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No. of Recommendations: 7
I mentioned idea #3, Navios Maritime Acquisition Corp (NNA) in both the other threads in this
year's tanker series. Well, actually, I only hinted at NNA in the Knightsbridge Tankers
(VLCCF) thread. I didn't specifically identify the company in that thread. I did however
identify NNA in the Nordic American Tankers (NAT) thread, as the company that was at the other end
of tanker chartering scale to NAT.

When NNA reported Q4 2012 results this week, it had 20 vessels, the same number as NAT. Of course,
one difference is NNA has all its operating vessels on time-charters. The NNA fleet consists of
7 Panamax size (LR1) product tankers
4 Handymax (MR2) product tankers
7 Very Large Crude Carriers (VLCCs)
2 chemical tankers
2 newbuild LR1 product tanker (one of these vessels delivered in Q1 2013)
7 newbuild MR2 product tankers,
or a fleet of different size/categories of vessels, and also a fleet that transports a variety
of liquid cargoes.

As mentioned in previous NNA threads, NNA started out life as a Blank Check company, or a SPAC-
Special Purpose Acquisition Corporation. The first deal in 2010 that removed the SPAC label
was a major one, involving the acquisition of 13 vessels and 2 option contracts. All but two
vessels were newbuilds. This year, 2013, actually marks the delivery of the last vessel in
that acquisition. Several months later, the company completed a second high value deal in acquiring
7 VLCCs (6 operating vessels and 1 newbuild). This was an important deal because all seven
vessels came with attached charters, most at very high cash-flowing rates. This allowed NNA to build
a firm foundation with a nice steady revenue stream.

More deals followed over the next 6-8 months, but all much smaller deals. Three in all,
each involving a pair of vessels, including the exercise of the newbuild options.
Lastly, a trio of MR2 vessels were ordered in early 2012. Unlike most shipping companies, NNA
management try to work out most of the financing details at the onset. They still pull some
surprises, but more on that in a little while.

My NAV calculation for NNA ends up with a range, $2 - $2.25/sh. I should clarify that I low-ball the
newbuilds since these are non-revenue generating assets. But when I look at NNA vs other tanker
companies, I realize their "safe revenue" strategy is not being accounted for in a NAV calculation.
So I opted for a different calculation based on the revenue stream,
2 * VLCC revenue stream + 0.5 * product/chemical tanker revenue,
or 2 * $100M + 0.5 * $80M = $240M, or $4.8/sh on the lower side. NNA's operating fleet is also
relatively new- only two vessels are at, or over, the 15-year mark.

In November 2012, NNA management pulled off what I initially considered a bad move. But, I have
changed my mind and decided it might not have been such a bad move. NNA opted to issue preferred
shares to partially cover the cost of 4 newbuild vessels, $3M per vessel. Holding onto cash makes sense
in the current tanker market, and the preferred shares are convertible to common stock in the medium term.
Navios Maritime (NM), NNA's original sponsor and largest shareholder, completed a similar
move a few years back when it was financing some dry bulk vessels. IIRC, within a year,
the company repurchased the preferred equity at a discount. Mostly the same managers, so perhaps
they are attempting to repeat the feat at NNA?

Where does NNA go in 2013?
As mentioned earlier, the company prefers to employ its vessels in the time-charter market. This serves
as a good hedge as it offers the company downside protection. In addition, 17 of 21 operating vessels
have profit-share arrangements. So, NNA gets to participate in any potential upside. For the VLCC charters,
each of the seven time-charters are at above-average rates vs current market rates. The earliest VLCC
charter expires in mid-2014, and is on the oldest vessel. NNA pays a 5c/sh quarterly dividend. With NAT
and VLCCF, I indicated I was not so confident of each company's ability to maintain its respective dividend
on an annual basis. OTOH, with NNA, I have a lot more confidence that the company can maintain its
dividend for the year. At current prices, NNA's annualized yield is 6.21%

I realize micro-caps trading around $3.25/sh are not most investor's favorite playing ground. But NNA
recently got a Wells Fargo analyst upgrade. NNA is currently my largest tanker position (but
I need to work on my position sizing strategy for these deep-discount micro-cap dynamos)

Q4 2012 presentation:
(Top link)

One small annoyance-
Slide 9: I've struggled to find that cash flow cushion in prior quarters. Maybe this
year, with a majority of newbuilds contributing to revenue and cash flow, NNA will be to
show the vaunted cushion.

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