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Business Context and Reporting Period

Company: Safe Bulkers, Inc.
Filing Type: Form 20-F (Annual Report)
Period Ended: December 31, 2010
Business Overview: Safe Bulkers is an international provider of marine drybulk transportation services, operating a fleet of Panamax, Kamsarmax, Post-Panamax, and Capesize vessels. As of February 20, 2011, the company operated 16 vessels with an average age of 3.9 years. The company is a holding company incorporated in the Republic of The Marshall Islands, with vessel-owning subsidiaries incorporated in Liberia. Operations are managed by Safety Management Overseas S.A., a related party controlled by the company's CEO.

Key Financial Metrics (Year Ended Dec 31, 2010)

Operational Metrics:

• Fleet Utilization: 98.93%
• Time Charter Equivalent (TCE) Rate: $29,534 per day (down 13.7% from 2009)
• Daily Vessel Operating Expenses: $4,342

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 5.2% to $159.7 million, primarily due to a 13.7% drop in TCE rates, partially offset by a 10.3% increase in operating days resulting from new vessel deliveries (Kanaris, Panayiota K, Venus Heritage).
• Profitability: Net income decreased 33.7% to $109.6 million. This was driven by lower charter rates and a significant reduction in "Early redelivery income," which dropped from $75.0 million in 2009 to $0.1 million in 2010. In 2009, the company recognized substantial income from charterers terminating contracts early; this was not a recurring event in 2010.
• Expense Increases: Vessel operating expenses rose 17.9% to $23.1 million due to increased crew costs, lubricant prices, and drydocking activities. Depreciation increased 41.7% to $19.7 million due to fleet expansion.
• Balance Sheet Growth: Total assets increased 28% to $805.4 million, driven by the acquisition of three new vessels and advances for newbuilds. Shareholders' equity more than doubled to $244.1 million, bolstered by a public offering and private placement in March 2010 that raised approximately $79.5 million in gross proceeds.
• Derivative Losses: Loss on derivatives increased to $8.2 million (from $4.4 million in 2009) due to mark-to-market valuation changes on interest rate swaps.

Guidance, Outlook, Risks, and Contingencies

Outlook and Growth:

• The company is contracted to acquire nine newbuild vessels through 2013, which will expand the fleet to 25 vessels with a total capacity of 2,387,800 dwt.
• As of December 31, 2010, commitments for newbuilds totaled $264.0 million. The company anticipates funding these through operating cash flow, existing cash, and additional debt financing.
• Management expects to maintain a mix of period time charters (providing stable cash flow) and spot charters (capturing market highs).

Key Risks:

• Market Volatility: The drybulk shipping industry is highly cyclical. Charter rates and vessel values are volatile and dependent on global economic conditions, particularly in China, India, and the EU.
• Customer Concentration: In 2010, three charterers (Daiichi Chuo Kisen Kaisha, Kawasaki Kisen Kaisha, and Cargill International S.A.) accounted for 76.3% of total revenues.
• Debt Covenants: The company is subject to strict financial covenants, including minimum vessel value ratios and debt-to-EBITDA limits. A decline in vessel values could trigger defaults, potentially leading to debt acceleration.
• Financing Newbuilds: Failure to secure financing for contracted newbuilds could result in the forfeiture of advance payments (totaling $99.0 million as of Dec 31, 2010) and breach of contract liabilities.
• Regulatory and Environmental: Increasing environmental regulations (e.g., ballast water, emissions) may require significant capital expenditures.

Dividends: The company paid $0.60 per share in dividends during 2010. Future dividends are subject to board discretion, earnings, and debt covenants.

Investor Verification Checklist

• Charter Rate Exposure: Verify the duration and rates of the 12 vessels currently on period time charters versus the 4 vessels available for spot market employment in 2011.
• Newbuild Financing: Confirm the status of financing commitments for the $264 million in contracted newbuilds, particularly the ability to secure debt for vessels not yet delivered.
• Customer Concentration: Assess the financial health of the top three charterers, which represent over 75% of revenue.
• Debt Covenant Compliance: Monitor vessel market valuations to ensure compliance with the "Minimum Value Covenant" (vessel value must not fall below 100-120% of outstanding loan).
• Early Redelivery Income: Recognize that the $75 million income in 2009 was a non-recurring event; future earnings should be evaluated without assuming similar early termination compensation.
• Related Party Transactions: Review the management agreement fees ($575/day per vessel + 1.25% of gross freight) payable to the CEO-controlled manager.