Rickmers Maritime Trust

[Nick]

Hi Nextwave,

I don't quite understand what you are driving at.

the trust manager is getting a free ride through
using shareholder money to buy a notoriously volatile asset like ships, value of which is known to no one, if demand is high one can techinically create as many ships as possible unlike creating as many orchard road or 5th avenue condos or shopping malls, thus fundamental value of a ship= cyclically adjusted price of steel+ other raw materials + labor, in bad times, value of ship= ZERO, study shipping cylces over a hundred years and you will know what i mean, the best of shipping titans have been unable to time the markets

No one is disputing that the vessel industry are commodity-like in nature since ship-builders can easily create vessels of any specifications within 2-3 years. But I don't understand how does this translate to vessels having 0 value ? At the moment, we are in a midst of a shipping recession and many well-run shipping liners did report a profit so if the value of their ships are zero, wouldn't their ROE be infinity ? As for shopping malls and residential properties, a property crash will wipe them out too as we can see in USA, Japan and recently in Europe. Half-completed buildings and townships due to poor capital management.

What does this mean ? It is not the type of asset that determines the Trust fate - it is the Trust's capital structure. I would consider PST assets to be crap compared to Saizen REIT 'defensive' residential properties but one managed to grow its NAV while another is under-going fire-sale.

the conversation ends right here as "dividends" are mainly an illusion that is paid through the book value of ships as long as a greater fool values the ships at that price- THERE IS ZERO VALUE CREATION

So the cash received by the Trust is false ? So the vessels owned has zero value ? So bankers are lending paper money at 80% LTV to Trust this year ? So the growth in NAV is purely fictional ? And a ghost ship transports our goods and raw materials across the high seas ?

Unless I am mistaken, the greater fool theory only holds for asset class which cannot generate any cash-flow on its own ie gold.

for those that that still like this business model, i have a proposition for you- me and my business partner are looking for 5m$ to buy a fleet of taxis in India to be run professionally, we will pay you part of the taxi rentals as dividends (yield 7%+) and charge you just 3% of total assets as mgmt fees....

I just glanced through Comfort Delgro taxi rental business which has operations in Singapore, Vietnam, Australia and the UK.

Taxi Assets: $1.214 billion
Taxi Revenue: $0.927 billion
Taxi Operating Profits: $102.1 million
Operating Profit to Asset Yield: 8.4%

Assuming Comfort charges 3% of the taxi revenue as part of its Management fees, this will cost $27.1 million. This value is a mere 2.9% of its real staff cost of the entire Comfort Group ($960 million) even though taxi revenue accounts for 39.7% of the Group's revenue. In other words, it is extremely likely, Comfort staff cost (or Management fees) exceed the 3% mark by a huge margin.

So by your logic, Comfort Delgro Management is even worst than the shipping trust Manager since its 'management fees' percentages are many times larger. And taxis are easily manufactured so again, it has zero value especially when oil prices soars. And lastly, their dividends are a mere illusion since we cannot determine its value with any certainty ? And the growth in book value is fictitious ? And so investing in Comfort is 'greater fool theory' ?

I apologize for poking fun but unless you clarify your stance on 'zero value creation' in all leasing businesses (but strangely not on leasehold assets), I think I am misinterpreting your points.




Hi Blackjack,

The shipping trust industry in Singapore is pathetic. A quick glance in the US listed shipping trust and you can see the huge disparity in quality and size. For this reason, I think it is more prudent to wait for this sector grow and attract better players before diving straight in (unless you can stomach the risk). This applies to all of the business trust here including property development and utilities. The local REIT sector is more developed and matured and hence carries a lower risk profile.

Cheers to all

[nextwave]

Hi Nextwave,

I don't quite understand what you are driving at.

the trust manager is getting a free ride through
using shareholder money to buy a notoriously volatile asset like ships, value of which is known to no one, if demand is high one can techinically create as many ships as possible unlike creating as many orchard road or 5th avenue condos or shopping malls, thus fundamental value of a ship= cyclically adjusted price of steel+ other raw materials + labor, in bad times, value of ship= ZERO, study shipping cylces over a hundred years and you will know what i mean, the best of shipping titans have been unable to time the markets

No one is disputing that the vessel industry are commodity-like in nature since ship-builders can easily create vessels of any specifications within 2-3 years. But I don't understand how does this translate to vessels having 0 value ? At the moment, we are in a midst of a shipping recession and many well-run shipping liners did report a profit so if the value of their ships are zero, wouldn't their ROE be infinity ? As for shopping malls and residential properties, a property crash will wipe them out too as we can see in USA, Japan and recently in Europe. Half-completed buildings and townships due to poor capital management.

What does this mean ? It is not the type of asset that determines the Trust fate - it is the Trust's capital structure. I would consider PST assets to be crap compared to Saizen REIT 'defensive' residential properties but one managed to grow its NAV while another is under-going fire-sale.

the conversation ends right here as "dividends" are mainly an illusion that is paid through the book value of ships as long as a greater fool values the ships at that price- THERE IS ZERO VALUE CREATION

So the cash received by the Trust is false ? So the vessels owned has zero value ? So bankers are lending paper money at 80% LTV to Trust this year ? So the growth in NAV is purely fictional ? And a ghost ship transports our goods and raw materials across the high seas ?

Unless I am mistaken, the greater fool theory only holds for asset class which cannot generate any cash-flow on its own ie gold.

for those that that still like this business model, i have a proposition for you- me and my business partner are looking for 5m$ to buy a fleet of taxis in India to be run professionally, we will pay you part of the taxi rentals as dividends (yield 7%+) and charge you just 3% of total assets as mgmt fees....

I just glanced through Comfort Delgro taxi rental business which has operations in Singapore, Vietnam, Australia and the UK.

Taxi Assets: $1.214 billion
Taxi Revenue: $0.927 billion
Taxi Operating Profits: $102.1 million
Operating Profit to Asset Yield: 8.4%

Assuming Comfort charges 3% of the taxi revenue as part of its Management fees, this will cost $27.1 million. This value is a mere 2.9% of its real staff cost of the entire Comfort Group ($960 million) even though taxi revenue accounts for 39.7% of the Group's revenue. In other words, it is extremely likely, Comfort staff cost (or Management fees) exceed the 3% mark by a huge margin.

So by your logic, Comfort Delgro Management is even worst than the shipping trust Manager since its 'management fees' percentages are many times larger. And taxis are easily manufactured so again, it has zero value especially when oil prices soars. And lastly, their dividends are a mere illusion since we cannot determine its value with any certainty ? And the growth in book value is fictitious ? And so investing in Comfort is 'greater fool theory' ?

I apologize for poking fun but unless you clarify your stance on 'zero value creation' in all leasing businesses (but strangely not on leasehold assets), I think I am misinterpreting your points.




Hi Blackjack,

The shipping trust industry in Singapore is pathetic. A quick glance in the US listed shipping trust and you can see the huge disparity in quality and size. For this reason, I think it is more prudent to wait for this sector grow and attract better players before diving straight in (unless you can stomach the risk). This applies to all of the business trust here including property development and utilities. The local REIT sector is more developed and matured and hence carries a lower risk profile.

Cheers to all

nick,

the bigger point is this- for an aset manager to earn fees and create value the asset should be enhanced similar to what is done in good reits e.g CMT buying bugis junction or IMM at market value but creating strong value through asset enhancement (e.g increasing yield by more than 200bps in a few years), or the asset should have strong potential for capital appreciation because of scarcity e.g someone that bought an orchard road property during the asian crisis.

Just buying ships and putting it on your balance sheet creates no value hence it is zero value creating although the actual asset does have residual value, please understand the difference between $ value of assets and value creation- what value does a shipping trust create?

comparison with comfort delgro is irrelevant, as the value in comfort delgro is owning taxi licences ( can you and I start a taxi service in Singapore?) and managing fleets not the value of taxis

good property values never get destroyed in crisis they always rebound ( no point using third tier names like Saizen to make a point on reits) unlike ships where if the crisis is long lasting like happened in the mid eighties, the values litererally fall to zero, book value has no meaning for ships given the volatility

btw, not sure how much you know about ship financing, but if you know anyone in the industry ask them about it- they will tell you how difficult it is to get a loan, it is max for 10 years for new ships and that too for very credit worthy borrowers , for second hand it is virtually not availiable

I don't want to argue as everyone has their own idea of what a good business is, i am just telling you a shipping trust does not qualify as a value creating business for me and i have given you the reasons, it may for you , all the best!

[Nick]

the bigger point is this- for an aset manager to earn fees and create value the asset should be enhanced similar to what is done in good reits e.g CMT buying bugis junction or IMM at market value but creating strong value through asset enhancement (e.g increasing yield by more than 200bps in a few years), or the asset should have strong potential for capital appreciation because of scarcity e.g someone that bought an orchard road property during the asian crisis.

Hi nextwave,

I do appreciate your comments.

You brought up 1 key point - Managers should be able to tap on organic growth (by using a mixture of debt and internal cash-flow) to increase distributable income. In a REIT, this is achieved through asset enhancement schemes which will increase rental rates (and quality of the rental roll) and hence lead to higher valuation. In other words, regardless of assets, a good Manager will create value in the Trust through actions which will lead to higher distributions from the very same amount of equity shareholder's pumped in initially.

I agree with you entirely and a good Manager will employ such actions to grow the distributable income organically with time. However, I don't see how this cannot be achieved within a shipping trust. A shipping trust can easily retain a portion of its net profit to fund vessel acquisitions which in turn will increase its distributable income (slightly) with no new equity raised. This is similar to the asset enhancement scheme of a REIT which aims to increase its DPU with no new equity being raised. Using PST as an example, it used a portion of its retained earnings to acquire US$183 million worth of vessels without raising a single cent of new equity. I am certain PST shareholders will experience a slight rise in DPU and hence consider such actions value-adding. In other words, while a shipping trust cannot enhance the value of a single ship, it can tap on its capital and payout structure to enhance its own value organically.

Comfort has grown its earnings by retaining its income and acquiring such businesses (with licenses) in the global market slowly with time. It can't raise the value of an individual taxi but it can tap on its capital to purchase new cabs or acquire other cab business to grow its profits.

It has been a fruitful exchange. I guess it is best for us to agree to disagree haha ! I don't view shipping trust to be superior to a REIT investment or vice versa. Each has their own merits and demerits. Both the shipping trust and REIT purchase brutally volatile assets (properties and vessels) and lease them out to generate cash. Locally, it makes better sense to invest in a REIT since the market is more matured with blue chip companies. Shipping trust is still fairly new in SGX with only 3 companies whose NAV don't even exceed US$350 million. I think even AIMS REIT have a higher NAV !

[mrEngineer]

Brillant exchange between nextwave and Nick. It shows the contrast between the definition of value in terms of finance and philosophy.

In finance, we often define value as anything that anything above Net Present Value and NPV. Usually we can measure NPV in terms of $ and cents. It is more quantitative in this aspect

Nextwave idea of value is a philosophy of valuable assets due to scarcity or asset enhancing capabilities. This usually cannot be measured in $ and cents. Thus, it is more qualitative.

Often, investors are buried within piles of quantitative (logical) analysis to believe that they are able to find that arbitrage or unique knowledge that no one else know. However if you notice the astute investors like d.o.g, nextwave, arthur, yeokiwi, dydx, WB etc, they are able to look beyond the numbers and into the business qualitative (art) analysis with experience which actually determines the higher rates of returns than us average investors.

[freedom]

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.

I beg to differ. whether a property is free-hold or not, eventually it will be written-off or the property holder has to top-up to enhance the property value, otherwise, the property will lose its yield eventually to yield nothing.

who on the earth will rent an office which is 100 years old? probably a lot of leaks and other problems. the landlord has to do asset enhancement which is no difference from acquisition of a new property.

it all boils down to asset replenishment. As long as the asset can be replenished (in the case of non-free-hold property/vessels would mean acquisition), there will be no problem.

on the other hand, short lifespan of an asset is a plus. it means you can replenish your assets faster and yield higher. for vessels, there is a very active second-hand market, unlike property, especially expensive properties.

---

guys,

i think you are all missing the forest for the trees, can anyone tell me what value a "shipping trust manager" adds by buying ships with shareholder money and putting it on his balance sheet to earn managment fees?

the trust manager is getting a free ride through
using shareholder money to buy a notoriously volatile asset like ships, value of which is known to no one, if demand is high one can techinically create as many ships as possible unlike creating as many orchard road or 5th avenue condos or shopping malls, thus fundamental value of a ship= cyclically adjusted price of steel+ other raw materials + labor, in bad times, value of ship= ZERO, study shipping cylces over a hundred years and you will know what i mean, the best of shipping titans have been unable to time the markets

the conversation ends right here as "dividends" are mainly an illusion that is paid through the book value of ships as long as a greater fool values the ships at that price- THERE IS ZERO VALUE CREATION

for those that that still like this business model, i have a proposition for you- me and my business partner are looking for 5m$ to buy a fleet of taxis in India to be run professionally, we will pay you part of the taxi rentals as dividends (yield 7%+) and charge you just 3% of total assets as mgmt fees....

Any takers?

Can I just ask you one question?

if there would be a war, would you still think the property on Orchard Road has a value? who could you claim your property value from? What if Orchard is flooded or Singapore is under-water?

it all boils down to the risk. there is no such asset in the world which always has a value.

---

if there is no risk, hardly there will be yield.

that's why vessels yield much higher than properties in Orchard Road.

[freedom]

I think a lot of people just saw the mess of Rickmers and think the management must be lousy. I suggest you to read the history about of Rickmers.

In the very beginning, Rickmers adopts the same strategy as PST, with the vessels of Rickmers were much younger than PST. at IPO, Rickmers had a contracted fleets of 10 vessels valued around US$ 700 mil and secured debt 360 mil, which in terms of shipping trust is not a bad leverage ratio. Then there comes the acquisition which makes Rickmers almost go under. the acquisition of 5 MOL ships and 4 Hanjin ships are all using debt. But, the management did signal that they will do an equity funding to raise 100 mil for the top-up facility and another 150 mil for partial repayment of debt for 5 MOL vessels and 4 Hanjin vessels. if all succeeded, the leverage of Rickmers should be still around equity:debt = 50 : 50 coupled with cash retained from operation. As for the 4 giant Maersk vessels, the management did mention that the delivery was still quite far away and they thought they could get a better financing deal later. If everything worked like they hoped, Rickmers would be doing fine just like PST.

The problems came as the sub-prime crisis unwinded. the credit was freezed. Rickmers could not do a successful equity raising because its unit price was too low (orignal expection was US$ 0.8). Rickmers couldn't draw down more loan because the vessel value fell.

I would not blame the whole mess for poor management, but poor luck(sub-prime, credit crunch) and lack of foresight.

For the future, I hope the management learnt the lesson and execute their strategy better next time of couse with better luck. Still, an equity raising exercise is unavoidable simply because the equity is too little to sustain its asset size. They probably will do it right after they reinstate the distribution. I guess the amount of the equity raising should be around US$100 mil. with 2 US cents/quarter distribution, I hope the unit price can rise to a level above 0.5 (20% yield? I hope $1, 10% yield), they can repay their convertible loan instead of conversion.

In the further future, there will be another round of equity raising exercise coupled with more acquisition. Don't oppose equity fund raising. just treat it as another IPO. And it is essentially the only way reits or trust can grow faster. Grow with retained profit for trust/reits is quite pathetic. Rickmers need certain asset size to really sustain a long way. just like reits, large cap reits can survive longer than smaller reits. and large cap companies can survive longer than small cap companies.


I have to add that I took a great risk to invest in Rickmers. So do your own research.

---

I want to further emphasis on the scheduled repayment. the amount is not random. it was written in the loans. That's why I said earlier, Rickmers does have a strategy to repay debt and grow with retained profit.

for the 360 mil facility, US$ 6 mil/ quarter starting from 2012 till maturity and with the remaining of bullet payment.

for the 288 mil facility for 5 MOL vessels, 72 mil should be repaid within 5 years after vessel delivered. the remaining 216 mil is divided into 5 tranches, US$ 1.2 mil/quarter (US$1.5 for the first installment) for every tranche for 20+ quarters and with the remaining of bullet payment.

for the remaining debt for 1st Hanjin Vessel, $862,500/quarter for the life of the loan and with the remaining of bullet payment.

from the above figures, it is obvious that the loan repayment is enough to cover its depreciation

[d.o.g.]

I would not blame the whole mess for poor management, but poor luck(sub-prime, credit crunch) and lack of foresight.

I guess it depends on what one expects of management. Personally, I expect the management of a company to have the foresight to prepare the company to survive a crisis, whether due to lack of business, lack of credit or just bad luck.

After all, if the management is not able to use their foresight to help the company survive a crisis, then what, exactly, are shareholders paying them for?

Any fool can run a business when things are going smoothly. We recruit and pay up for capable people because one day there will be a crisis that the fool cannot handle.

[freedom]

I would not blame the whole mess for poor management, but poor luck(sub-prime, credit crunch) and lack of foresight.

I guess it depends on what one expects of management. Personally, I expect the management of a company to have the foresight to prepare the company to survive a crisis, whether due to lack of business, lack of credit or just bad luck.

After all, if the management is not able to use their foresight to help the company survive a crisis, then what, exactly, are shareholders paying them for?

Any fool can run a business when things are going smoothly. We recruit and pay up for capable people because one day there will be a crisis that the fool cannot handle.

I doubt that there is such management that can do well in whatever condition in reality and with great foresight, is it like God already? And how much would you pay for that kind of management? less than 1 million? I did not pay them well and I would not expect them to do a great job. enough for my yield would be enough. If you pay peanuts, you get monkeys.

I am not team with Rickmers and I did not invest in Rickmers since IPO. I only managed to invest a small position in Rickmers after the restructure deal. Everyone makes mistakes, what matters is what you can do after that.

Everyone takes his own risk and get his yield. I catogarize Rickmers as a high-risk and turn-around play, so please do your own research.

[Nick]

Thank you Freedom for taking time to explain your rationale behind investing in Rickmers.

I too invested in RMT post-restructuring though I sold my units pretty recently. RMT does have a loan payment plan and its blue chip charterers should keep counter-party risk to a minimum. In terms of assets, I daresay, RMT has the best assets among the 3 shipping trust.

I feel the problem with RMT stemmed from its over-ambitious acquisitions when vessels were trading at peak prices. Perhaps if they had IPO'ed a year earlier or spread out their acquisitions over a period of 3 years, they would be in better shape today. But what's done is done. Ultimately, Management is to be blamed for failing to act accordingly.

I suggest you take a look at the large cap US based shipping trust (or master partnerships) to see their scale. After looking at it, I realized why FSLT and RMT ended up listing in SGX !

Ship Finance
Fleet: 8 Suezmax, 22 VLCC, 20 Dry Bulkers, 9 Container, 10 Offshore, 2 Chemical Tanker
Total Assets: US$2.85 billion
Debt: US$1.93 billion
Cash: US$71 million
NAV: US$790.6 million

Teekay Offshore Partners
Fleet: 37 Shuttle Tankers, 6 FSOs, 2 FPSOs, 11 Aframaxes
Total Assets: US$2.36 billion
Debt: US$1.49 billion
Cash: US$158.5 million
NAV: US$534 million

Seaspan Corp
Fleet: 69 Container Vessels (405,100 TEUs)
Total Assets: US$4.29 billion
Debt: US$2.37 billion
Cash: US$146 million
NAV: US$850 million

I am not saying these are good investments etc. Just trying to highlight the size and scale these US-based ship leasing firms have. Our local shipping trust have a long way to go before it can even match them in terms of size. Another to note is their gearing - ship leasing businesses will have high gearing regardless of their size. This makes it risky if the Management is unable to manage his capital structure correctly. There is no room for error.

[freedom]

Thank you Freedom for taking time to explain your rationale behind investing in Rickmers.

I too invested in RMT post-restructuring though I sold my units pretty recently. RMT does have a loan payment plan and its blue chip charterers should keep counter-party risk to a minimum. In terms of assets, I daresay, RMT has the best assets among the 3 shipping trust.

I feel the problem with RMT stemmed from its over-ambitious acquisitions when vessels were trading at peak prices. Perhaps if they had IPO'ed a year earlier or spread out their acquisitions over a period of 3 years, they would be in better shape today. But what's done is done. Ultimately, Management is to be blamed for failing to act accordingly.

I suggest you take a look at the large cap US based shipping trust (or master partnerships) to see their scale. After looking at it, I realized why FSLT and RMT ended up listing in SGX !

Ship Finance
Fleet: 8 Suezmax, 22 VLCC, 20 Dry Bulkers, 9 Container, 10 Offshore, 2 Chemical Tanker
Total Assets: US$2.85 billion
Debt: US$1.93 billion
Cash: US$71 million
NAV: US$790.6 million

Teekay Offshore Partners
Fleet: 37 Shuttle Tankers, 6 FSOs, 2 FPSOs, 11 Aframaxes
Total Assets: US$2.36 billion
Debt: US$1.49 billion
Cash: US$158.5 million
NAV: US$534 million

Seaspan Corp
Fleet: 69 Container Vessels (405,100 TEUs)
Total Assets: US$4.29 billion
Debt: US$2.37 billion
Cash: US$146 million
NAV: US$850 million

I am not saying these are good investments etc. Just trying to highlight the size and scale these US-based ship leasing firms have. Our local shipping trust have a long way to go before it can even match them in terms of size. Another to note is their gearing - ship leasing businesses will have high gearing regardless of their size. This makes it risky if the Management is unable to manage his capital structure correctly. There is no room for error.

Thanks Nick. I did mention that I expect Rickmers to do several rounds of equity fundraising (amounting to 500 million USD or more) to reach the same scale of US peers. Anyway, I don't think I will hold it for that long.

I bought Rickmers, fully aware of its mess. But I do think its model probably works in certain way especially compared with REITs in Singapore. As well, Rickmers is dead low now and with a yield of 7+%.

another thing is about the price of the acquisition during 2007 - 2008. I think Rickmers paid a fair amount at that time and now as well. in June, Evergreen ordered 10 * 8,000 teu containership for 1.03 billion USD each. Evergreen ordered another 8,000 teu container ship for around the same amount recently. and in Dec, NOL ordered 12 container ships range from 8,400 teu - 10,000+ teu for 1.2 billion. So 70 million for 4,250 teu containership should not be considered too high. and although vessel valuation dropped during crisis, container ship new-build price did not drop, simply just there was no order and few s&p activity in second-hand market. from charter revenue view, long term average charter rate is still around 25,000 USD/day for 4250 TEU container ship. in the last 10 years, charter rate for 4,250 teu container ship was above 60,000 USD/day in 2003 and 1,000 USD/day in 2009. Using cash flow method, 70 million is also not that high.

I think I should re-phrase my earlier comment as "I don't blame everything simply for the poor management". Otherwise, during sub-prime, should all company management/political leaders be blamed for it? As a human being, can he/she never make any mistake?

I would say I speculate Rickmers for mid-term gains (3 - 5 years).

do your own research.