Rickmers Maritime Trust

[Zelphon]

U wan FREEHOLD PROPERTIES in a REIT..

Come...

JOIN ME IN SAIZEN REITS !!!

LOL...

[Blackjack]

I recall that all 3 shipping trusts used to depreciate their vessels based on a lifespan of 10 years, a conservative measure assuming an actual lifespan of 20-30 years. Sometime during the crisis, depreciation was re-pegged to 30 years instead. I reckon its to spruce up the expenses being recorded.

[Nick]

I recall that all 3 shipping trusts used to depreciate their vessels based on a lifespan of 10 years, a conservative measure assuming an actual lifespan of 20-30 years. Sometime during the crisis, depreciation was re-pegged to 30 years instead. I reckon its to spruce up the expenses being recorded.

10 years is just too short and extremely aggressive. It doesn't reflect the true valuation of the vessel. FSLT does something like that and it makes it difficult to understand its balance sheet. 20-30 years will be more accurate. Courage Marine has 25-30 year old vessels plying trade routes while Mercator Lines has a 17 year old vessel plying a 13 year contract. But again, it depends on the quality of maintenance and type of vessel used.

Personally, a 25-30 year depreciation policy with the assumption of zero scrap value should be sufficient.

[Blackjack]

Personally, I felt the former depreciation policy of 10 years was better even if it might be too aggressive. The same theory applies to developers who might choose to recognise the entire cost of project development upfront whilst opting to realise the profits at different stages. Being conservative is good for investors isn't it? We also do not know how long the vessel really can operate in reality, given that the depreciation of 30 years is already operating at the edge of the assumption.

I am willing to forego some accuracy in exchange for more conservativeness, but again, this is my personal view.

[Nick]

Personally, I felt the former depreciation policy of 10 years was better even if it might be too aggressive. The same theory applies to developers who might choose to recognise the entire cost of project development upfront whilst opting to realise the profits at different stages. Being conservative is good for investors isn't it? We also do not know how long the vessel really can operate in reality, given that the depreciation of 30 years is already operating at the edge of the assumption.

I am willing to forego some accuracy in exchange for more conservativeness, but again, this is my personal view.

Depreciation exist to spread out an expense over an asset life-span. If not for depreciation, companies will routinely be writing off any acquisitions made within its first year ie RMT writing off its 16 vessels in 2009 so that its profits will be similar to its operating cash-flow from 2010 onwards (though equity will be massively negative).

Hence, it is best for companies to avoid financial engineering to deflate or inflate its earnings by adopting a depreciation policy which reflects the true asset lifespan. If a tanker can only last for 20 years on average or a dry bulk panamax vessel is able to last for 30 years, then treat it as such.

Ultimately, there is nothing conservative about adopting a 1 year or 10 year or 30 year policy. The cash in-flow over the asset life-span will remain the same regardless of its depreciating policy. How the Trust deals with this incoming cash is the true measure of its conservative nature. There is no difference between a trust which adopts a 10 year depreciation policy and another with a 30 year depreciation policy if both only paid out whatever they earned to keep equity stagnant. The former will initially pay out a little before compensating with huge dividends in the last 20 years while the latter will have a consistent dividend payout ratio.

[Blackjack]

I hope you don't take what I opined negatively, or interpret as me being biased against shipping trusts in general.

You are right to say that companies should do well to align their depreciation policy to one that reflects the real picture that can be expected. What I'm saying is that since no one knows exactly how long any particular vessel can really operate in reality (though there may be general consensus in the industry to define it as lying somewhere between 20-30 years), it would be prudent to apply a shorter period to expense it off. Maybe not to adopt a period as short as 10 years, but certainly not as high as 30 years, assuming that is the longest period one can expect.

You are also right to say that the cash in-flow over the asset life-span will remain the same regardless of its depreciating policy, and that how the company treats cashflow is of ultimate essence. In that case, there will be no difference between depreciating it on 30 year basis instead of 10. Why the change in policy in that case?

Much of the argument revolves around the remaining value of the vessels owned by the trust, based on what I have read so far. Which is why I brought up the case of changing depreciation policy. Using your example of a well-run shipping trust using its cash-flow from depreciation to renew the fleet, I would infer the actual amount due from depreciation would be an important consideration, as fleet renewal would be again be intrinsically linked to the cash in-flow as above.

If a depreciation of 30 years is used and the vessel in question managed to operate only for 20 years due to it being poorly maintained, would that be realistic?

For investors who rely on NAV as a parameter when considering shipping trusts, I believe this would again be a cause for consideration. Based on my impression so far, this would certainly be the case.

Ultimately I think it doesn't hurt to err on the side of conservativeness. To digress, I have friends who write off their entire investments the moment they purchase something. Is that impractical or conservative? I prefer to think its the latter though I prefer to use a less conservative means.

Again, it all boils down to individual preference I guess?

[Nick]

Hi Blackjack,

We are in this forum to share our opinions so there is nothing to be apologetic about. I have learn much from our previous exchanges and I hope our sharing will benefit each other and anyone who seeks to learn about the merits and demerits about investing in a shipping trust. If I sound too defensive, please point it out so I can tone down my postings ! I am not defensive in nature after all I did pen out my reasons for divesting from RMT mere months after stating my support for it in this very same forum. Am I fickle hmm haha !

What I'm saying is that since no one knows exactly how long any particular vessel can really operate in reality (though there may be general consensus in the industry to define it as lying somewhere between 20-30 years), it would be prudent to apply a shorter period to expense it off. Maybe not to adopt a period as short as 10 years, but certainly not as high as 30 years, assuming that is the longest period one can expect.

I certainly do agree with you here. It is impossible to determine exactly how long a vessel can last. Technically, a vessel can last indefinitely with appropriate levels of maintenance but at some point, the cost of maintenance, insurances and upgrading will outweigh any gains in keeping it afloat. Unless I am mistaken, industry experts tend to classify this crucial point when a vessel reaches 20-30 years. I don't have a list or statistics to back up how long a vessel should last or what is the industry trend. I guess to some extent, the shipping trust redeems themselves by assuming zero scrap value after 30 years when in reality, these scrapped vessels have some value.

You are also right to say that the cash in-flow over the asset life-span will remain the same regardless of its depreciating policy, and that how the company treats cashflow is of ultimate essence. In that case, there will be no difference between depreciating it on 30 year basis instead of 10. Why the change in policy in that case?

I don't think Rickmers ever changed their depreciation policy. In their 2007 Annual Report (pg 41), the depreciation policy assumes that vessel has 30 years life-span. PST did change their depreciation policy in 2008 from estimated life span of 25 years to 30 years. No reason was given for the change besides mentioning that they periodically review the useful lives of their vessels. In other words, I guess they may extend or reduce this life-span in the future based on vessels condition and technology advancements.

I compiled our local shipping companies depreciation policy here -

NOL: 5-25 years + estimated scrap value
Courage Marine: 30 years + estimated scrap value
Mercator Lines: 25-30 years
Samudera Shipping: 15-25 years
Rickmers Maritime: 30 years + no scrap value
PST: 30 years + no scrap value

Much of the argument revolves around the remaining value of the vessels owned by the trust, based on what I have read so far. Which is why I brought up the case of changing depreciation policy. Using your example of a well-run shipping trust using its cash-flow from depreciation to renew the fleet, I would infer the actual amount due from depreciation would be an important consideration, as fleet renewal would be again be intrinsically linked to the cash in-flow as above.

True. But this problem doesn't just impact shipping trust. It impacts nearly all companies since few companies deals exclusively with non-depreciating assets. We cannot infer whether are their depreciation policy truly accurate.

If a depreciation of 30 years is used and the vessel in question managed to operate only for 20 years due to it being poorly maintained, would that be realistic?

This is a very valid point. A well-run shipping trust would keep its vessels in good shape time to time. A conservative shareholder will stick to trust dealing with time charters since the vessel maintenance will be in the Trust's hands as opposed to the charterer (which may not care too much about maintaining something it doesn't own). Of course, there are obligations on the charterer side in a bareboat charter but personally, I prefer things to be kept in-house haha !

For investors who rely on NAV as a parameter when considering shipping trusts, I believe this would again be a cause for consideration. Based on my impression so far, this would certainly be the case.

There will always be cause of concern for the use of NAV to value anything. I don't pay much attention to REITs NAV since valuers may not be accurate - I tend to be more interested in whether are their valuation consistently rising which reflects an appreciating asset class. Hence I tend to more interested in the NAV trend rather than its actual value. In this case, we have to trust the auditors, ship valuers and BOD in ensuring the financial statement reflects what is going on. Personally, I would like to see shipping trust providing annual valuation of their fleet like how REITs does it. I think only FSLT does this (and on a quarterly basis) kudos !

In Summary:

1) There is no way any shipping trust (or company) can determine how long its assets can last. The only thing they can do is to periodically determine how long their vessels can last and make any necessary changes if their opinions changes.

2) A well-run shipping trust will ensure that nearly all loans can be repaid within the first 20 years of the vessel existence. This will prevent the shipping trust from getting into trouble if the vessel is no longer sea worthy a few years prior its estimated life-span. Moreover, revenue will decrease when the ship gets too old. It is best to clear off loans prior that.

3) The Trust cash-flow is large enough to ensure any changes of its useful lives of its vessels will not critically impact its distributable income in the long run.

4) A well run shipping trust will ensure that its vessels are properly maintained at all times and kept insured.

5) A shipping trust should ensure that no matter what depreciation policy is used, the Trust should have retained a significant portion of its original equity within a time-frame that provides reasonable buffer should anything go wrong (ie 20-25 years).

6) The greatest risk a shipping trust face (with regards to depreciation) is its failure to estimate useful lives within an acceptable margin. If the vessel can no longer function after 20 years despite being ear-marked for 30 year of action, the Trust can be in hot soup. It will have to invest heavily in repairing the vessel to make it sea-worthy again. This becomes a life-threatening issue if that particular vessel is heavily encumbered with loans. This is why I prefer shipping trust which employ long term amortizing loans so that by that age, it will be lightly encumbered.

Many thanks to Blackjack for taking time to discuss an often over-looked aspect of shipping trust investing.

Please correct me if my ideas are incorrect.

[nextwave]

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?

[Blackjack]

Good points you have there too Nick. Actually I used to hold RMT a long time ago as well, but managed luckily to divest quickly before the troubles all began. I've stayed out of shipping trusts ever since.

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nextwave - To provide a fair argument, I might consider using you and your partner if I am convinced you can generate much more profit than what I can do with $5 mio, and allow me to break even in a year. Show me what you can do. Provided I do have the money of course

[Zelphon]

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?

Well, if you tell me u wanna IPO ur taxi biz, I won't touch ur stock...
But after a deep crisis and the valuation has took a big hit and yet all ur taxis still running as usual... and ur stock is priced at a deep discount..

Why not?
I may just buy some of ur taxi biz stock for the dividend yield..