Market dynamics impacting the demand and financing of port...

www.aegirports.com

Franc J Pigna CRE FRICS CMC, Managing Director

American Association of Port Authorities -Infrastructure Development

and Financing SeminarSan Diego, California

Port Property Advisors Maritime Research Maritime Advisors Supply Chain Advisors Maritime Equity Research

Market dynamics impacting the demand and financing of port infrastructure and emerging alternative funding options ©

www.aegirports.com2 AAPA Port Infrastructure Development & Finance 2015 | © Aegir 2016

To be determined?

• The environment, market, competition and technologies related to ports are rapidly changing.

What will be the impact on port infrastructure and its financing?

• Challenges port authorities face are changing and increasing.

How will this impact their ability to fund their infrastructure needs?

• Increasingly, traditional funding sources and structures for ports are failing to meet the need for capital.

How will these evolve and what changes are on the horizon?

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Subjects to be covered:

Another ‘New Normal’ underway - again

Port challenges – changing and increasing

Alternative and evolving funding structures

Conclusions/takeaways

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Another ‘New Normal’ underway – again!


• Container terminal investments and operations:

‒ historically highly profitable and resilient

‒ with high barriers to entry and limited competition.

• Although not immune to market volatility and global economic shifts, ports’ sector proved its resiliency – even in 2009.

• Typical EBITDA margins for global container terminal operators remained in 20-45% range a year.

• But, container port industry entering new, ‘mature phase’, resulting in lower profitability and a more challenging environment.

Container port demand

Containership sizes Shipping lines Competition Returns

10-15 years ago

Strong demand growth

Limited growth in ship size

Smaller shipping lines and alliances

Competition for acquiring port assets

Generally high returns

Today Weaker demand growth

Huge growth in ship size (raising terminal opexand capex)

Much bigger shipping lines and alliances

Greater international competition for acquiring port assets

Lower returns?

Are we entering a new period where port and terminal profitabilityis markedly less than in the recent past?

Source: Drewry Maritime Research

Changing environment for port and terminal operators


Demand growth

Source: Drewry Maritime Research/Aegir Port Property Advisers

Double digit growth (̴11%pa) before Great Recession (2008/09); since then, single digit (̴5%pa) – lowest growth rates ever in the industry (apart from 2009). But there is the China Factor.

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625646

680 689 706

1.82%2.07%

2.80%

4.15%3.59%

4.12% 3.94%

1.48%

-2.07%

4.80%

2.84%

2.23% 2.35% 2.47%

3.50%3.80%

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 2011 2012 2013 2015 2016(f)

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TEU

Global Container port throughput

CAGR ̴11% CAGR ̴5%


Ship sizes


Average and largest ship sizes exponentially increasing…what will be the be the impact?

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6000

9000

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-TEU

Average vessel size in global fleet

Existing fleet New deliveries

CAGR +1.9% CAGR +15.3%


Impact on ports of major peaksRequirement for more infrastructure; longer periods of underutilisation

THURSDAY

Before

After

6,000 boxes

MONDAY3,000 boxes

…and what if the ships are off-schedule

too?

3,000 boxes

MONDAY


• Larger carrier alliances = larger, more complex port clients

• Less fragmented terminal capacity

• This will lead to further consolidation

Shipping line Alliance

Maersk Line

MSC

CMA CGM

CSCL

UASC

NYK

OOCL

Hapag-Lloyd

APL

MOL

Hyundai

Cosco

K Line

Yang Ming

Hanjin

Evergreen

16 4

2M

Ocean Three

G6 Alliance

CKYHE

Alliance

?

Major shipping lines and their respective alliance – musical chairs



Competition for port assets

Source: Drewry Maritime Equity Research

M&A multiples creeping up again

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25

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EV/EBITDAmultiple (x)

Prior to 2006~9x

2006-2007~19x

Financial crisis ~11x

Recent deals ~14x


Entering a market of lower returns

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FY11 FY12 FY13 FY14 FY15e FY16e FY17e

EBITDA (US$ bn) Y/Y % change (right axis)

4.9%

6.5% 6.5%

8.7%8.4%

8.1%

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6%

7%

8%

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FY09 FY10 FY11 FY12 FY13 FY14 FY15e

Drewry Port Index: Return on Equity Drewry Port Index: EBITDA growth estimates

Source: Bloomberg, Drewry Maritime Equity Research. Note: Drewry Port Index is a market-weighted index, comprising 11 listed terminal operators Drewry Maritime Research covers globally. The ROE estimates of respective companies are weighted accordingly.

Source: Bloomberg, Drewry Maritime Equity Research

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Port challenges – changing and increasing


• US$57 trillion in global infrastructure required from 2013 to 2030 just to keep up with projected GDP growth

• This exceeds the value of global infrastructure to date

• US requires about $1.6T next five years (double current outlay) - just to get to acceptable levels (ASCE)

• 2013 US port infrastructure underinvestment: past 4 years USDOT invested $357m in 25 port projects - $40m less than Port of New Orleans did in its own port (The Economist)

The infrastructure challenge –why things are changing, quickly

13


Enhanced equipment and

infrastructure required

Investment challenges –implications for ports and terminals

More rapid obsolescence of existing terminal capacity


Vessel call volumes and handling speeds: the increasing disconnect(size of exchanges per vessel call get very large, very quickly)

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Number of boxes

exchanged if = 40% of

ship capacity *

Ship size (teu)

Former Maersk Line CEO:

6,000 moves in 24 hours =

250 berth moves

per hour

* i.e. 20% of vessel discharged and 20% loaded per port call ** JOC Port Productivity Data (2013, 8,000teu+ sized ships)

Best performing terminal in the world

Annual average 179

berth moves per hour **What level of productivity does the shipping line want (they may not

want the fastest) andare they prepared to pay for it?


Investment implications – for a wider supply chain…

Shipping lines obtaining sea

transport cost savingsfor themselves (and cargo owners) with

bigger ships…

…but generating higher investment

needs in other parts of the supply

chain (for other service providers) eg, infrastructure


State of port property (AAPA’s Research Paper: overview on how port’s manage their largest asset – property, challenges faced and key issues for further research’, April 2013)

• International survey conducted of six ports:‒US Gateway‒US Inland‒US Gulf‒European gateway‒Asian transhipment ‒Latin American regional


State of port property

• Port’s surveyed represented:‒ 34,176 acres/13,831 hectares‒ $6.835 billion in land value (at $200k/acre or $495k/ha)

‒ 2,145,000 teu’s‒ 750,000,000 MT


Aegir survey results – Port Authorities know the issues

• Ports need to act like a business and not constrained by economic development issues

• Have reached serious point of being capital constrained; past financing methods do not work

• Need to better understand private sector capital markets

• Believe solutions will come from private sector


Aegir survey results

• Shift to property rent revenue from MAG’s and throughput charges

• Property side of business needs to be better understood

• Terminal concessions underlying land do not take into account

• No starting basis of value for property portfolio

• Leases do not reflect real financial performance needs


Aegir survey results - lease issues

• Balance between ‘fixed’ and ‘variable’ rents (Ie, property and throughput respectively)

• Balance between fixed rent and MAG revenues (pressure from rating agencies for ports)

• Issues surrounding lease capitalisation for companies from changing IASB/FASB regulations and resulting impact on leases

• Shorter term property usage from greater peaks

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Alternative and evolving funding structures


Alternative funding – answers coming world wide, even Florida:Florida Port Financing Commission

• Florida has fifteen ports

• Florida Port Financing Commission (1996), established to obtain joint funding and obtain reduced costs for Florida Ports

• Bonds paid through a combination of sources, including motor vehicle registration fees

• Revenues and fees are deposited with: State Transportation Trust Fund

• Florida Seaport Transportation and Economic Development Council acts as Trustee

• There is growing interest in bond project finance in Europe (eg, European Investment Bank application for Project Bond Initiative); the Florida Port Financing Commission example is closely being looked at by Europe


• Goal: decongest traffic by diverting port traffic away from downtown

• Cost: $1 billion (started May 2010; opened August 2014)

• Funded with Availability Payments (or Maximum Availability Payments) where Public sector directly reimburses Concessionaire without direct charges to the public eg, tolls

• Concession: 35 years

Availability Payments – the Miami Tunnel


• Challenges:‒ Capital constrained port authority‒ Port needs intermodal and logistics park (eg,

distribution centre) capabilities to remain competitive

‒ Port needs to increase revenues streams; optimized underutilized valuable lands

• Solutions:‒ Attract private sector capital without selling

land ie, long term leasehold‒ Access national pension fund capital to

finance development‒ Generate revenues through combination of

ground rents and throughput participation fees• Opportunities:

‒ Significantly increase cargo throughput‒ Increase revenues‒ Increase competitive advantages

Leasehold - ground leasesCaribbean example

Logistics Park

Intermodal facility


• Challenges:‒ Major port with little intermodal capability‒ $16 billion pension fund with near port land to

be ‘underdeveloped’ for ‘Big Box’ retail• Solutions:

‒ Present pension fund with alternative development option – port related

‒ Prepare comprehensive revenue stream comparison analysis: Big Box versus on dock intermodal facility

• Opportunities:‒ Pension fund would significantly increase its

ROI and value of site‒ Port significantly increase cargo throughput

and competitive advantages‒ Fund commits $450 million to the project

Private sector – off port:Pension fund commitment to alternative (ie, port) use of major landholding


• Need for capital to expand and modernize major ports exceeding governments’ ability to fund them

• This will force changes in the PA structure (ie, corporatization, privatization)

• Statutes limiting the securitization/collateralization of port land will change to release tied up equity

• Examples:‒ Port of Rotterdam corporatization resulting in

significant financial performance increases‒ Port of Brisbane privatization 2011 (A$2.1 b)‒ Ports Kembla and Botany (A$5.07 b)‒ Potential privatization of the port in

Melbourne‒ Port of Piraeus – most recent, end of 2016:

• Cosco buys 67% of PA• Pays approximately US$405m – 70% over stock

market price • Enterprise value is 23x; more realistic would be

8-10x’s• Only makes sense if major growth expected –

difficult here

Most radical solution on the way: privatizing the Port Authority option

Piraeus Port - Greece

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Conclusions/takeaways


Conclusions

• Terminal operators/shipping lines need to co-operate to mitigate negative impact of larger ships/alliances.

• Price hikes for shipping lines: PA’s pay for infrastructure, port users use it at subsidized prices. End consumer must choose: pay with taxes (ie, subsidies) or pay real cost of transportation in goods pricing; either way, they pay.

• New era upon us of lower margins and returns; may result in some investors and operators leaving the market.


Takeaways

1. Radical changes coming on how port infrastructure will be financed/owned.

2. PA’s to continue facing increasingly challenging competitive environment and funding markets, forcing change on how they are structured.

3. Balancing of stake and share holder interests’, environment and other issues will continue but, PA’s will increasingly look, be operated and structured like private sector enterprises; port economic development goals will be addressed after the ‘bottom line’, not above.


Franc J Pigna CRE FRICS CMCManaging Director

Aegir Port Property Advisers

Neil DavidsonSenior Analyst – Ports & Terminals

Drewry Research | Drewry Maritime Advisors

Thank you!

www.aegirports.com

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Port Property Advisersort Property Advisers

Port Property Advisors

Since 2003, Aegir Port Property Advisers have been a pioneer consultancy engineered to meet the unique property challenges of the ports and maritime industries. Aegir’s focus is to enhance a port’s competitive and financial value by more strategically using its major asset.

In the last decade Aegir has undertaken complex port property lease, asset management, valuation, development feasibility, management consultancy and strategy instructions in Europe, the Middle East, Africa, the Americas and Asia.

Aegir & Drewry: helping you navigate the world of ports by

bridging the gap between the port and property sectors.

From our origins in 1970 London to a 21st century maritime and shipping consultancy, Drewry has established itself as one of the most widely used and respected sources of impartial market insight, industry analysis and advice. This in-depth understanding and objectivity provides our clients with the actionable advice and recommendations they need to achieve their ambitions and stay ahead of the market.

• Over 400 port assignments in 50 countries in the past 10 years.

• Since 2010, provided commercial and due diligence advice in port M&A and financing with a value of approximately $20bn.

• In last 5 years provided advice on vessel valuations on asset value of more than $180bn (combined).

• In last five years advised on container shipping industry investments totalling $6bn.

Market dynamics impacting the demand and financing of port...

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