market dynamics impacting the demand and financing of port...
TRANSCRIPT
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 ©
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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!
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• 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
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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.
249279
315363
399443
497525
478
548596
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%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
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3.00%
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5.00%
6.00%
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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 2011 2012 2013 2015 2016(f)
Glo
bal
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rld
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ct
Mill
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TEU
Global Container port throughput
CAGR ̴11% CAGR ̴5%
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Ship sizes
Source: Drewry Maritime Research
Average and largest ship sizes exponentially increasing…what will be the be the impact?
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3000
6000
9000
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Aver
age
vess
el s
ize
-TEU
Average vessel size in global fleet
Existing fleet New deliveries
CAGR +1.9% CAGR +15.3%
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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
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• 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
Source: Drewry Maritime Research
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Competition for port assets
Source: Drewry Maritime Equity Research
M&A multiples creeping up again
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EV/EBITDAmultiple (x)
Prior to 2006~9x
2006-2007~19x
Financial crisis ~11x
Recent deals ~14x
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Entering a market of lower returns
0%
2%
4%
6%
8%
10%
12%
14%
0
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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%
7.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
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
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• 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
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Enhanced equipment and
infrastructure required
Investment challenges –implications for ports and terminals
More rapid obsolescence of existing terminal capacity
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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?
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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
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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
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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
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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
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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
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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
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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
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• 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
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• 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
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• 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
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• 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
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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.
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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.
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Franc J Pigna CRE FRICS CMCManaging Director
Aegir Port Property Advisers
Neil DavidsonSenior Analyst – Ports & Terminals
Drewry Research | Drewry Maritime Advisors
Thank you!
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