Rickmers Maritime Trust

[Musicwhiz]

Hi Nick,

Perhaps if you don't mind, could you share with us which aspect of your logic was flawed? I think everyone on the forum will have much to learn from your thought processes and how you figured it out, and since I am also continually learning about Trusts (having been vested in FSLT previously), this is also of interest to me.

Only if you are comfortable, of course. Thanks!

[Nick]

Divestment of Rickmers Maritime

I liquidated Rickmers Maritime Trust today after much thought over the past few days. This investment was made quite a short while ago , after their EGM approval of the Group's restructuring. I made this investment for the following reason:

1) The Trust was paying out 13% of its cash-flow hence giving it sufficient buffer in the event of a dip in revenue
2) The Trust's retained earnings will boost its book value significantly over the next few years.
3) The Trust can exit the LTV waiver program in the next 3 years and hence raise its dividends significantly
4) The Trust cash-pile will rise with time hence allowing it to make yield accretive acquisition in from 2011 onwards.
5) Possibility of favourable loan refinancing or new debt sources ie bonds.

However, recently, I came to realize that my original investment premise was flawed.

I will give an explanation on my views for each of the 5 original investment premise.

1) This is one of RMT main strength since it is only paying out less than half of its net distributable income after loan amortization. I have no issue here. I am quite certain RMT can maintain dividend payouts at this level.

2) My exchange with fellow former d.o.g. forced me to re-think this premise. RMT net profit currently stand at US$7 million every quarter and it pays out US$2.4 million to unit-holders on a quarterly basis. This implies that the Trust will retain around S$18.5 million annually. However its book value stands at US$322 million so the growth in book value is a mere 5.7% which isn't really fantastic considering its debt to equity ratio exceeding 225%. Essentially, RMT has maxed its gearing but doesn't promise much growth either.

To put things into perspective, I studied a listed ship leasing company called Ship Finance with similar debt to equity ratio. In 4Q 2006, its debt to equity ratio stood at 290% with an equity of US$600 million. However by 3Q 2010, its book value has grown to a whooping US$790 million with debt to equity ratio of 245%. This means that Ship Finance has seen its book value grown by a third in less than 4 years or approximately 8% annual growth rates. Its common share float has increased by 10% in that period as well so retained earnings was the main driver in its book value growth. Moreover, it is doing so while paying out 60% of its net earnings to shareholders as opposed to RMT's 34%. PST, on the other hand, promises growth in book value of 3.3% but its debt to equity ratio stands at 83% and it pays out 70% of its net profit to shareholders. The recent US$330 million worth of vessel acquisitions will increase its retained profits substantially from 2012 onwards. Hence, I feel RMT is actually under-performing its peers. This could be due to its high interest expense and acquiring vessels at peak prices.

3) This remains a high possibility and the "best case" scenario. However, if the shipping cycle takes a dip, this may lead to negative implications. Personally, I never liked the idea of LTV covenants in loans since it exposes the Trust to the very volatile asset valuation cycle. What is the point of making the Trust extremely anti-cyclical when you expose it to volatile vessel valuation movement? Granted, LTV also has its good points , if asset valuation rises, the Trust may be able to borrow more money. The last crisis exposed the terrible weakness behind LTV covenants - it is no surprise that every shipping trust listed in Singapore with a LTV covenant (RMT and FSLT) suffered a terrible blow.

4) A quick glance at ship leasing companies around the world will illustrate the cautious acquisitions that are taking place in order to secure contracts with blue chip firms while lowering the average capital cost of each vessel in their portfolio. PST has agreed to US$330 million worth of acquisitions so far this year while ship leasing companies like Ship Finance has started acquiring vessels in 2010. PST's recent acquisition of 9 vessels have an average revenue to asset yield of 16-18% while RMT current fleet have a similar ratio of 13%. In other words, there are plenty of yield accretive opportunities out there. I am afraid that RMT may miss out on this opportunity. Moreover, with its highly leveraged balance sheet, I don't think there is more room for acquisition. It is just unfortunate that it chose to expand at the height on the shipping bull. RMT started 2007 as the largest shipping trust in Singapore with a large pipeline of vessels however today it faces a great risk of losing its lead within the next 2 years to PST.

5) I am afraid of cash calls from the Management to repay loans in the future. Loan refinancing may be years away. As d.o.g pointed out, it is the Manager's interest to grow the Trust asset value hence the risk is always there. Moreover, its sharp discount to NAV will make it hard to acquire value-enhancing acquisitions. There is some irony here - RMT needs to get its unit price to NAV range to raise funds to lower gearing and hence increase its payout but the only way to increase its unit price is by increasing its DPU which it can't unless its gearing drops -> so it is stuck. Ship Finance dividend yield stands at around 6-7% while PST yield is around 8.9% so it is easier to make value enhancing acquisitions with equity fund raising (if need be).

Essentially, point (2) and point (4) was my bug bear especially after the PST acquisitions.

Disclaimer: Shipping Trust is a high risk investment. This is not a call to buy or sell. I am not responsible for the accuracy of any data here. This represents my own POV.

Disclosure: Vested in PST. I just glanced through Ship Finance over the weekend so my understanding of its data might be flawed.

[iff]

After much thought, I have decided to fully liquidate my shareholdings in Rickmers Maritime Trust.

Disclaimer: Not a call to buy or sell.

Hi Nick, does your "fully liquidate" means cashing out from this investment?

Yes...I sold everything. I bought this Trust very recently - a few days after the EGM approval for its re-structuring. I have come to realize that my original investment premise was flawed and hence I decided to sell the Trust.

Hi Nick,
We all learn and review along our investment path
Every decision is good one as long as we are clear about the objectives. Cheers

[Nick]

Hi Nick,

Perhaps if you don't mind, could you share with us which aspect of your logic was flawed? I think everyone on the forum will have much to learn from your thought processes and how you figured it out, and since I am also continually learning about Trusts (having been vested in FSLT previously), this is also of interest to me.

Only if you are comfortable, of course. Thanks!

Hi Musicwhiz,

I noticed that you do the same for your past divestments ie Ezra, Pac Andes, FSLT etc. I will attempt to follow your foot-steps. I posted a brief explanation above

Hi Nick,
We all learn and review along our investment path
Every decision is good one as long as we are clear about the objectives. Cheers

I agree with you whole-heartedly

[Nick]

A piece of good news for Rickmers unit-holders.

CSAV EXTENDS CHARTER OF M.V. KAETHE C. RICKMERS FOR ANOTHER 12 MONTHS AT SIGNIFICANTLY IMPROVED CHARTER RATE

....Compañía Sudamericana de Vapores (“CSAV”), has declared its option to extend the charter of M.V. Kaethe C. Rickmers for an additional 12 months. The extension will take effect on 25 March 2011 and the renewed lease is fixed at a daily net charter rate of US$23,888 per day, against the current net rate of US$8,288.....

http://info.sgx.com/webcoranncatth.nsf/V...600330270/$file/CSAV_to_Extend_Charter_of_Kaethe_C_Rickmers.pdf?openelement [Press Release]

This should increase RMT revenue by US$5.69 million. But note that this is still a 1 year T/C so there is no assurance that the market rates will remain at such levels in early 2012. But over-all a long over-due good news for the Trust.

(Not Vested)

[nextwave]

guys,

unfortunately am pressed for time, and there have been some very good posts on this, all i will say is

do NOT invest in shipping trusts from a buy and hold perspective, the whole business model is to make themselves rich at the expense of shareholders

they have NO similarity to REITS

[Nick]

guys,

unfortunately am pressed for time, and there have been some very good posts on this, all i will say is

do NOT invest in shipping trusts from a buy and hold perspective, the whole business model is to make themselves rich at the expense of shareholders

they have NO similarity to REITS

Hi nextwave,

I have read many of your post here and they are extremely educational. As a unit-holder of PST, I am quite keen to learn why would you classify all shipping trust to have poor business model.

Personally, I would consider PST business model to be pretty excellent (superior to many REITs and Trust) because it has loan re-payment plan and its cash are being retained for asset renewal and even growth (albeit a small amount). Most business trust and all REITs are not able to repay their loans without turning to unit-holders for $$$ nor do they retain income to replace depreciating assets (ie BOT plants, utilities or leasehold land). I may be wrong so I await your views to learn more.

Thanks for sharing

[Zelphon]

guys,

unfortunately am pressed for time, and there have been some very good posts on this, all i will say is

do NOT invest in shipping trusts from a buy and hold perspective, the whole business model is to make themselves rich at the expense of shareholders

they have NO similarity to REITS

On the contrary, I am vested in Rickmers via long term buy and hold strategy...

Reason being of the deep discount to NAV and stable and brightening prospect of the Trust....

The charter extension news today could be one of the many good news to come as shipping recovers...

The Trust is now having only 14% payout ratio and capped at this rate for the next 3 yrs with cap DPU of 0.70 US cents... means that after 3 years... the Trust will most probably be cash rich...

Whether they will reward shareholders with this cash or expand, we won't know but with a stable yield of 7% for the next 3 years at current price with a huge upside potential, Rickmers is a good mid term counter...

Another thing to note is the century old brand name of Rickmers.. The Rickmers Group has made it clear during the recent crisis that they will know allow RMT to fail and tarnish the reputable name of Rickmers...

[peter lee]

on the subject of investing in Rickmers via long term buy and hold strategy... i am still confused about it .

pse rectify me is i am wrong;

for medium term ( may be a few years), due to better chartered rate, the earning of this company can be better, payout can be better, debt/equity ratio can be better too, ...

but what is the life span of a ship ? twenty or ten years.
is the depreciation of ships taken account
in arriving the net earning or distribution ?
eventually, will the ships be write-off?

whereas for REIT, especially freehold properties,
eventually, i do not think properties will be write-off.

thank you for any replies.

[Nick]

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.

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.

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.

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.

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