Croesus Retail Trust: Luz Omori and Niz Wave I.

I really shouldn't be blogging now because I am so sleepy but I just couldn't resist looking at the announcement and, then, I'm trapped. OK, this will be a short one (I hope). Here are some things which got my attention.

DPU Improvement

In an earlier blog post, I said that the Trust would probably use the funds from the MTN they issued soon. Otherwise, we could see a 5% decline in DPU.

Now, with the acquisition of 2 new properties, Luz Omori and Niz Wave I, we will see a 5.7% increase in DPU instead of having to worry about a 5% decline. Good news for income investors!

Borrowings

The two properties are purchased at a slight discount to valuation which is good. However, the total value is still some $176.3 million. This is much more than the $100 million MTN the Trust issued last month.

In an earlier blog post, I was wondering if a placement or a rights issue would happen. Instead, the Trust has taken on more onshore debt, specifically, a 5 year debt facility with Mizuho Bank. They were able to borrow rather cheaply and the effective interest rate for this debt facility and the MTN together is 2.96% per annum.

With these purchases and borrowings, by my estimate, gearing level has gone up from 42% to approximately 55%.

The properties

The information provided by the Trust is mostly clear enough. I really like the fact that the Trust chose to purchase both the properties in Tokyo. These properties are located in areas which have seen growing populations in recent years and are within a few minutes walk to train stations.

What I want to point out is that Luz Omori's land is not freehold but leasehold in nature. This probably explains the relatively small price tag of S$42.7 million which is also at a slight discount to the valuation of S$44 million. The lease on the land expires in July 2059, 45 years from now.

As for Niz Wave I, the situation is bizarre because the building sits on 4 parcels of land of which 3 are freehold and 1 is leasehold and this lease expires in December 2029, 15 years and a few months from now. Would they have to tear down a quarter of the building then and return the land in original condition? Bizarre.

I am inclined to believe that the owner of that particular land parcel would probably allow the lease to be extended when the time comes since that one parcel of land is unlikely to be of much use to anyone if the surrounding 3 parcels of freehold land are owned by the Trust. Then, the question of price will have to be answered but it can only be answered when the time comes.

NPI Yield

These two buildings together have quite a decent NPI yield of some 8.1%. The 4 malls in the Trust's initial portfolio have an average NPI yield of about 7.8%. So, in addition to being DPU accretive, the purchases are NPI yield accretive but it could possibly have something to do with the fact that Luz Omori sits on land with a relatively short lease. Yields for leasehold properties are generally higher since they are usually cheaper to buy.

See Media Release: here.
See Acquisition Announcement: here.

Related post:
Croesus Retail Trust: Cap rates and growth.

Marco Polo Marine: Drilling for higher income.

I am going to take another trip down memory lane and this time to look at why did I invest in Marco Polo Marine. Then, I will look at the most recent development in the business.

I first invested in Marco Polo Marine in the middle of 2012 when I spotted persistent insider buying. I got in at 31.5c and 32c a share. Since then, I have been accumulating. The highest price I paid was 42c a share and the last time I bought more of its stock was on 24 June 2013 at 37.5c a share.

The combination of a few factors gave me the conviction to make Marco Polo Marine the largest investment in my portfolio:

1. Insider buying.
2. Chairman of the company has close to 60% stake.
3. A relatively consistent ROE of about 15%.
4. Timely emphasis on building a fleet of AHTS vessels.
5. Enforcement of cabotage laws in Indonesia.
6. Relatively cheaper valuation compared to peers.

A complaint I had was that it was moving too slowly and I wished that it would leverage up and buy OSVs to immediately take greater advantage of the higher charter rates in Indonesian waters.

In the current climate, it is hard to buy OSVs at what might be considered good prices and it is not difficult to understand why. So, Marco Polo Marine would rather build OSVs in their own shipyard than to buy from others. However, they did manage to get a good price for MP Prevail last year. I think that shows that the management is rather savvy when it comes to acquisitions.

With their gearing level on the rise, however, I was rather concerned about the strength of their balance sheet but if the business chugs along with the progressive deliveries of the OSVs being built in their shipyard, we should see progressively stronger earnings in the next couple of years, everything else remaining equal.

Of course, we now know that everything else did not remain equal because Marco Polo Marine issued some MTN and decided to buy a jack up rig. This was totally beyond my expectations and it took me a while to digest the news.

My initial reaction was to ask how Marco Polo Marine, a company with a market capitalisation of S$135 million, was going to pay for a US$214 million rig? That was a natural reaction. However, when we think of the S$300 million MTN they have in place, it all makes sense.

Marco Polo Marine drew down S$50 million in MTN in the last quarter and this attracts some S$0.7 million in finance cost every quarter. As they only have to pay 10% of the rig's total bill this year, I have an inkling that they might use the remaining money to pay down debt. They only have to pay another 10% of the rig's total bill by 11 February 2015. The balance 80%, they only pay when they take delivery of the rig in 4Q 2015.

What this means is that we could see lower profit this year. However, if some debt is paid down and if the two 8,080 BHP AHTS vessels are completed on time, we could see the impact lessened. Assuming the status quo, then annualising 1Q 2014's numbers, we could see a 22% reduction in EPS to approximately 4c or so, year on year. This assumption is, of course, unrealistic, and would form my worst case scenario for the company.

The cabotage law in Indonesia will include drilling rigs by December 2015 and to time the delivery of the rig in 4Q 2015 really makes sense. There is no need for a huge capital outlay in the meantime while Marco Polo Marine sees more own built OSVs joining its fleet in the next two years which should improve earnings as the vessels enjoy higher charter rates.

When the time comes to take delivery of the rig, Marco Polo Marine should be financially more robust but it would still need to draw from its S$300 million MTN program to pay for the rig. This is the hard truth but it is good to know that financing is in place.

Chances are high that Marco Polo Marine will be able to secure a contract for the rig a few months before they take delivery of it. Chances are also high they will be able to get pretty good rates as there is a lack of such high specs rigs in Indonesia and, of course, the enforcement of cabotage law in the country for rigs by then tilts the scales in Marco Polo Marine's favour.

Now, how significant an income contributor could the rig be?

According to AM Fraser, the Pacific Class 400 jack up rig which Marco Polo Marine ordered commands a day rate of some US$ 160,000 in Thailand. With the cabotage law in Indonesia, the rate could be higher when Marco Polo Marine takes delivery of their rig end of next year. I know that AHTS vessels enjoy a 20 to 30% premium in Indonesian waters. Could we expect the same kind of premium for rigs come December 2015?

If we were to do some quick mental sums, we would be able to conclude that this is probably going to be a very good investment. Simplistically, just putting the rig to work 11 months in a year could bring in some serious money without factoring in any possible premium. In such an instance, the return on the investment would quite easily exceed the 5.75% coupon payable on the MTN.

So, my assessment of this latest development is that it will lead to some short term earnings depression due to higher finance costs but it is not going to cause the company any distress. By 2H 2014, things would start to look up and by 2015, with more AHTS vessels in its fleet, enjoying higher charter rates, earnings would look even better. Then, when the rig is delivered by end of 2015, we should see a big boost to earnings, if everything goes as planned.

Do we share Sean Lee's vision and are we able to take the same leap of faith? Or do we think he has a few loose screws in his head?

Related posts:
1. Marco Polo Marine: Exciting times ahead.
2. Marco Polo Marine, Mermaid Maritime and Jaya Holdings.