Floating Assets – Tufton Oceanic Assets Investment Fund

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Tufton Oceanic Assets (LON: SHIP) is a $ 280 million (£ 200 million) investment trust that owns and leases 22 container ships. I participated in its $ 14.7 million issue (i.e. an issue of a bond not immediately placed with investors) in March 2021 at $ 0.98, personally and on behalf of clients of Tyndall Investment Management.

I discovered SHIP in 2018, when it launched, armed with all the skepticism I could muster. Surely sea transport must be equivalent to air freight, subject to regulatory vagaries, high operating costs and low margins?

Weigh the risk

The experience and knowledge of the management team quickly dispelled my prejudices. The crucial difference is that SHIP rents its container ships, so that the operational risks linked to fuel costs, the vagaries of cargo and port regulations are borne by the tenants rather than the lessors, the shareholders.

The assumption of operational risks decreases the potential return on assets but significantly reduces volatility, which means that shareholders can focus on the critical risks: whether the value of the vessels will rise or fall; whether the fleet is fully “leased”; the rental environment, stimulated by the (dis) supply / demand balance for global maritime transport; and the value of the US dollar.

It is important to recognize that these are US dollar assets and the returns for sterling investors will have the additional volatility of the USD / GBP exchange rate.

I used this confidence as a tool for diversification in client portfolios, so I had to decide if this extra volatility was worth the returns on offer. In 2018, and thereafter in the stock placement in 2019, my fear of a stronger sterling price against the US dollar outweighed my greed, and I only bought a few stocks on the account. of customers based in US dollars.

The rental environment, I learned from the management of SHIP, is very important. In the depths of the Covid-19 crisis, SHIP was leasing its assets on short-term charters for low single-digit returns, such was the pessimism about global trade.

A year later, rental yields of 25% +/- are possible, on much longer charters. Rental rates are set at the time of charter, so it is up to the manager to negotiate the best available conditions.

The costs of “vacations” for property investors or owners will be well known, and they are compounded for vessels at sea: any discrepancy between charters can decimate profitability. It comes down to the management history of the company’s charter, which is extremely good. New entrants will have to earn their stripes.

Finally, I was surprised if not shocked to learn that container ships around the world are assessed daily by an international standard methodology relating to type of vessel and engine, scrap prices and the value of charters in place. .

As of the date of SHIP’s Q1 Investor Update webinar, the portfolio held a negative charter value of $ 44.6 million. This means that if the 22-vessel fleet were free to re-charter today, the net asset value would increase by $ 44.6 million or 15.7% from a net asset value of $ 284.4 million in the first quarter. The point is that the fleet must go through the lower value secured charters in 2020 and before before they can be re-leased at current rates.

Demand for sea charter exceeds supply

All of this brings us to what charter rates will do in the future.

The manager firmly believes that there are not enough vessels to meet the level of demand and that this problem will be exacerbated by the emission reduction targets. Older, less efficient vessels will be retired sooner, and the easiest way to meet emissions targets is to slow down.

Add a supporting macro – never given – and the case is compelling. The portfolio is currently producing gross returns of around 13.5% (or perhaps a net 8.5% after amortization and fees), before factoring in the “pull to pair” as the boats move towards the sea. end of their charters, supporting today’s 7% dividend yield. .

Management points out that rental rates generally work well in inflationary environments as the value of cargo increases and the value of scrap ships increases. That being said, the reverse is also true, so it will never be an “uncorrelated” asset.

I set the bar high on ‘diversifiers’ within my portfolios, especially where there is such a clear link to global growth. Considering the performance profile, management history and macro factors, I believe Tufton Oceanic Assets currently meets this bar.


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