Sdic Power Discussion Threads

[scburbs] 08/3/2010 13:30

If SDIC don't follow my preferred liquidation route then they stand to make €70m over the next few years as the swap unwinds (this assumes they are net rents breakeven). The swap unwinding equates to 21 Euro cents per share or slightly more than the current share price!

Personally I still think everyone (bar Speymill Group, although no doubt they will be creaming disposal fees off the top!) is better off if they start selling properties as I can't see many lenders wanting to renew 80% LTV facilities on anything other than onerous terms. In order to avoid this issue they need to be selling properties now. In my view they should be looking to sell at least a third of the portfolio (reduces gearing from 80% to 70%).

[davidosh] 08/3/2010 13:27

"....as for high yielding, the net yield is negative as is cash generation so the original prospectus I would suggest is not worth referring back to." Well, it's worth referring back to to remind ourselves what they said they'd do and if they'd simply stuck to Plan A, they may not be in the mess they are! (jeffian)

jeffian....agreed and I know two shareholders who bought large stakes in the original float based on that principle and are far from happy. Directors should be responsible for this change in strategy and explain who it has benefitted ?

[jeffian] 08/3/2010 13:21

Sorry. I seem to have got up everyone's nose with the "business model" comment. I just meant that at the outset, it wasn't meant to be that complicated.

Lagosboy,
"That is the driver for capital growth,a little udating and the value converges......." No, no no, no! As an old property hand I've seen that argument used for years (that the value of existing buildings must at some point rise to at least equal replacement cost) and there is absolutely no evidence to support it. The only thing that will drive values is supply and demand and there is no reason why there should not be a 'dual market' (low value older buildings vs. higher value new build) indefinitely as described by Ydderf above.

"....as for high yielding, the net yield is negative as is cash generation so the original prospectus I would suggest is not worth referring back to." Well, it's worth referring back to to remind ourselves what they said they'd do and if they'd simply stuck to Plan A, they may not be in the mess they are!

[davidosh] 08/3/2010 13:03

If you find the term business model pretentious, let's just say that the original objectives have not yet been met. Vacancy rates at 7.5% plus refurbishing 7.5% of estate plus 3% bad debts, that's a big chunk from the gross yield.....can this be rectified ??? I don't know the answer or solution, maybe someone else does.(lagosboy)

Well let me have a try.....

1. Vacancy rates are always likely to be around 3-5% just with normal turnover of tenants and resultant voids. I have not looked closely but I see no reason why this should not be reduced to nearer the average for the german market.

2. The refurbishments are not showing credible gains at present and that is the part of the business model that needs to be proven for me especially if there is a huge loss of rent whilst the property is out of action and huge fees paid relating to the project. Who is doing this work and what are the cost benefits ?? Show us the model and examples of the benefit ??

3. With regards to the fees being charged....If they were based only on a percentage of value added or yield enhancement then we may see an improvement all round. There has only been one winner so far from SDIC and that has been the property managers and their associates IMO. That needs to be addressed.

[lagosboy] 08/3/2010 12:06

Jeffian

If SDIC did not buy cheap older blocks....why would you they have such large ongoing refurbishment costs ?

The website states


SDIC owns over 26,000 apartment units, a sizeable proportion of which will are located in and around the 15 largest German cities. SDIC believes that German residential values in its portfolio, which are currently 40% below the building cost (excluding any value for land), will converge with the cost of construction in the medium to long term.

That is the driver for capital growth,a little udating and the value converges, as for high yielding, the net yield is negative as is cash generation so the original prospectus I would suggest is not worth referring back to.

If you find the term business model pretentious, let's just say that the original objectives have not yet been met. Vacancy rates at 7.5% plus refurbishing 7.5% of estate plus 3% bad debts, that's a big chunk from the gross yield.....can this be rectified ??? I don't know the answer or solution, maybe someone else does.


Many of the amatuer buy to let investors were indeed exactly that, wiped out in 2008/09 and even the UK's most successful husband and wife buy to let professional investors are finding life less rosy these days.

[jeffian] 08/3/2010 10:56

All this talk of the "business model" is a bit ott - it's hardly rocket science! The original Prospectus (which, unfortunately I can't now find other than on a pay-site) simply presented this as a high-yield, dividend-paying, asset-backed investment fund. I certainly don't remember any talk of buying cheap, discounted older blocks and having high vacancy rates and refurbishment costs whilst they were 'developed' into something more valuable as one poster here claimed. They were simply going to buy high-yield property and distribute surplus income as a dividend (target 6%) after interest and management costs. The issues seem as clear as day to me; their vacancy rates are too high, their refurbishment costs are too high, their management costs are too high and their gearing is too high. Even the most amateur buy-to-let investor can grasp the principles required but they would (rightly IMHO) think it a bit pretentious to call it a "business model"!

[lagosboy] 08/3/2010 10:35

Exactly scburbs, I agree......the end result could be the same, not too preoccupied thought that the convenat issue has been raised.

It is intersting to read the language in both the 2008 and 2009 A/C's on banking convenats generally and then to find this situation arising.

Are you a buyer of the stock?

[scburbs] 08/3/2010 10:26

Lagosboy,

Banks starting to question the business model? Let's be realistic it is much more likely that the banks are far too preoccupied questioning their own business models!

[lagosboy] 08/3/2010 08:51

envirovision

Agree chances are slim, partic in Germany, where hyper-iflation has always been the nation and Govt's biggest fear based on past history.

Probably get Govt intervention to portect tenants and rental caps whilst all other cost increased, and who knows how the loan interest will be hedged at that time, hopefully fixed.

We don't really know what the financing issue is, beyond a covenant on one of the loans. I am assuming that they either have or a liquidity issue meeting a repayment, a loan to value issue but my biggest concern would be the banks starting to question the buisness model.


If anyone knows exactly what the financing issue is that would help everyone in their evaluations of SDIC.

Right now I have to agree, I can't see any reason to buy in again.


It is a pity because this should have been a solid performer as part of a portfolio, opportunity to participate (with liquidity thru shares) in buy to let (with atwist) in a stable market.

[envirovision] 07/3/2010 20:43

Hi there, aside for the financing issues which clearly need to be resolved to bring some confidence back to support the share price, i am trying to figure what would be a good reason to be holding sdic.

Runaway inflation could provide a level of stimulus for the german residential property market not seen since days of bomber harris.

Its just very very sad though that the chances of for sdic its investors and germany having runaway inflaton are just about as slim as it can possibly get out of any developed nation in the world.

A business model which does not work and a management fund structure that is not in shareholders interests can hardly be a compelling reason to get involved.

[lagosboy] 07/3/2010 20:16

ydderf

Many thanks, I think it is clear that your view is that the SDIC business model does not work. Capital appreciation 1% pa does not get anywhere covering the cost of capital, let alone the managers fees and other commissions.

Is Goal, preventing investors buying Speymill Uk as this would seem the better play now?

SDIC owns over 26,000 apartment units, a sizeable proportion of which will are located in and around the 15 largest German cities. SDIC believes that German residential values in its portfolio, which are currently 40% below the building cost (excluding any value for land), will converge with the cost of construction in the medium to long term.

You don't buy this then,

The only business model for buying German property would be to wait for companies like SDIC to run inti problems and buy them at bargain price.

Otherwise buy new and run a lean and mean machine, but even then I am not sure this is one for small retail investors.....but who knows.

It just does not look good all round to me at the moment.

[ydderf] 07/3/2010 17:04

lagosboy, no, I haven't. the thing about German res is that is it the most stable investment asset class ever, no boom and bust capital values but slowly appreciating income (slow = +1% pa). If the directors have disclosed everything to shareholders, I can see no reason for the company to fail, however it could limp along for years until an mbo takes it out on the cheap, once the finances are cleaned up.

German res is it unsuited as an asset for highly geared quoted uk propcos - the only rational explanation for the existence of these cos is that they generate huge fees and commissions for the managers.

The managers and promoters can hardly admit this though, can they?

You ask about my business model, I don't really have one but this explains for my reasons for buying

[davidosh] 07/3/2010 16:53

ydderf....I understood you were a buyer of german property. How does your own business model work and what does it need to make the SDIC model work in the same way ?

[lagosboy] 07/3/2010 16:08

ydderf

I don't thjnk anyone is comparing the two markets, indeed quite the opposite is true.

You are however raisng a very valid point in your dsecription of the German Properties and matters such as heating costs & others. (service charges, repairs, insurance etc)

It is concerns such as these that casts doubt over the business model which is based upon the gap narrowing bewteen the market value of older properties (after updating and being properly managed)and new builds. SDIC estimates this valuation gap to be 40%

If what you say is true, the demand for older properties (refurbed or not) will never match that of new builds. I think you have a valid point, but I am not a German Property expert. It also folllows that my theoretical comments that the estate value could actuall fall in value further would also be your view.

I guess that you beleive that the business model is fatally flawed.....have you taken a short position in the stock?

[ydderf] 07/3/2010 13:17

I am beginning to see that part of the problem is that investors believe the German res market is similar to the UK one.

It isn't

Most old blocks (most are 100 years old) would never be built now. Marble staircases and enormous square meterage of common parts and unused (e.g entrance and hallways) interiors, would certainly be expensive to build now, but there is no demand for them. Heating costs are a real problem in Germany, apartments are often difficult to let because of this, etc etc - there are many observations to make here.

The new blocks being built are in much greater demand and arguably the old res stock is depreciating - certainly the German tax office allows 1.5% annual depreciation against income, and that is in addition to repairs.

[lagosboy] 07/3/2010 11:27

I think some of you are missing the fundamental issue with SDIC and that is the efficacy of the business model.

The purpose was to buy older tenancy blocks with multiple units at prices around 40% less than the cost of an equivalent new build.

By applying a refurbishment plan to these older blocks it was expected that they would increase in market value by circa 40% thus equating to the value of new builds without having spend anywhere near 40% in refurbishment costs. Thus it was the simple approach of buying second hand and updating that would drive capital appreciation, which, as has been correctly pointed out has not really existed within the German residential market for the last 15 years.

The dissapointing aspect for me is that despite the recovery from the trough of one of the most severe economic downturns & despite spending considerable sums on refurbishment that the estate's commercial value continues to be marked down year on year.

It would appear that not only has the business model failed to produce the expected capital apprecaition but also that the operating level, direct costs, bad debts and vacancy rates have become out of control.

Quickly on yield, the respective gross yield (10% at SDIC) is irrelavant if the net yield is negative. SDIC currently does not produce a cash surplus from operations.

Liquidating the company will not create any value for shareholders as it will only be trade buyers and they are savvy enough to pick these units up at knock down prices. Indeed there are companies set up whose business model is to do exactly this. Even selling selectively will not help much and it just further undermine the model.

It would only be the banks that would enforce such an action, if they became sufficiently concerned about their outstanding loans.


Expert evaluation on the exact relationship between yield and capital values is needed, since clearly whilst capital values theoretically increase as yield increases, there still needs to a bidders out there. Right now one could at the extreme argue that the SDIC estate has zero value because it is producing zero net yield and decling in value. Why woulod you buy something if it cost you to hold it ?.... clearly because you believe the captal value will rise......that is what the business model was designed to produce & must start doing or the NAV figure we hold on to, becomes meaningless.

I take the points on fees etc & really I can't comment or speculate, the banks could shut that down if it was serious, I guess. I think there is a bigger issue and when all is said and done Mr Mellon is just a tad more successful than I, so maybe it will get turned around and his beliefs and trust in the German Property Market will turn out to be correct in the fullness of time.

[skyship] 06/3/2010 17:48

Hi all - this has always been on the radar, but I've never actually looked at it seriously. Is there a reasonably up-to-date single post or press article which provides a good overview of the status here?

Frankly I was surprised to see the share price back down to these levels - I had assumed Jim Mellon's buying would have lifted and maintained to higher levels. The share price suggets these are either extremely cheap.....or SDIC is headed to the knackers yard!

Perhaps best to keep one's powder dry until we here more of this:

"Two directors of the Company, together with the Manager and Adviser, recently
met with representatives of its lenders to continue discussions on the banking
facilities currently available to SDIC and the measures which may be agreed with SDIC's banks in order to remedy any covenant breach, should that occur.

A further update on these continuing negotiations will be provided at the time
of the announcement of the half year results for the period ended 31 December
2009 (due to be released in the second half of March 2010) or earlier, if
appropriate."

[davidosh] 06/3/2010 17:18

ydderf....in many ways I agree with you there especially regarding shareholders interests and those of the managers and fee takers. Indeed you could say that the managers, consultants and no doubt the maintenance men who are probably all in some way employed or acting on behalf of Speymill Group are really trying to maximise the returns for Speymill under the management contract. They are therefore not incentivised towards extracting value for SDIC. I would be pleased if someone could show me differently though.

If the management is efficiently done in house and directors appointed who know how to drive returs for SDIC rather than SYG I cannot see how yields of 7-11% cannot generate profits and eventual dividends for SDIC holders. I am in favour of selective sales to bolster the balance sheet and reduce gearing but otherwise no need for liquidation.

Liquidation would be throwing in the towel and suggesting the whole strategy was a farce from start to finish IMO as property prices have not collapsed in Germany.

[ydderf] 06/3/2010 16:16

the only course of action of benefit to shareholders is the liquidation of the company. there is no growth German in residential property capital values - I speak as an experienced direct investor, that's why yields are 7-11% - the high market rate of income return is a reflection of the lack of capital appreciation prospects. if there were real propects of capital appreciation the yields would be much lower

this is a simple tussle between the capital (shareholders) interests, and revenue (managers and fee takers) interests - the two cannot be reconciled.

its pointless arguing about the structure of the company, while there are managers, there will be fees, and a unexpressed shadow-agenda

[lagosboy] 05/3/2010 11:58

Happens all the time crawford, it's called a Rights Issue or Placing, only thing is that it happens in advance of the event.......all very clever stuff.

[crawford] 05/3/2010 11:18

Don't worry chaps, I've never seen a share go below 0p yet.

[lagosboy] 04/3/2010 10:53

davididosh

Whilst you correctly point out that Mr. Woodford has been involved in a dispute with Omega Insurance, that has largely been resolved. I would characterise it as a 'serious spat'but boardroom shakeups and personality clashes always make good press.

It is also a very different issue to SDIC, Omega was profitable but had failed to put to work additional capital, some of which was provided by Invesco. Whilst Omega remained profitable it was against a back drop of the likes of Amlin, Hiscox & others generating triple digit increases in profits. Investors led by Mr wood therefore sought to make board and management changes and to get this capital deployed.

Those objectives have been largely and my view is that Mr Woodford and Invesco have ample resources to take more than one managemnet team of to task at any one time.

Th issue at SDIC is twofold (1) are the management team up to the task (2) is the business model fundamentally flawed in its assumptions or is it just a time frame issue.

The original assumptions and paramters of the model have indisputably failed, now it is a matter of how the situation can best be rectified.

[davidosh] 04/3/2010 01:40

For those unaware Omega is the company where NW is currently doing battle with the board and so rather pre occupied.

[davidosh] 27/2/2010 17:40

bisiboy....I see Raven Russia as a very good example of what can be done and the other large holders are bound to line up behind NW if he backed the same changes here. JM would not be able to stand in their way and it would be very embarrassing if we had to force it rather than JM get on with the job. So there you have the way forward IMO. A detailed plan put before NW simply modelling the RR one if necessary and a time limit for the changes or we mount the action by EGM ourselves and everyone has to stand up and be counted.