STR - Stride Property [ex DNZ Property]

[fungus pudding]

The management agreement is a very generous 0.6% of total investments per year plus extra fees and performance fees. Therefore, for example, it is not in the interest of the manager to sell properties to reduce gearing. Secondly, the manager controls the board so they can pretty much do what they like. That is why they could make the public offer without consulting the owners.

That last point is the subject of current legal debate.

[OldRider]

By what mechanism does the management company control the board ?

Can they prevent a takeover ? and are they paid out in the event of one?

[Jessie]

By what mechanism does the management company control the board ?

Can they prevent a takeover ? and are they paid out in the event of one?

As the managers can appoint 4 board members and the owners only 2, even if some fairy godmother bought up all the shares, the managers would still control the company.

[Jessie]

DNZ has 2 problems: a high level of debt level, and a management agreement which acts against the interests of the owners.

The current income statement looks something like this:

Annual rents: $60m
Operating expenses: $7m
Management & Admin: $12m
Interest costs $23m
This leaves $18m profit which is well below the current distributions of $23m.

However, the current interest rate of 6.5% will not last. If interest rates increase to say 8.5%, interest costs will increase to $32m and profit will fall to only $9m and distributions would have to be slashed or completely halted. This will be the situation in about 3 years time if nothing is done. Also, under this scenario, banking covenants will be breached, and interest rates will therefore rise even further.

So the company has to act and soon. The only options are to raise new capital or to sell property.

The deferred plan involved raising new capital and left the company in a reasonably sound condition, but reduced equity for existing shareholders.

The alternative is to sell property. However, the managers will not be happy with this as it will reduce the value of their contract. So any scenario involving selling property will also have to factor in a buy-out of the contract. On paper, this should leave the shareholders with more equity per share than a capital raising, but it may be difficult to sell a large number of properties at reasonable prices in the current climate. Something like $300m worth of property would need to be sold to leave the company with 35% debt giving maybe $1 asset value per share or better, depending on the sale prices that can be achieved.

I imagine some combination of property sales and new capital is the most likely outcome of MMG and DNZ management negotiations.

Given the poor past record of many of the properties and the abysmal performance of management, the best option might be to liquidate the company in an orderly manner and pay back everything to shareholders. A payout of better than $1 per share in capital plus residual income over several years should be possible.

[Jessie]

MMG want DNZ managers to sell property rather than raise capital to reduce debt. However, I have my doubts they are right.

At current valuations, DNZ properties have a gross yield of 8% implying a net yield after costs for a buyer at current valuation of say 6.5%. One can currently buy shares in a property trust such as Kiwi with a net post-tax dividend yield of 8%. Why would anyone buy a mediocre DNZ property at anything like its current valuation when they can buy shares in a LPT with better quality properties at a much better yield? I suggest that sale prices may be well below valuation.

[Snapper]

Goy rung up by some call centre guy from DNZ asking all sorts of questions about who I was getting advice from, had I received a letter from Money Managers, did I want to see someone to get financial advice, etc...so now DNZ is wasting our money on getting call centres.

I did sign the resolution that was sent though, there's no apparent shareholder representation on the DNZ board at present so anything would be an improvement.

[Omega]

Share sales since trading recommenced
15/12/2009 7,884 Shares @ 0.70
14/12/2009 1,956 Shares @ 0.80
14/12/2009 15,000 Shares @ 0.80
11/12/2009 2,614 Shares @ 0.50
08/12/2009 677 Shares @ 0.41

[fungus pudding]

Share sales since trading recommenced
15/12/2009 7,884 Shares @ 0.70
14/12/2009 1,956 Shares @ 0.80
14/12/2009 15,000 Shares @ 0.80
11/12/2009 2,614 Shares @ 0.50
08/12/2009 677 Shares @ 0.41

Is it any wonder? Most buyers would run a mile from these mobsters. But you can bet your boots they will use this low price as ammunition to rip us off further.

[Balance]

So what was Simon Botherway, proponent of good corporate governance, doing on the Board of DNZ?

[fungus pudding]

So what was Simon Botherway, proponent of good corporate governance, doing on the Board of DNZ?

Earninghis living.