Hi Peter Lee,
I am a unit-holder of Pacific Shipping Trust and was vested in RMT for a few months so let me share my views on your queries.
Vessels tend to last for 20-30 years depending on the vessel class and maintenance. Unless I am mistaken, PST depreciates its vessels with the assumption of 30 year life-span with 0 scrap value. Rickmers also assumes that its vessels have a useful life of 30 years.
Depreciation is considered to be an expense in the P&L Statement. It is added back in the cash-flow statement. A shipping trust may choose to distribute cash-flow from depreciation to its unit-holders (100% cash payout) but its equity will decline. A good example would be FSL Trust in 2007 and 2008 and KGT at the moment. PST, on the other hand, has always retained cash-flow from depreciation so its equity has remained constant (and even grown). Currently, PST only pays out 70% of its net profit (or 45% of its cash-flow). RMT, at the moment, is only paying out a third of its net profits (or 13% of its cash-flow) so depreciation is definitely taken into account. Essentially, as long as the trust is paying out less than it earns, it is able to replenish its assets with time.
Hence, both PST and RMT should be able to replenish its assets and even grow its asset base slowly with time.
Ships are being depreciated on a regular basis so there is nothing to be written off. At the same time, a well-run shipping trust would be using its cash-flow from depreciation to renew the fleet. Using PST as an example, its fleet value has decreased over the past 2 years but its NAV has increased because it is paying out less than it earns and so the cash retained can be used to re-pay loans or kept in the bank for fleet renewal. In 4Q 2008, PST owned US$462 million worth of vessels and its NAV was US$223.5 million with a total debt of US$229.9 million and US$13.8 million cash. By 3Q 2010, its vessel valuation has declined to US$433 million but its NAV has risen to US$239.3 million with a total debt of US$199.9 million and cash (including vessel deposit) of US$24.0 million. This is a good example of how a well-run trust can grow its value with the right capital structure. Nearly every company in the world owns depreciating assets and yet is able to grow its value by heeding a conservative distribution policy and making the right acquisitions. Shipping trust are no different.
I must add that the 3 local shipping trust are not as good as its US peers in terms of size, debt funding, fleet diversification and track record. Time is needed for the local shipping trust industry to take off.
Most local REITs own leasehold properties. I am not too sure whether can the lease be renewed cheaply ?
Hope this helps
I am a unit-holder of Pacific Shipping Trust and was vested in RMT for a few months so let me share my views on your queries.
(28-12-2010, 04:05 PM)peter lee Wrote: what is the life span of a ship ? twenty or ten years.
Vessels tend to last for 20-30 years depending on the vessel class and maintenance. Unless I am mistaken, PST depreciates its vessels with the assumption of 30 year life-span with 0 scrap value. Rickmers also assumes that its vessels have a useful life of 30 years.
(28-12-2010, 04:05 PM)peter lee Wrote: is the depreciation of ships taken account in arriving the net earning or distribution ?
Depreciation is considered to be an expense in the P&L Statement. It is added back in the cash-flow statement. A shipping trust may choose to distribute cash-flow from depreciation to its unit-holders (100% cash payout) but its equity will decline. A good example would be FSL Trust in 2007 and 2008 and KGT at the moment. PST, on the other hand, has always retained cash-flow from depreciation so its equity has remained constant (and even grown). Currently, PST only pays out 70% of its net profit (or 45% of its cash-flow). RMT, at the moment, is only paying out a third of its net profits (or 13% of its cash-flow) so depreciation is definitely taken into account. Essentially, as long as the trust is paying out less than it earns, it is able to replenish its assets with time.
Hence, both PST and RMT should be able to replenish its assets and even grow its asset base slowly with time.
(28-12-2010, 04:05 PM)peter lee Wrote: eventually, will the ships be write-off?
Ships are being depreciated on a regular basis so there is nothing to be written off. At the same time, a well-run shipping trust would be using its cash-flow from depreciation to renew the fleet. Using PST as an example, its fleet value has decreased over the past 2 years but its NAV has increased because it is paying out less than it earns and so the cash retained can be used to re-pay loans or kept in the bank for fleet renewal. In 4Q 2008, PST owned US$462 million worth of vessels and its NAV was US$223.5 million with a total debt of US$229.9 million and US$13.8 million cash. By 3Q 2010, its vessel valuation has declined to US$433 million but its NAV has risen to US$239.3 million with a total debt of US$199.9 million and cash (including vessel deposit) of US$24.0 million. This is a good example of how a well-run trust can grow its value with the right capital structure. Nearly every company in the world owns depreciating assets and yet is able to grow its value by heeding a conservative distribution policy and making the right acquisitions. Shipping trust are no different.
I must add that the 3 local shipping trust are not as good as its US peers in terms of size, debt funding, fleet diversification and track record. Time is needed for the local shipping trust industry to take off.
(28-12-2010, 04:05 PM)peter lee Wrote: whereas for REIT, especially freehold properties, eventually, i do not think properties will be write-off.
Most local REITs own leasehold properties. I am not too sure whether can the lease be renewed cheaply ?
Hope this helps
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.