Sdic Power Discussion Threads

[lagosboy] 01/4/2010 16:16

scrubs

Don't hang your hat on one small disposal. It could have been the crown jewel of properties in the entire estate.....who knows.

These are multi unit blocks and if you believe any potential buyer's due dilgence would not uncover the reasons for the sale and that they would not adjust their bid accordingly I think that is a very naive postion to take.

An earlier poster who runs a property company in Germany spelled it out very clearly,he explained that the best money to be made in German Real estate was in buying bombed out property companies, which were over leveraged, over ambitious on the operational side and reliant on overly optimistic projections of capital growth.

Davidosh

Of course I am aware that the estate is not professionally valued every month, but given the relative static nature of capital appreciation in this market over the last 15 years, I would suspect that the year end estate valuation is not far off from the current day valuation. I think that is a resonable assumption to make.

As I said earlier, if you and shcrubs believe that properties could be sold at a premium, by definition that means the year end valaution (+- immaterial movement to today) and current valuation understates the true market value of the properties.


Whilst I agree it is not in SYG interests to support disposals as it will reduce the estate valuation upon which its fees are calulated, it is likewise in SYG's interest for the Estate to be valued correctly and not undervalued as you are suggesting.

It is also in all parties best interest for both SYG and SDIC to prosper.

Being pragmatic, the worst properties will be showing the highest loan to value ratio's and these will not be easy to sell & a premium would be a pipe dream.

The superior properties will oppositely, have the lowest loan to value but if they are sold off the estate quality will be seriously compromised and future capital appreciation will be negated.

It is not a simple process.

It is not in anyone's interests to watch SDIC collapse but I think it faces a serious problem without a re-capitalisation as it does not generate any cash whilst at the same time it needs cash to support the business model of refurbing.

Look, some form of re-cap idea has already been floated, so the sounding out process has begun, I am sure the major shareholders will have all voiced their views.

I am sorry but I think your objectivity is being clouded because you know a placing or rights issue will be dilutive.

I guess no extraordinary dividend this year.......ooops, here comes that frying pan!!!!!

[davidosh] 01/4/2010 15:02

scburbs....spot on. There are management issues too. I will not put money into any fundraising without big changes and I want to see how this model generates cash.

[scburbs] 01/4/2010 14:57

Lagosboy,

I meant €22.46m proceeds, €21m book value. Profit €1.46m.

I didn't say it was easy to sell at a premium, it was you who said they would be forced to sell at a large discount and I provided evidence to counter that claim. I think they should be able to sell at close to book value (for the very reasons you make about mark to market!) and, therefore, they should be selling.

I agree there are fundamental issues to resolve and the disposal of properties would not solve them all, but I would hardly describing selling properties in order to deleverage as papering over the cracks!

The current distressed valuation is due to the debt issues, selling properties directly addresses this issue and would lead to a revaluation of the share price. Yes, the company would still have more work to do, but this would be a massive step in the right direction.

[davidosh] 01/4/2010 14:56

Lagosboy....They do not revalue the properties every month ! If the value at June year end is 'x' and they sell a building in November for X plus 5% that is not an inaccurate valuation just a market move or good selling conditions since the valuation point.

[lagosboy] 01/4/2010 14:42

schribs & davidosh

With respect I think you guys are missing the point.

If it were that easy to sell properties at a 'premium', then surely they should be valued at that figure in the accounts, since that is their true market value. Mark to market in its purest & indisputable form.

Get a few bids,satisfy the bank, revalue the portfolio accordingly....job done.

Shrubs, I guess your figures above are incorrect, not double book value....anyway I suspect other factors driving such a small disposal and could easily be some cherry picking.

Right now the market is valuing the portfolio on a distressed basis, you can not argue with the share price and you can not argue that this company does not generate cash. Diposals to pay down the bank does not address that problem and of vacancy rates, indirect costs, refurb, estate quality....the list goes on and on.

There are some fundamental issues to reslove and papering over the cracks to buy time does not resolve them.

[ydderf] 01/4/2010 14:34

scburbs and pauly - you are both intelligent and numerate commercial property investment persons, please check my assumptions on the OTE thread, I can hardly believe they are correct.

Have I missed something?

Please read both yesterday's announcement and also the last half year report together with my analysis.

[davidosh] 01/4/2010 12:47

Properties have been sold at a premium to book value and they are spread across many cities so no need to appear distressed by selling a few in rotation or when a keen buyer appears in a location. Just need to incentivise a good selling agent. The market there for rental portfolio sales must be ten times bigger than here in the UK.

[scburbs] 01/4/2010 12:42

Lagosboy,

We will have to agree to differ as I am very confident that I am bang on the mark.

I am not suggesting a rushed liquidation of the portfolio, but a sensible disposal programme of say €200-300m. To date they have sold €22.5m of properties at a premium over book value of €21m.

Sales of a few hundred million is a drop in the ocean of the German residential market. If you read the reports from the main competitors many of them have realised much more than that from disposals and they have not been selling a large discounts.

[lagosboy] 01/4/2010 12:38

schrugs

You are way off base.

Selling properties has no clear or guaranteed positive effect & the discount necessary to achieve sales could even further worsen the problem.

If it were that easy, the bank would agree the strategy ,rather than hold company in breach and ultimately compromise its own security. That makes no commercial sense for te bank.

Forget the refurb, that's not working and looks as though a chunk of it is really ongoing repairs and renewals in disguise.

Kibes

I think SDIC is just a small part of JM overall asset base. He has interests such as in Regent Pacific and whole host of companies, too many to mention here. Website will give you an insight.

[davidosh] 01/4/2010 12:35

Property disposals are needed. The dilution would be huge in a fundraising and we are talking probably £200m needed to reduce the borrowings as a minimum. That is four times the market cap !! If the business model is not working are you sure the instos will be keen.

[scburbs] 01/4/2010 11:50

Disposal proceeds would be required to pay down debt so would clearly improve the LTV covenant position along with the amortisation issue. It is a no brainer that disposals are the best route for shareholders (potential conflict with what is best for the manager here!).

A capital raising can then be carried out at a much better price once they have stabilised and demonstrated that they are actually adding value from the refurbs.

[kibes] 01/4/2010 11:29

jeffian - I do wonder how much Jim Mellon has lost on this. If his property portfolio formed a major part of the SDIC estate he must have lost a fortune. Quoted as worth £500 million, his holding in SDIC is now only around £10 - £20 million.

[rightnice] 01/4/2010 11:28

Any guesses on how much they would need to raise????

[rightnice] 01/4/2010 11:26

Clearly the major shareholders could raise the capital amongst themselves - I saw this happen with MWB Group recently. Notwithstanding, the discount is usually smaller when this happens only the dilution is greater as PIs can't participate. Nevertheless if the share price falls before the current price as a result, PIs can just buy at the lower price from the market, perhaps not as cheaply as the price offered to major shareholders but certainly an opportunity to average down and profit considerably from the benefits of the placing to the share price in the medium term.

[jeffian] 01/4/2010 10:03

Indeed. The company said this -
"Amongst those discussions are potential options which may be available to SDIC, such as recapitalising the Company and/or internalising the management, investment advisory and property management functions. It is the intention of the Board and its advisers to discuss these possibilities with key shareholders once the discussions with the financing banks have been concluded."

And who do you think those "key shareholders" are? (Clue: Not you!)

Remember this one?

"jeffian - 18 Feb'10 - 18:54 - 516 of 780 edit

Watch out. This is a rich man's playground. A not-uncommon stunt in these circumstances (cf. Reuben Bros / PBR) is to 'rescue' the Balance Sheet via a Placing resulting in a major shareholder becoming an even more major, or even controlling, shareholder. Mellon's own property portfolio formed the basis of the SDIC estate and, whilst subsequent acquisitions mean that his interest in the company is minor, if substantial, he's not going to sit and watch you lot dump his SYG management company and take control of 'his' properties."

[lagosboy] 01/4/2010 09:30

kibes

I agree totally, could worsen the situation, that's why some form of capital raising is most likely option in my view & that is why I am out again as small shareholders always get killed in these situations & often don't even get invited to the party.

It is fat of life that when a company underperforms some pain occurs.

[kibes] 01/4/2010 08:19

WShak - surely selling off properties reduces the value of the portfolio and therefore has an adverse effect on the LTV ratio? Unless of course the corresponding loan is also paid off. Does selling off 20% of properties make any difference? It may help the immediate cash position but it doesn't have any helpful effect on covenants does it?

[lagosboy] 30/3/2010 17:58

Wshak

SDIC consists largely of multiple units within large blocks., so looking at trade buyers.

JM owns just 12% of SDIC and 44% of SYG directly plus a further 40% via Brunbrae (from memory).

Not sure JM will want go that route but as you say he could be out voted on the matter and SYG loose the contract I presume. I don't know the details of the contract but ome must assume that JM would have built in protection.

If you are going to sell properties, ideally you would llike to sell the poorer ones but as this is a trade buyers market that will be very difficult and the better quality ones will only attract bids at a discount if there is the slightest whiff of a problem which there already is.

The reality is SDIC has not generated any cash from operating activities for the last 3 years at least. It has spent a huge amounf of cash on refurbishment and at the same time the market vlaue of the estate has shown no significant increases.

At a 80% discount to NAV (or whatever it is) the market is pricing in a distressed sale of the entire company or a fund raising such as deep discounted rights issue. I don't agree with that valuation but I understand is basis.

[wshak] 30/3/2010 16:46

lagosboy,

Nobody is suggesting that we play hardball with lenders, SDIC is in no position to do that. However, an orderly liquidation of, say, 20% of the portfolio over a couple of years is something that I would expect banks to approve of.

We already know that the business model has failed - today's accounts say as much. As for complex shareholders interests, Jim mellon only controls a minority stake in SDIC and its future will be decided by the institutions. SYG's value relies entirely on its contract with SDIC, which can be terminated at any time if SDIC's management feel that is in their shareholder's interests.

I doubt anyone is going to give the current team any more money to spend so the only other way to reduce leverage is to sell off some properties. Other property companies seem to have managed that during the past year. If SDIC can't sell their properties at book value, then their valuations can't be worth much.

I am not advocating a mass sale, simply a few properties in each region per month.

WShak

[scburbs] 30/3/2010 16:17

Lagosboy, LOL! I was referring to the German residential property market as being robust, not SDIC!

[lagosboy] 30/3/2010 15:38

Nice try schrubs !

Robust means strong and healthy, not really terms that can be applied to SDIC from date of formation to current.

Robust is silent on sustainability or long term but I get your drift.

Wshak

Merging SYG into SDIC is not a simple task,there are complex shareholders interests in both companies to consider. I fear it would just cause a bitter and expensive dispute which will only serve to detratct from the core problems at SDIC and delay rectifying them.

We all knew about the structure (fee terms) when we bought in, so little late in the day to start crowing about it.

Liquidating properties is in my view the worst possible approach. This sends a strong signal that the business model has failed,..... buyers will be more than savvy enough only to offer low ball prices or just sit back and wait.

I agree with davidosh, this is a mangement issue and this should be the first port of call to start start turning this ship around. To allow what is essentially a simple business model to go so far off the rails is very poor.

The banks would also love to recover their loans and lend the money out again and get a pat on the back from Gordon and Alistair for meeting targets without advancing new money. Isn't RBS one of the lenders ?

[davidosh] 30/3/2010 13:58

I am not so sure they will be out of a closed period if the ongoing bank negotiations are so crucial and/or a placing is in the offing. In that event directors are more likely to want to buy in a discounted issue rather than the market.

I prefer to see management and director changes rather than director buying !!

[bisiboy] 30/3/2010 13:41

we should see jim melon starting to buy now

[wshak] 30/3/2010 10:55

They still seem to be negotiating with the bank over amortisation covenants so that may be used as a reason not to meet with activist shareholders but I'm not sure that I would accept that. There is talk of merging the Manager of the properties with SDIC and that will certainly help with the enormous conflict of interests that currently exist, but it's not enough on it's own. The market will undoubtedly be spooked by the talk of possible cash injection but that would be madness at the current price and would dilute shareholders to oblivion if they are unable to take part.

Of those that could take part in a fund raising, the question must surely be, why would they want to when it is quite clear that SDIC's managers haven't particularly spent money wisely in the past?

The answer to SDIC's problems is to slowly liquidate a portion of it's property portfolio and take the hit on the interest rate swaps associated with those properties. Management have consistently portrayed the interest rate swap markdowns as being an accounting measure but I'm afraid that the losses are real - just as my losses on SDIC's shares are real despite the fact that I haven't sold them. The fact is that SDIC are paying more in interest than they would be if the hedges weren't in place so losses are being spread out over a number of years rather than a single hit that would result if a portion of the debt is paid back - there no reason to keep property that we can't afford on this basis.

There are few banks out there who want to repossess and the banking covenants should get sorted, especially with chunks of the portfolio being ring-fenced from each other.

Vacancy rate of over 14% is absolutely hopeless and I can't see how this has been allowed to happen, even taking into account refurbs. On a positive note, there is huge scope for improvement there and getting it down to 6% will have a dramatic effect on cash flows. That, combined with asset sales, has to be the way forward.

WShak