Before we begin, a quick comment on some developments in the tanker space. What a nice tanker rally it has been the past few days. Many of our positions like Teekay Tankers (TNK) and International Seaways (INSW) are performing exceptionally well, and are now in good profit-making territory (I took some chips off the table – it’s always prudent to do so – but still maintain core positions). My key focus remains on Teekay Corporation (TK), which is also picking up (in part due to the TNK rally), and I expect positive momentum going forward once the Teekay LNG Partners (TGP) issues (U.S. sanctions on COSCO affecting the Yamal LNG project) are resolved. I also look forward to the much-anticipated Teekay Group Investor Day, which was postponed due to the sanctions incident, and I ultimately expect a nice win-win resolution concerning the TGP IDRs, which in my mind will mark the real inflection point for TK and remove the overhang from TGP. That said, the TK FPSOs are still a concern.
Back to Navios Maritime Partners (NMM). It has been almost four years since our previous article on NMM entitled “Navios Maritime Partners Is Embarking On An Unusual Path For A Marine MLP“, written in February 2016. At the time of writing, the unit price was ~$15/unit versus ~$17.50/unit currently. To refresh our memories, back in 2015/16 NMM eliminated distribution payments and repositioned itself as an opportunistic vehicle to acquire cheap dry bulk vessels, deviating from its containership-focused MLP aspirations. The timeline was as follows (note these are pre-reverse split figures).
- Q2 2015 earnings: NMM reiterated its commitment to pay a minimum distribution of $1.77 per unit annualized through 2016.
- Q3 2015 earnings: NMM announced an aggressive distribution cut (>50%), citing poor market conditions and suggested the revised distribution of $0.85 per annum is sustainable for five years. The rationale for the cut was to redeploy the distribution savings accretively in a fleet renewal program, particularly in containerships, effectively repositioning NMM as a containership-focused MLP.
- Q4 2015 earnings: NMM completely eliminated the distribution and repositioned itself as an opportunistic vehicle to acquire cheap dry bulk vessels, deviating from the containership-focused MLP intention.
In other words, following one of the worst dry bulk markets on record, in a matter of a few quarters, between Q2 2015 and Q4 2015, all hell broke loose and the entire model was disrupted. NMM ended up being a broken MLP and income investors ran for the exit, as NMM was not even paying 1 cent in distributions. One of our conclusions after the distribution elimination was the following:
If NM can make it without sacrificing NMM as an independent entity, then we are hopeful for NMM. It all boils down to malintent. After all, NMM is still cash flow positive, the balance sheet is decent (given current market conditions) and will strengthen over time (as cash piles up). There are no CAPEX commitments. Even accounting earnings are positive, all else constant (due to the long term contracts). NM is at the heart of the problem. Management is clearly working for NM, as the CEO owns around 30% of NM, and therefore has to protect her wealth.
It is important to note that until 2016, NMM was a stellar dividend payer, paying $200+ per unit in distributions since inception (or $13+ per unit on a pre-reverse split basis). The evolution of NMM’s quarterly distributions since inception is as follows:
Lots of things have changed since our previous publication. Some highlights include:
- In 2017 NMM formed Navios Containers (NMCI) following the acquisition of the 14-vessel container fleet from Rickmers Maritime. NMCI initially listed in Norway and subsequently migrated to the U.S. (NASDAQ) via a direct listing (given the failed IPO attempt).
- In Q2 2018 NMM restored distributions. The new distribution policy entails distributions of $1.20 per common unit annually (or $0.08 per common unit on a pre-reverse split basis). Since then the distribution has remained constant. To put things into perspective, prior to the first cut in 2015 the annualized distribution was ~$26.5 per unit (~22 times higher than the current amount). I am not suggesting we will reach that level again.
- In Q2 2019 NMM implemented a 1:15 (one-for-fifteen) reverse split of its common units removing the psychological overhang of NYSE delisting notices when the share price is below $1 over a consecutive 30 trading-day period. Note this is a psychological positive more than a substantive one, as nothing really changes with regards to a company’s fundamentals. But optics matter.
- In Q1 2019, NMM announced a $50M unit repurchase program which provides a tremendous opportunity to acquire units well below NAV. Long term holders stand to benefit. I expect the pace of repurchases to pick up going forward, especially once the Term Loan B refinancing is completed (more on this below) – which was the reason for slowing down the pace
- NMM’s general partner (GP) interests were sold by Navios Holdings (NM) to N Shipmanagement Acquisition Corp, an entity affiliated with NMM’s Chairman and CEO, as part of the sale of NM’s ship management division. This is significant as the market perceived the relationship with struggling NM as a toxic link. NM is arguably under water (i.e. negative NAV).
- Despite renewing the dry bulk fleet over the past few years and trying to consolidate the containership assets in NMCI, NMM has retained the five containerships chartered out to HMM on lucrative fixed contracts. The main reason for this is that NMCI cannot afford to acquire these assets despite having an agreement in place to purchase each vessel for $36.0M. Note, charter rates are set to surge in December 2019, increasing from $24,095 per day to $30,119 per day. That is an additional ~$6,000 per day per vessel which equates to a ~$30,000 per day cash flow boost, equating to ~$11m in annualized terms – almost the entire amount NMM currently pays in distributions. These contracts provide much-needed stability, allowing NMM to be cash flow positive in virtually any dry bulk rate environment, as the lucrative charters expire in December 2023:
- Throughout 2019, NMM has taken significant steps to refinance its entire Term Loan B (expected to close within 2019), achieving substantial interest savings. Management has hinted distribution increases once this is complete. Net Debt to Capitalization remains low at ~36% and, post Term Loan B refinancing, NMM has no debt maturities until Q4 2021:
- In Q1 2018, NMM completed a public offering of 18.4M common units at $1.90 per common unit, raising approximately $35.0M of gross proceeds – at a price well below NAV. A proper justification for this unnecessary dilution was never provided, though it was certainly not required due to NMM’s already attractive cash from operations. Some speculate that NMM had a deal lined up that didn’t work out. Still, damage was done.
- NMM has been paying noteworthy prepayments for management services to NM (the previous GP). While not outright abuse, this is not in line with prudent business practices, especially due to NM’s poor credit risk.
- Ownership by NMM’s directors remains low. With the exception of the CEO, all other director and officers as a group own ~0.1%. There is virtually no director who has actually bought units in the open market. On the other hand, the CEO has increased her ownership to more than 3%. Whilst this is overall positive, it has occurred via stock options, not purchases in the open market. Optics matter.
- Management has refrained from adopting a distribution policy in line with historical practices. While I recognize that the MLP landscape has changed dramatically, the current distribution payout level versus current and projected cash flow generation is very low. That said, as mentioned above, there are indications that distribution increases will be considered once the Term Loan B has been refinanced. Personally, I prefer a round of aggressive repurchases well below NAV to bring down the unit count meaningfully (and make up for the previous unnecessary dilutions) and then have the ability to hike distributions on a per unit basis more aggressively. Note the $50M unit repurchase program represents around 25% of the current market cap. That is substantial.
- There have been cash outlays from NMM to Navios Europe entities that bring no substantial benefit to NMM’s unitholders. Perhaps the endgame is for NMM to absorb the Navios Europe II dry bulk fleet (7 dry bulk vessels in total, 6 built in 2011, 1 built in 2010).
The ‘grey’ area:
There is one event that I am not sure if it is a net positive or negative. In Q1 2017 NMM completed a unit offering of 47.8M common units at $2.10 per common unit, raising ~$100M of gross proceeds. This raise heavily diluted legacy unitholders, who had suffered the pain of the initial distribution cut and subsequent elimination, which led to a collapse in the unit price (more than 90% drop). Many argue that this offering put the partnership back on solid footing by raising much-needed equity. However, the whole point of the distribution elimination in the first place was to retain as much cash as possible within the business, improve the balance sheet, and eventually get NMM ‘out of the woods’ without raising equity at rock bottom prices. Noted NMM always generated substantial cash flow from operations, supported by the five HMM containerships.
What I find ‘unfair’ is that the equity raise took place a short while after the acquisition of certain financial assets from NM for $27.0M, payable in the form of (1) $4.05M in cash and (2) approximately 13.1M common units of NMM. This was essentially a dropdown of financial assets from NM to NMM, which increased NM’s ownership from ~20% to ~30%, due to the 13.1M common units offered to NM at rock bottom prices. Shortly thereafter, NMM raised the aforementioned $100M and NM’s ownership (without really participating in the unit offering) fell back to ~20%. So, in my view, this was nice little plan for NMM to raise $100M fresh capital from external investors without NM diluting its ~20% ownership in NMM. Note, one month later, a large chunk of the $100M proceeds was used to fund the 14-vessel container fleet from Rickmers Maritime, which was subsequently transferred to NMCI for a $5M fee, as well as a $30M equity injection into NMCI. So it’s not that NMM kept that cash in house.
What’s more, the investment in NMCI does not produce any direct cash flow benefits to NMM, as NMCI doesn’t pay any distributions, and it is unclear what the long-term plan is with respect to NMM’s holding in NMCI (given that NMM envisages to be a pure play dry bulk vehicle). Also, if NMCI is one day able to afford acquiring the 5 containership vessels from NMM, each for $36.0M as per the agreement, this will represent a nice boost to NMM’s cash balance, however at the expense of losing the nice long-term cash flow stability, as the HMM charters expire in December 2023. So NMM will have to eventually replenish this ‘lost’ revenue/cash flow, which means acquiring dry bulk vessels in the open market, most likely without charters attached, which comes with risks, including uncertainty around IMO 2020 with respect to the argument of scrubbers (i.e. elevated CAPEX) versus slow steaming, etc.
Since our 2016 article, we took advantage of the weak unit price to increase our NMM position, especially when the unit price traded below $15 per unit (or below $1 on a pre-reverse split basis). This allowed us to bring down our average price close to the current unit price. Even today, NMM’s unit price continues to trades well below NAV of ~$50 per unit. Also, NAV is set to increase as a result of increased cash from operations, all else constant. As such, our expectation is for multibagger upside, supported by unit repurchases (large program relative to the current market cap), higher distributions over time, and a resilient market (aided by a low order book, potential supply constraints with regards to IMO 2020 regulations, etc). We may add to our position depending on market conditions, especially at prices below $15 per unit. For further analysis, I highly recommend reading J Mintzmyer’s article entitled “Navios Maritime Partners: Prepare For The Cash Flow Surge“.
To conclude, following the announcement of restoring the distribution (milestone moment) in 2018, the CEO commented:
I am pleased we were able to restore distributions for our unit holders. Over the past couple of years, we used our cash flow to solidify our balance sheet and to renew and expand our drybulk fleet. Indeed, since 2016, we grew our drybulk fleet by 37% and reduced its average age by 12%, on a deadweight tons basis. In the process, we established a unique platform in the drybulk sector capable of generating significant cash flow. We will share free cash flow with our unit holders through distributions, which we hope to increase as market opportunity and cash flow permit.”
Given that NMM has taken significant steps to refinance its entire Term Loan B (expected to close within 2019 – another milestone moment), management has hinted to distribution increases once the refinancing is finalized. The refinancing will lead to substantial interest savings. This, in conjunction with the $6,000/day per vessel boost (another milestone moment) in cash flows provided by the five HMM containerships, and unit repurchases (another milestone moment) well below NAV, positions NMM for a significant increase in cash flow on a per unit basis. The dry bulk market is the wild card (there are some positive signs) and also there is still uncertainty regarding NMM’s position within the Navios Group endgame structure (especially since the GP is no longer in the hands of NM, which on the other hand arguably somewhat derisks the thesis). In any case, let’s hope the CEO will deliver on her commitment to “share free cash flow with our unit holders through distributions, which we hope to increase as market opportunity and cash flow permit”. Buybacks certainly help as everything needs to be viewed on a per unit basis. Long NMM.
Disclosure: I am/we are long NMM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am also long other names in the shipping space including TK, TGP, TNK, INSW, GLNG
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.