Rickmers Maritime Trust

[Nick]

RMT original plan was to raise up to US$650 million worth of new equity as stated in here - http://rickmers.listedcompany.com/newsro...062E.1.pdf

If they had acted when the unit price was trading above $1, their NAV would be close to their USA peers and they should have easily financed their 13,100 TEU vessels in 2010. RMT would have been a different animal altogether and would have thrived in 2009/10 cherry picking vessel acquisition opportunities.

If they had done this fund raising as planned in 2008/09 with unit price severely below NAV, the acquisition would have been yield negative.

I believe RMT will issue new shares to satisfy the CB. If DPU doubles to over 1.2 US cent per quarter, the unit price will exceed S$0.50 which makes conversion price of S$0.48 highly attractive. Moreover issuing shares will boost the equity by US$49 million since the CB debt will be removed in the liabilities segment while no cash out-flow was required. All this is mere speculation...

[freedom]

RMT original plan was to raise up to US$650 million worth of new equity as stated in here - http://rickmers.listedcompany.com/newsro...062E.1.pdf

If they had acted when the unit price was trading above $1, their NAV would be close to their USA peers and they should have easily financed their 13,100 TEU vessels in 2010. RMT would have been a different animal altogether and would have thrived in 2009/10 cherry picking vessel acquisition opportunities.

If they had done this fund raising as planned in 2008/09 with unit price severely below NAV, the acquisition would have been yield negative.

I believe RMT will issue new shares to satisfy the CB. If DPU doubles to over 1.2 US cent per quarter, the unit price will exceed S$0.50 which makes conversion price of S$0.48 highly attractive. Moreover issuing shares will boost the equity by US$49 million since the CB debt will be removed in the liabilities segment while no cash out-flow was required. All this is mere speculation...

agree. that's why I think Rickmers' model can work.

[d.o.g.]

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

I think there is some confusion here. Loan repayment has nothing to do with depreciation. Even if RMT had no loans the ships would still depreciate and need to be replaced. Even if the ships did not depreciate the loans would still need to be repaid (or refinanced).

As it is, the ships do depreciate, so money must be set aside for replacement. There are loans, so money must be set aside for repayment. The two sums of money are independent and must be paid for separately.

[Nick]

Vessels are acquired with a combination of debt and equity.

So lets classify V = D + E where V is vessel, D is debt and E is equity.

Depreciation is the annual write down of the vessel value till 0.

Dep = V / Useful Estimated Live. In Rickmers case, it estimates that its vessels can last for 30 years with 0 scrap value.

Hence Dep = V / 30

If Rickmers retains cash which equates to its depreciation amount for 30 years, it will get -> Cash = 30 X Dep = V = D + E. In other words, both the debt portion can be repaid and equity portion will be replenished.

At the moment, both RMT and PST are using the cash-flow from depreciation to pay down their loans. This will ensure that the loans will be repaid before the vessel life-span expires. Cash generated thereafter can be used to replenish the equity portion.

This strategy is not without risk -

1) There is no guarantee the vessel can last for 30 years without expensive repairs/maintenance.

2) The cash-flow generated from each vessel will decrease as the vessel ages. It may not be sufficient to cover the depreciation aspect alone.

3) Assuming everything works well, there is no guarantee that the replenished equity portion will be sufficient to purchase a similar vessel since vessel prices fluctuates.

A more conservative strategy is to separate vessel depreciation cost and debt payment. Profits should be used to repay debt while cash-flow from depreciation will be used to replenish assets. This requires significant cash to be retained hence rendering the purpose behind a shipping trust redundant. On the flip side, the fleet size will grow very quickly. I think this is the strategy used by ship operators.

[freedom]

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

I think there is some confusion here. Loan repayment has nothing to do with depreciation. Even if RMT had no loans the ships would still depreciate and need to be replaced. Even if the ships did not depreciate the loans would still need to be repaid (or refinanced).

As it is, the ships do depreciate, so money must be set aside for replacement. There are loans, so money must be set aside for repayment. The two sums of money are independent and must be paid for separately.

if it is a company, it works like that.

if it is a reit/trust, let's face it, there is only one way for growth, issuing more equity. debt repayment is just to compensate the depreciation of existing assets to keep equity the same value. the rest is the yield of the investment. when the debt = 0, your initial investment is the equity left.

---

Vessels are acquired with a combination of debt and equity.

So lets classify V = D + E where V is vessel, D is debt and E is equity.

Depreciation is the annual write down of the vessel value till 0.

Dep = V / Useful Estimated Live. In Rickmers case, it estimates that its vessels can last for 30 years with 0 scrap value.

Hence Dep = V / 30

If Rickmers retains cash which equates to its depreciation amount for 30 years, it will get -> Cash = 30 X Dep = V = D + E. In other words, both the debt portion can be repaid and equity portion will be replenished.

At the moment, both RMT and PST are using the cash-flow from depreciation to pay down their loans. This will ensure that the loans will be repaid before the vessel life-span expires. Cash generated thereafter can be used to replenish the equity portion.

This strategy is not without risk -

1) There is no guarantee the vessel can last for 30 years without expensive repairs/maintenance.

2) The cash-flow generated from each vessel will decrease as the vessel ages. It may not be sufficient to cover the depreciation aspect alone.

3) Assuming everything works well, there is no guarantee that the replenished equity portion will be sufficient to purchase a similar vessel since vessel prices fluctuates.

A more conservative strategy is to separate vessel depreciation cost and debt payment. Profits should be used to repay debt while cash-flow from depreciation will be used to replenish assets. This requires significant cash to be retained hence rendering the purpose behind a shipping trust redundant. On the flip side, the fleet size will grow very quickly. I think this is the strategy used by ship operators.

essentially, that's the difference between liner companies and ship trusts. of course, with liner companies, the stronger management factor provides more income. with ship trust, there is only CEO + CFO + some non-operation personel. I never expect too much from a company which only two person working.

[Blackjack]

If Rickmers retains cash which equates to its depreciation amount for 30 years, it will get -> Cash = 30 X Dep = V = D + E. In other words, both the debt portion can be repaid and equity portion will be replenished.

At the moment, both RMT and PST are using the cash-flow from depreciation to pay down their loans. This will ensure that the loans will be repaid before the vessel life-span expires. Cash generated thereafter can be used to replenish the equity portion.

Hi Nick, this seems like just a return of equity to me.
By prioritising the cashflow to plough back into loan repayment first followed by equity, it is merely delaying the gratification to unit holders who think they are getting an increased payout subsequently.

Unless you meant the retention of cash is much more than 30 X Dep? The excesses would then contribute to any value add. Assuming that the operating costs, management fees, administrative costs, listing costs, etc are all negated, if that is all possible. The fact that ships depreciate whilst real estate potentially appreciates makes shipping trusts a naturally disadvantageous proposition in my view. Of course, there is also a possibility that the former might appreciate if there is a supply crunch, but I wouldn't bet on that especially since there are more viable investment opportunities out there.

Hi freedom, if a reit/trust needs to issue more equity as the only way for growth, I'm sure many of the forummers here would not hesitate to run away from such investments. Its good that you are mentally prepared to top up more cash though, cos separately I think one would have a greater holding power generally in any investment if that is the prevailing mindset. Of course, one would need to examine the attractiveness of the investment by its own merits.

I absolutely agree with d.o.g. and nextwave on the topic of management capability and value creation. There is no reason why anyone should part with his/her money if there is no value in doing so. Remember any transaction is always about mutual gaining. If you do not think you gain any value from entering into a relationship whereas the other party certainly does, its time to reconsider.

That said, you might want to seriously consider your investment in RMT or any other shipping trusts for that matter, if you do not expect much from such a model as you've mentioned.

[Nick]

Hi Blackjack,

By prioritising the cashflow to plough back into loan repayment first followed by equity, it is merely delaying the gratification to unit holders who think they are getting an increased payout subsequently.

In this case, the shipping trust strives to repay all of its loans (D) while regenerating the equity portion of the vessel (E) by the time the fleet expires. Distributions are funded solely by the profitability of these vessels which are on long term charter contracts. When the vessel life is over, the regenerated equity portion together with a new set of debts will be used to re-purchase vessels which will be placed on long term charters and its profits will be used to fund distributions. The cycles goes on. In other words, this models attempts to deliver success to shareholders in 3 ways -

1) Repay all loans (D) while re-generating equity (E) by retaining cash-flow from depreciation.
2) Use the net profits to fund the distribution.
3) Replenish its assets with a mixture of regenerated equity and new debt.

As mentioned in the previous post, there are inherent risks with this model. None of the local shipping trust have adopted this model at the moment.

Unless you meant the retention of cash is much more than 30 X Dep? The excesses would then contribute to any value add. Assuming that the operating costs, management fees, administrative costs, listing costs, etc are all negated, if that is all possible.

In a shipping trust, it is more accurate to use the net profit as opposed to the operating cash-flow to determine its payout ratio since depreciation cannot be paid out. The net profit figure is arrived after deducting operating cost, management fees, admin cost etc. Assuming 100% payout policy, shareholders will receive all of the profits as its dividends while equity remains stagnant (forever ideally). The shipping trust functions as a bond since dividends and equity can hardly grow.

If the shipping trust was a little more conservative, it will not pay out all of its profits. Instead it will retain a small portion of it for further loan payment, growth, a rainy day etc. In turn this will lead to a small growth in NAV and hence the value add. PST pays out 70% of their net earnings which means that it retains around US$8 million annually (the other 30%). This has allowed its book value to grow slightly from US$223 million to US$239 million in 2 years. If they carried on with this for the next 15 years, their NAV will increase by 50% without a single cent of new equity being raised. It isn't a large figure but still beats nothing haha ! RMT retains an even larger proportion of its profits due to the DPU cap imposed on the Trust.

The value-add in the REIT is derived from the appreciation of each structure it holds which allows it to take on more debt to purchase other assets. That particular asset should also experience higher cash-flow. Personally, I prefer hotel stocks for this...they have a lot of hidden value waiting to be un-locked. The value-add in the shipping trust comes from the potential growth in its entire book value and hence the distribution.

Hope this helps

[freedom]

why are people so against issuing equity? essentially, it is just like another IPO. as long as the model works, it does not matter how many IPOs it can have. What's more important is whether the business model works or not.


issuing equity does not equal issuing equity at discount. during boom, equity raising is issuing equity at premium.


what I am preparing for RMT's equity raising exercise is that they will issue more equity at above current market price. If they are going to issue equity at discount to current price, I don't have a reason to invest into it at all.


after going through sub-prime crisis, I realize that to invest into a reit or trust successfully is to rob the previous unitholders.

[edragon]

after going through sub-prime crisis, I realize that to invest into a reit or trust successfully is to rob the previous unitholders.

I would rather think that it is investment in fair value according to one's assessment of the current business. If your assessment is wrong and the value drop further after your investment, would you say that the new investor have robbed you?

[Zelphon]

I divested all my holdings in RMT today at $0.40.

Reason is to accumulate some cash into opportunity fund.

I believe a correction is due soon.