, that’s helpful. That makes a lot more sense. Because obviously, it was a difference in the equity requirement between zero financing and whatever it might be. So just to clarify, in the timeline there are you saying that — I mean, obviously, there’s no guarantee, and it depends on the market condition. But are you saying kind of the goal is to get those new builds fixed on charters, maybe Q3 or Q4 of this year? Is that…?

EC: We have already circulated the specs of the ships. There is quite a bit of interest. We’re taking our time. We’re not in a hurry. My expectation is — and again, as you said, there’s no guarantee, my expectation is that within this year, we will end up fixing them. But we can afford, let’s say, to be patient, and again maximize the outcome. So that’s what we intend to do.

JM: Okay, well, assuming that goes fairly well, and you sign a reasonable contract on the duration of those contracts, do you have any idea? I mean, I know it’s a window, and it remains to be determined. But would these be maybe like four or five years or maybe closer to like 8 or 10 years, any thought on that?

EC: I think it’s going to be between 5 and 10, probably towards the 5 more than towards the 10. That’s what we’re shooting for. And it will of course, be a function of what sort of discount you’d need to agree to go up to 10, right. So we’re going to try to find the sweet spot. But I don’t think it’s going to be — definitely not below five. But we’ll see whether it makes sense to go longer, and what sort of discount we would have to accept.

JM: Yeah, certainly. It certainly makes sense. And of course, if you go with five or six, you’re talking 2029 and 2030 openings. And of course, we don’t know the markets can be good or bad. But what we do know is those ships would be very high spec, right and opening up at a time.

EC: Exactly, exactly. That’s exactly right, because they’re going to be at the top of the list in terms of emissions requirements, and all these other things. So they will always have a very good place in the market. And this is why we’re not anxious to get necessarily 10 years and accept a big discount at this point. We can afford, again on these ships to be a bit more opportunistic.

JM: Certainly. So it sounds like if everything goes well, those ships will hopefully have a charter by the end of the year that you can announce, of course, once it’s completed. And then what about financing? Is that something that gets done right before delivery?

EC: No, this is going to be arranged the first half of next year, I guess. The ships are delivering in March of 2024 through September. So it is prudent to put financing together first half of next year, I think. So we have time. There’s no pressure. And that’s when that’s going to happen.

JM: Yeah, definitely. Yeah, I know, we’re definitely talking about a speculative timetable here. I mean, things can move a little bit. But what sort of leverage — I mean, assuming right, lots of ducks in a row here, but assuming the charter 5, 6, 7, 8 years, whatever it might be, what sort of leverage is reasonable for these new builds? I mean, obviously, things can change. And it depends on the banking terms. But are we talking 50%, 60%, or do you think much higher than that?

EC: It could go up to 70% or 80%. I mean, easy. And especially when you have a good charter in place, you can maximize leverage, although maximization of leverage is not always the sole target, right. As I said before, we’re mindful of the development of overall corporate leverage. We care about our credit rating. We were recently upgraded by both S&P and Moody’s.

We are conscious of the credit quality that we need to have in order to have better access to the public debt markets. And actually, for the specific financing of those ships we want to get the lowest possible cost, right, because these are top technology vessels. They will have very good charters. Therefore whether we lever them at 65% or 75% or 80%, the extra leverage is not going to solve any problem for us. But if we can secure much better terms at 65% or 70% we will go for them. So it’s not that — the sole objective is to maximize leverage.

JM: Yeah, I mean, it’s definitely calculus. I guess my point of my questioning or my point of inquiry here is if folks look at your recent six vessels that you’ve ordered, and it’s $520 million, about 530 million, right in total CapEx, right, in the total outlay. But if you apply leverage to that, even if it’s a moderate 70%, 75%, 80% leverage to that with your charter, we’re talking like $150 million cash outlay here. We’re not talking $530 million.

EC: Exactly. Exactly.

JM: Yeah. And I think a lot of people — but we won’t get that. I mean — like you’re throwing all this money at new builds. It’s like, well it’s $150 million, not $530.

EC: Exactly.

JM: Okay, I just clear — to get that out there clearly, because I think there’s a misconception of like, how much these new builds cost and what the sort of economic returns would be. I don’t want to [multiple speakers] — yeah, go ahead, Evangelos.

EC: No, I agree. My point was, whether the equity will ultimately be 130, 150, or 170, it doesn’t make or break our capital allocation or balance sheet, right? As long as the debt that you source is competitively priced.

JM: Certainly. So one of the big narratives and one of the big pushbacks, I hear, and I understand it, as an investor, because I like repurchases, I like dividends. I think it’s good to see that immediate return. But one of the criticisms I hear a lot is a company like Danaos is only going to invest all their money into more new builds.

So first of all, that’s something that’s out there, and it’s prevalent. But do you want to expand on that a little bit, because it’s obvious that you’re interested. You’ve done six of them. It’s obvious that you might be interested in more. So I guess, first of all, how do you think about more of these? Is it — do you want to fix the charter first, and then add more or might there be several, several more added on speculation?

EC: No, I mean, we have historically built many ships. And the general rule of thumb was that we build them on the back of charters, right. So I don’t really see that we’re going to have an expanded new building program, all on speculation, right. So we will do a bit of mixing and matching. It depends on many factors. When you place the order, how the new building prices are moving, when the vessel is due to be delivered, because the further out, of course, the bigger the risks.

In this instance, for the six ships, deliveries are recently, soon, which is, let’s say 2024, where we felt pretty confident that people would fix those ships within the year. If you’re offered ‘25 or 2026 slots, it starts being different. And again building on speculation, big order book, it’s not what we’re in the business of doing. So you should expect more, not necessarily very soon, but it is on our minds. We need to renew the fleet, we need to find the right balance on capital allocation between reinvesting in the business and rewarding shareholders.

We care about long term value. And so you cannot put all of your eggs in one basket. It would be the easiest decision in the world to splash out the money to shareholders right away. It’s not how we think. We’ve made that very clear. We’re trying to be very transparent about our thoughts on capital allocation. We want to invest in the new technology of ships that are going to be — they will form the next generation of containerships. We will do so gradually. We’re going to be very mindful of striking deals that bring us the appropriate returns.

We are not going to grow for the sake of growing, if that’s what people are concerned about. We care about profitability. And we have demonstrated that because we’ve only done six new buildings, right? We haven’t done 76. And the reason for that is — partially has to do with uncertainties on future technology around fuels, and also sticking to our return targets, because we have seen a number of new building projects offered with charters that generate low single digit equity returns, on the back of 90% or 95% leverage.

We don’t believe that these projects make sense. That’s why we haven’t entered into any of them. So that’s how we’re going to proceed. We’re paying a dividend. We’ve announced the share repurchase program. I think there is room to achieve all the goals that we have, as long as we are mindful of the core principles of where we want to get to, and not rush into making decisions. I think patience is a virtue. You need to strike when the time is right, typically in shipping. And that’s what people sometimes forget it.

In shipping, you make money when — not when you’re investing at the top of the cycle. But when the market softens. And that is when you want to have the balance sheet to be able to source accretive growth opportunities and offer outsized returns.

JM: Yeah, we certainly seen that. And we’ve certainly seen those cycles in containerships, and all the other segments as well. So it sounds like Evangelos, I don’t want to put words in your mouth, so definitely correct me if I’m misinterpreting. But it sounds like you’ve done these six orders, you’re looking for charters on these six, hopefully soon in the next quarter or two.

When you get those charters or when you think the charters are very likely, maybe around the same time, you may, you might order a few more new builds. But the overall idea is not to create a huge new build order book, maybe a moderately sized one. And you want to keep resources and a strong balance sheet for the future when the market might get a lot weaker. Is that a fair summary?

EC: Yes, borrowing from, from Jamie Dimon, we want to build a fortress balance sheet. And that’s what we’re doing. The market is offering us the opportunity to do so. And that’s what we want to achieve, not just because we want to have a nice balance sheet. But exactly because we want to be able to use this balance sheet and take maximum advantage of opportunities that will present themselves going forward, no matter how the market moves.

JM: Yeah, I mean, I’m sure, John — I mean, with hindsight, I’m sure there’s nothing you could do at the time, because it would be — it had been a rough decade before. But I’m sure you wish that you had a strong balance sheet in 2018 and ’19, right. You could have bought, definitely 500 ships. Yeah, no, it’s interesting, and it’s clearly a cycle.

Can you — one last question on the new builds here just to clear up some things, and so folks can understand. Can you talk a little bit — I mean, I know you haven’t signed the charter yet, but I know you have some rough ideas. Can you talk a little bit in broad terms, kind of the economics you see here, a little bit unleveraged — you can give a range, but sort of the unlevered returns that you might see and sort of the ROE with leverage, because I think a lot of folks look at new builds, and they think these are super low return. Maybe they’ve looked at the ones that your competitor

EC: These are the transactions we did not do, right, exactly, because they were transactions back to back, placing the order with a charter, exactly with very low returns. Look, we’re targeting double digit unlevered returns, okay, that’s our target. And depending on leverage, you could get equity returns in the high teens, right. So that’s what we’re looking for. And exactly, this is why we did not pursue the transactions that others did, which is very good for them. I’m not in any way trying to be critical, but it’s not a good fit for us.

JM: It definitely depends on the terms of your leverage and things like that. I’m glad you didn’t pursue 40 new builds at 90% leverage. But I’m also cognizant of — my biggest pushback or concern as an investor. And it sounds like you’re being balanced. The $100 million share repurchase is a step in the right direction. My concern is the returns that you can get from repurchasing your own equity at this point. And I know we agree on this part that the returns from repurchasing your own equity are massive, right? I mean, it’s like literally buying $2 for $1, or buying $1.50. I mean, it’s very cheap.

So my concern is that if there’s too many new builds, or too much desire to fortify the balance sheet, then we’ll miss out on this opportunity with the shares. And if you can balance both of them, then I don’t think it’s a problem. But as long as one is not heavily pursued over the other.

EC: Well, I believe that we have the resources to pursue both, right. So it won’t be that one will be at the detriment of the other. And it’s just the matter of how you micromanage it. And when you do what you do, right. It’s a matter of timing. But the resources are there.

JM: All right. So we talked about repurchases. We’ve talked about vessel acquisitions. Evangelos, is there anything in the second hand market — I mean, you did a really interesting deal last fall. And I think you took actually a lot of criticism for it at the time, those ships that you bought last fall, and of course, the economic returns have already proven themselves. Is there any interest in other secondhand deals? Or has that ship kind of sailed? Is it too late for those?

EC: We thought that the ship had sailed even last autumn, as you say, right, and we got our hands on that deal, which was a terrific deal. So yes, we’re definitely always looking out for opportunities. They would have to be younger ships as those ships were. Those six vessels you are referring to also are top notch in terms of emissions and environmental considerations. I don’t think there’s that many in circulation, to be honest, at least not that many at reasonable prices.

So we’re not going to pay top dollar at the top of the market, definitely to buy secondhand tonnage. But if opportunities present themselves, we have the ability to act very quickly, and take advantage of them.

JM: Certainly, on the other side of that token is looking at some of your really old ships. And I say really old, I mean they’re built to do 30 or 35 years of service, but in this market, 20 years is pretty old. You sold two of them for forward delivery. You have some openings coming up in ‘23. Some of those are kind of older ships. Is there any interest on doing more forward sales to kind of accelerate that renewal of the average age?

EC: We’re not excluding any of it. As long as they can be charted for good periods and at good rates, it’s always better to keep them. But we’re not — there is no sort of hard rule on how you approach these matters. We’ll monitor how the market moves, and we will decide accordingly.

JM: Yeah, certainly interesting. And one last criticism, just I mean, I’m basically passing along questions or critiques I see of Danaos Corp. One concern I’ve seen is that if the market softens in the ‘23, or ’24, ‘25, hopefully it’s more of ‘25 and less of ’23, right, hopefully, we don’t know. And some of these vessels are on lucrative charters, but they’re going to come off their charter, and they’re going to be older. They’re going to be 20 years old, right. And they come off the charter and the rates are so bad, maybe it’s ‘25. And the rates are really bad. Will you keep a ship on speculative at that point, Evangelos if the returns don’t make sense? Or would that be an obvious demolition candidate, get rid of it and focus on the newer ships?

EC: Yeah, I mean, look we’ve been through a big since ’08 financial crisis, through COVID, we operated the company during a very bad market. And during those 12 tough years, we did demolish a number of ships, when it was evident that it did not make sense to maintain a 25 year old ship, pay for its dry docking and upkeeping and the vessel would barely earn OpEx, right. So yes, we’re not going to shy away from scrapping tonnage if market fundamentals are such that lead to such a conclusion, right.

So we’re not sentimentally attached to the vessels. And actually, exactly this goes also to my earlier point about reinvesting in the business and ordering new tonnage. Exactly — we want to maintain the competitive edge of this company, we need to order modern tonnage, exactly because of the effects of a softening market may be. So you may have to dispose some older tonnage in a very bad case scenario. But you will still have your new ships that will have come online by then to replenish your income.

And to be honest, I don’t see that we’re headed off of a cliff. It’s a cycle, shipping is cyclical. At some point the market will turn. But given the fundamentals the house view at this point is that, yes, the market will correct. And maybe the high rates that we’ve been able to achieve will come down a bit. But even at the corrected levels they will still be super healthy. So I don’t foresee that. Of course, I don’t have a crystal ball. But with what we know today, and unless there are other black swan events that I cannot predict, we don’t see a hard landing of the market in the near future. I don’t know if that helps. But that’s our view.

JM: I admire the optimism, but there’s definitely some stormy clouds on the macro front, and we’ll see how they transition themselves. Of course, you have a layer of isolation due to the structure of your contracts. But of course at some point, right, the market strength will matter. Hopefully the market doesn’t turn for another year or two. It just — it’s hard to tell at this point, I think from the macro side of things. I’m sure…

EC: It is hard. And we don’t — we cannot tell the future, certainly.

JM: So look, we talked a lot about capital allocation. The last sort of leg of that chair that I want to address is the dividend. The dividend — you recently started the dividend last year, right, after many years of being unable to pay a dividend due to obvious balance sheet reasons. You started off as decently sized, considering you hadn’t had a dividend, but now it’s a tiny percentage, right of your cash flows, very small percentage. Is there potential for like a near medium term dividend raise? Is there any interest in something like a special dividend? Any sort of thoughts put out to that?

EC: Well, I cannot comment on a special dividend, because this is up to the discretion of the Board, as it is a one-time item. But I can tell you about the regular dividend that we have committed on to keep on growing it. And that’s what we intend to do. Now the pace of such growth — again, we will see it going forward.

We have recently raised the dividend by 50%. And our goal is to have a sustainable dividend that the company is going to be able to pay going forward. And paying out a big regular dividend at this point, with all the concerns that you rightly mentioned about the coming years, without supporting it with further growth and new ships coming online and new EBITDA generated from new builds and all these other things, we don’t believe it’s necessarily prudent.

So we want to have an all-weather dividend. And that’s where this is all coming from. And yes, we want to have to continue growing it at the proper pace. And that’s what we’ll do.

JM: What about the remaining stake in ZIM? And I know we’ve talked about this on lots of different calls. You divested a lot of it over the past few quarters. Do you think you’re going to be — I mean, it’s obviously non-core. I think you’ve been pretty clear on that. Is this something you think you’re probably going to be out, as in by maybe the end of this year? Is that a reasonable target? Or do you think it might take longer? Any thoughts on that?

EC: Our position hasn’t changed? It’s non-core, and as you said — we said, we will gradually divest. And that’s what exactly what we’ve been doing. And the numbers of ZIM look great for this year, right? And there is a lot of dividends that are going to come our way, come the way of all ZIM shareholders. And so yes, it’s going to be, again, gradual divestment. The dividend income is also on our minds. We want to sort of maximize that position as best as we can.

So I don’t want to give you a specific timeline that you’re going to hold me to, but yes, near term, whatever that means, 12, 12 to 18 months, this is going to probably not be on our books anymore.

JM: Okay, thank you. Evangelos. Two things. And I think we — you and I have talked about this in our previous call, but I just want to make sure it’s out there for all investors, asking a little bit of nuance, first of all, on the Hyundai, HMM vessels that come open in 2024, my understanding is those have a three — I think it’s a three year extension on those. Can you talk a little bit about when that needs to be exercised? Is it all in one chunk, all three years, all or nothing? And then when do they need to exercise that?

EC: Yes, it’s a three year extension of the current rate, which is north of $60,000. And then they need to declare it close to the firm period expiry. So this is not going to be declared anytime soon. Actually two, three years ago, no one was even looking at these extensions as candidates to be extended. But the way the market has developed, these are actually good rates for these ships. But we’re not going to know before we’re close to the expiry of the charter.

JM: Yeah, makes sense. I remember looking at those even just two years ago, and thinking those rates were laughably high. There’s no way. And now they’re — if anything, they’re low. So yeah, it’s funny how that changed. Other nuance is on the CMA-CGM ships. I know we talk about this a lot. But my understanding is they have a six month option on those ships — or a six month mandatory period where they have to pay whatever the broker says the rate is for six months, right, and it could go up to 12, right, 6 to 12. But they’re only six because the rate is so high. Is that right?

EC: Exactly. I mean, we have already fixed the number of them for the six month period at market. And we’ve been earning close to $150,000 a day on the ships. Because that’s where the spot rates are for such vessels today, right. And actually, on the latest one of them, where it is running at north of 150,000 through October of this year, it has already been extended for three years at a pretty high rate. So that’s what we expect happening on all these other ships of the series.

JM: Yeah, no, that’s helpful. That makes sense. I think the one before it was also extended. Right? I think the one before it was extended for five years.

EC: Yes. Correct. The one before that was extended for five years. That’s correct.

JM: Okay. So I guess we’ll see what happens on the rest of them. But it sounds like those six month charter rolls are happening and they are happening at very similar rates to what we already saw. Is that fair? Yes. Yeah. Okay. Final question for you on kind of a nuance here. And I if you can’t answer exactly, that’s okay. But I think people are curious. In the U.S., there’s a period of lockup where a lot of companies cannot repurchase within two weeks of the close of the quarter, which is, I mean, that’s like today, right, two weeks to the close of the quarter, and then they can’t repurchase until after they report results.

Does that sort of like draconian lockup apply to you? Or is it something different, like internally that you’ve figured out?

EC: My understanding from the latest discussion I had with our lawyers is that we can still execute on the repurchase. I think we have to be a bit more mindful of — from June 30, through the publishing of earnings, but even then, when there is nothing material sort of happening, which is non-public. I think one shouldn’t be in trouble for repurchasing shares. I mean, we will observe whatever needs to be observed. We always do such — we handle such matters in a prim and proper fashion. But we’re not going to overdo it.

We’re going to do what is required and what securities law prescribes. But I don’t think that there are any hard restrictions as long as you know, things have been — that are happening in the background have been already disclosed to the markets, which is the case at this point. And people are properly informed.

JM: Yeah, that’s helpful Evangelos. Just a piece of advocacy for me, I hope, obviously, depends on your auditors and how fast you can turn things around. But I would advocate that you report your Q2 results as soon as possible. I mean, if you have a choice between the end of July and the middle of August, let’s do the end of July. Yeah.

EC: We always — we always try to report and we typically do that, at the end of the next month, after the quarter ends, and I think this time we’re going to be reporting earnings probably August 1, which is a Monday. That’s the most likely date. But in any event, when we have more clarity on the specific date, we will put out a release. But that’s what I expect.

JM: All right, Evangelos, that’s fair. I would love to see 25 July, Monday too, But no, the sooner the better and appreciate what you’re doing. Evangelos thanks for joining us this morning. Thanks for taking the time to answer some of these questions.

EC: Thank you very much, J. Have a good one.

JM: You as well. This concludes our interview with Danaos Corp CFO Evangelos Chatzis, recorded on the morning of June 16, 2022 at about 8am Eastern time.

As a reminder, nothing on the call today constitutes official company guidance or investment recommendations of any form. I currently have a long position, long exposure to Danaos Corp (DAC).