TAKING STOCK 24 NOVEMBER

 

WHEN Gareth Morgan announced he would offer his huge talent to a new political party to work with future governments, my first response was one of admiration.

How much punishment is someone prepared to take to achieve change and improve life in New Zealand?  What courage!

My second reaction was to review the background of people who seek public office.  I was surprised to learn how few people transition from obvious family, social and financial success to public office.  Only rarely do social or business leaders offer their services to government or local government.

It was not always so.

In the distant past it was common for good people with real wealth to want to contribute, often in local government, often as the local mayor or councillor, often believing that they could improve the outcome for others.  Many wanted their legacy to be a contribution via public service.  One might include John Key in this group.

Perhaps that still happens and maybe is what is happening in one of New Zealand’s best cities, Dunedin, is the result of problems that perhaps well-intentioned people cannot solve.

Perhaps Dunedin is the place on which to focus, to illustrate the difference between what one assumes are good intentions, but observes are appalling results.  Perhaps the wrong people are in charge.

Dunedin is in many ways in crisis, grossly overloaded with debt, partly as a result of a series of bad decisions, presumably made in good faith by people who, one again presumes, set out with good intentions.

Certainly the Auditor General, Lyn Provost, does not react to the deep cynicism of activists, and the Commerce Commission appears to pardon the sort of questionable errors that have created Dunedin’s debt crisis, though there has been some CC and Auditor General criticism.

In recent weeks, the crisis has focussed on what some claim is negligence and stupidity over Dunedin’s power network.

What the activists describe as a cover-up has occurred, with those tasked with the daily maintenance of Dunedin’s infrastructure blowing the whistle on a series of goofy errors by those who govern the two council-owned organisations, Aurora Network and Delta, both of which are owned by Dunedin City Holdings Ltd, which in turn is owned by the Dunedin City Council.

These confusing structures may have been created logically.

But they do provide layers which make scrutiny difficult and allow unappointed people, feeding from council funds, to take responsibility with what appears to be accountability to the council but perhaps not to the public.  Certainly there could be greater transparency.

The current crisis has been exposed by whistle-blowers, who claim that keeping the power on in Dunedin is a ‘’daily struggle’’ because of utterly negligent maintenance programmes, leading to real threats: -

1. Imminent failure of the network.

2. Risk to maintenance staff, one of whom has already died while working on a dangerous telegraph pole.

The maintenance people believe many thousand power poles are rotten, decades older than would be safe, and likely to break or be blown over, causing death or injury to maintenance staff, or passers-by.

The poles are rated 0 for extreme risk of failure to 6, meaning indefinitely safe.  Directors have Health & Safety obligations and can be personally liable.

Whistle blowers allege that poles rated 0 by independent experts are being re-rated ‘’satisfactory’’ (2 or 4) by the operating council company.

Furthermore, the whistle blowers allege that the lack of maintenance is linked to the Dunedin Council’s demand for dividends, the council being over-burdened with debt.

The doubters allege that the council operator has failed to maintain poles, thousands now likely to fall over in a moderate wind, and they allege that those being upgraded will be replaced by poor quality, cheap Chinese steel-fabricated poles with ‘’ductile’’ qualities 40% worse than the accepted standard.

When I research all of this I ponder who aspires to ‘’help’’ the public by governing such a company.

In the past the Dunedin City Council appointed some distinctly mediocre people (note: the public had no say) to govern its subsidiaries, Dunedin City Holdings Ltd, Aurora Energy and Delta Holdings Ltd.  It is not clear to me who recommends some unimpressive people.

In an era of financial stress, Delta, governed by directors closely linked to various property developments and also linked to the botched governance of South Canterbury Finance, decided to invest in property developments in an attempt to make profits that they said would ensure that Delta won contracts as the property developments were completed.

Delta invested $7 million in Luggate Park, a development organised before the 2008 crash by Jim Boult, the new mayor of Queenstown.

Luggate Park failed to proceed as planned and in 2013 Delta wrote off $6m of money belonging to ratepayers.  Ouch.

The uncompleted and un-sold development subsequently was transferred to new owners twice and now is owned by an Auckland developer who has sold some sections and is selling more.

Total sales, it seems, will release around $30m, leaving the new owner with a handsome gain, of at least $10m, not a loss of $6m.  It seems the new owner is the right sort of owner for a high-risk, high-return adventure.  Councils, and their operating subsidiaries, would very rarely be the right entities for such adventures.

Delta sold its land after an accountant examined the processes that led to the purchase, and recommended the mess created be exited.  He saw no value in allowing time to pass.  The loss was realised.

It would be fair to say that the accountant and Delta did not foresee that time might uncover demand for Central Otago and that patience might lead to recovery for Delta.

The transaction highlighted the conflicts involved and highlighted the absurdity of the original purchase, obviously made with a very short term target, after what I regard as inappropriate decision-making, by a completely inappropriate council organisation.

Delta spent $25 million buying into a Yaldhurst development in Christchurch.  It, too, was slow to gather pace so Delta wrote off $12 million and has now ceded its first mortgage control.  Many wonder why.  The public have not received an intelligent response.

Generally no one, perhaps with the exception of Hanover, Strategic Finance and South Canterbury Finance, likes to cede a first mortgage position, unless the handover is to a party that is certain to ensure the loan is repaid, perhaps with a giant input of capital.

Delta ceded its first mortgage without any such new capital.

It also spent some millions buying into Jacks Point, near Queenstown, which has, to its credit, survived a decade of delays and slow sales but is at last attracting buyers and slowly filling up, though it is not somewhere I would choose to live.

Again the Delta decision was conflicted, the Delta directors exposed to some justifiable criticism from those whose money underwrote these speculative investments (the rate payers).

Over a precious few years, Delta has managed to borrow and lose at least $20 million.  Governance? Competence?  Motive?

Delta, or Dunedin City Holdings, has other investments in a City Forest and Taieri Railway and it is an underwriter of the financially disastrous city stadium for which Forsyth Barr will pay around $2.5m to maintain 10 year naming rights, ending in 2021.

The Delta directors have changed from a group that included Mike Coburn and Stuart McLauchlan, both of whom were closely associated with the behaviour of South Canterbury Finance in its final nine months, behaviour I loathed.

When they left Delta, they were replaced by Bill Baylis and Denham Shale, the latter having recently died.  McLauchlan moved on to the Aurora board.

McLauchlan is still named as a Delta director on its 2016 Annual Report.  Perhaps Shale and Baylis were interim appointees made by DCC to oversee the revised directorship structure of DCHL and its group of companies – Aurora/Delta, City Forests, Dunedin Airport, and Taieri Gorge Rail.

McLauchlan, Baylis and Shale were the other directors at South Canterbury Finance in 2010 when the directors and Forsyth Barr’s Neil Paviour-Smith were making a hash of trying to rescue SCF, with its inept chief executive Sandy Maier Junior.

Forsyth Barr had recommended these people to serve on SCF but, of course the Dunedin fund manager had no hand in choosing Delta’s directors.

Nor could FB have had this role.  FB does not run the city.

With Delta, FB would have been conflicted because it had negotiated to pay around $2.5 million for the 10-year naming rights to the Dunedin stadium, while Delta’s directors were committing to use some of its electricity network revenue (around $5m) to help service the inflated debt of the Forsyth Barr stadium.

And, of course, Eoin Edgar, the major shareholder of Forsyth Barr, had been the energy on the Carisbrook Stadium Trust which had promoted the concept of the new stadium, Edgar offering to make a $1 million personal donation, offering to encourage corporate sponsorship for the stadium, and in return arranging to buy 10-year naming rights to help generate the funds for the stadium.

This naming rights arrangement was wrongly assumed to involve an up-front payment of capital but was in fact a monthly-in-arrears purchase beginning two years after the project was designed, the first payment made one month after the stadium was opened.

McLauchlan has often worked with Edgar and was his vice-chancellor (Edgar was chancellor) at Otago University.  Forsyth Barr organised a bond issue for the University, and was well rewarded for its work.

Both also worked on the Otago Rugby Union’s board, which also received a Dunedin City bail-out.

As you can imagine, none of those who have served the people of Dunedin by working as appointed, paid directors of Delta, are receiving much gratitude for their magnanimous public service.  Their critics are vocal.

Gareth Morgan may want to bear this in mind.

Delta, two years ago, declared an accounting profit of $12 million from its electricity networks role, perhaps boosted by a $7 million revaluation of the trees in the forest it owns, and paid a $15 million cash dividend to the cash-strapped Dunedin Council, as well as paying around $5 million to service the Forsyth Barr’s stadium’s $250 million (approx.) debt.  You might wonder why it did not pay the $5m to the council and allow it to service the debt.  Perhaps Delta had tax losses that made for tax efficiency.

The Dunedin Council services two mortgages used to fund the stadium totalling around $145 million, and it pays a few million each year to offset other costs and to pay the stadium for its role in promoting the city and various community events.

The civic-minded directors of the various council-owned subsidiaries who oversee all these sort of investments do not seem to receive universal gratitude.  Many internet forum contributors argue that Dunedin is being poorly served.

Some staff and management of what should be the cash cows, Aurora Energy and Delta, are conducting a visible campaign, suggesting the bad investment decisions of the board have led to neglected maintenance, endangering the electricity network and posing real safety threats thanks to thousands of rotten poles that should have been replaced many years ago, along with ageing switchgear, transformers and underground cables which are the unseen threat to the city’s reliability of supply.

Those who are generously burdening their lives by accepting well-paid directors’ roles have reacted by asking Deloittes to conduct an investigation, and have determined that public enquiries should not be put to its chairman or CEO, but to a journalist, now a Public Relations officer, Spiro Anastasiou.  I dislike this PR intervention.  The CEO should be the front man.

The independent Delta director, Steve Thompson, joined Deloittes from the IRD 27 years ago and is now the managing partner of Deloittes, which will allocate another staff member to investigate the allegations of Delta mis-governance.  I would have preferred the external investigator to have come from a totally independent third party, rather than Deloittes.

The former manager of Delta, Richard Healey, claims that to restore the electricity network now to a high standard would cost hundreds of millions.

It was he who described the job of keeping the lights on as a ‘’daily struggle’’.

Delta, as you might guess, has a corporate box at the Forsyth Barr stadium.  You might expect this though I do ponder the value of a monopoly subsidiary of a council having any commercial need for such an expensive facility.

But the stadium needs sponsors, desperately.  The sponsorship support that was promised has not been delivered, except in very modest amounts.

Dunedin has been told that the stadium would receive tens of millions of revenue from corporate sponsorship when its promoters were selling the concept of a stadium.

The money raised was a minute fraction of that sum, leaving the council with a loss-making stadium, albeit a very well-constructed sports facility, requiring debt servicing which even at today’s rates plays an unwanted role in Dunedin’s burgeoning debt levels.

Dunedin is a great city, for far more reasons than just its adoption each year of 10,000 students, of whom a small percentage go on to be very well-trained doctors and dentists.

It borders the wonderful rural province of Southland and is only a few hours’ drive from New Zealand’s tourism centre, Queenstown.

It has needed qualified, well-intentioned, competent and unselfish people to provide public service, at peppercorn prices.

If it has attracted such generous leadership, the city has not reacted with obvious gratitude to all those benefactors trying to share their expertise and kindness.

The public today appears to be angry, scathing in their judgement, and far from respectful to the various Dons who have wanted to help the Tartan city enjoy its haggis.

Gareth Morgan should reflect on this, though he will offer expertise way beyond most who offer to serve.  He has no obvious conflict of interest, no financial objectives and does not seem like a man motivated by power, or in a quest of fame.

He is clever, amusing, generous, well-connected, well-meaning and undoubtedly wants the best public outcome for the constituents who form New Zealand’s electorate.

If the Dunedin example is being replicated throughout the country he might want to reflect on the question no one likes to ask.

Is it worth the effort?  I guess he will be one who answers the questions by asking himself ‘’Can I add value and will the people feel I am serving them?’’

‘‘Do I genuinely have knowledge and can I afford to share the time and expertise so it is good value for money, for the people who will pay the cost?’’

As far as I can see, he will have no conflicting interests.

 _ _ _ _ _ _ _ _ _ _ _ _

THE settlement announced in the claim of the Capital + Merchant Finance liquidator, KordaMentha, from the CMF Trustees, Perpetual, will surprise few.

Perpetual, a trustee with an appalling record for neglecting the obvious, failed in its duty to virtually all of the finance company investors that Perpetual represented.

It would not want a court case to produce a result that opened the door to all claimants who could find a way around the Limitation Act.

Its insurers would have wanted such future claims even less than Perpetual, for the insurers may also have insured the other hopeless trust companies, Covenant, NZ Guardian Trust, Trustees Executors and NZ Permanent Trustees.

Indeed, the insurance industry has already shelled out tens of millions because of disgraceful behaviour by financial sector participants, though few payments related to the trustee company failures.

The settlement figure has not been disclosed at this stage but the decision to end this matter prevents the need for a court case which was to have begun in November and would have been well attended by various other parties with potential claims to file.

As it is now, the High Court has not been asked to rule.  I regret this.  Court exposure would be an effective way of highlighting the dreadful corporate behaviour of the past decades.  Something must be done to be the ‘‘risk’’ that ought to accompany pursuit of ‘‘return’’.  The threat of jail might be defined as the ‘’risk’’.

CMF has returned to the public eye in one other event this month.

Its 2006 chairman, Trevor Janes, was National Party-linked and later appointed to the board of the Accident Compensation Corporation, having been a director of CMF who was not charged with the offences that led to the jailing of other CMF directors.

Janes signed the 2006 prospectus but a subsequent document extending the life of the prospectus, which stemmed from the original document, was signed by the other directors and it was those directors who were charged and later jailed.  I am still bemused by this.

Janes has been in the news this week, nominated for an award made by Deloittes to be judged by Neil Paviour-Smith, Samford Maier Junior and the NZ Herald Business Editor, Fran O’Sullivan, perhaps with one or two other judges.  I do not know the process for selecting those who judge.

Janes’ nomination was for ‘‘Chairman of the Year’’, an award once won by Pumpkin Patch and Hanover chairman, Greg Muir.

Capital + Merchant Finance’s collapse came some time after Janes’ departure from its chairman’s role.  He was very wise to resign when he did in 2006.

It failed in 2008 because it was a stupidly managed finance company, with virtually no real capital, effectively geared at 200 to one.  Its governance and management was child-like.  Stoned sheep might have done a better job.  The failed directors should never re-surface in commerce, anywhere, certainly not to preside over other people’s money.

We will not see the likes of it again (I hope!).

The ACC has been a most successful fund manager and insurance company for decades, having enjoyed excellent investment leadership from the likes of Nicholas Bagnall, and earlier Stephen Montgomery.

Any recognition of their success will be applauded.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

 

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Edward plans to be in Blenheim on 5 December and Nelson on 6 December.

Mike will be in Hamilton on 30 November.

David Colman will be in Palmerston North and Wanganui on 7 December and New Plymouth on 8 December.

Investors wishing to make an appointment are welcome to contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 17 NOVEMBER

THE terrifying quakes that have brought death and destruction to some parts of New Zealand will dominate the behaviour of all sane people, for some time.

They put into perspective some of the time we all spend on providing for the future as we assume it to be.

We might all rationalise life after political upheavals, or wars, or other man-created events but none of us have a clue as to the plans of nature altering the angles of the plates on which we balance.

We do not know whether we will still be on stable ground tomorrow, next year, or next century so typically we respond by assuming that nature will let us proceed with our plans.  Status quo suddenly sounds attractive.

Certainly I know of no rational way to prepare for a natural disaster, other than to meet the Civil Defence recommendations (water, transistor radio, prunes, tissue paper) and to keep some old-fashioned money in your pocket.  Power cuts mess with technology.

This inability to cope with what might become the important and the essential requirements of life does not extend to knowing the future value of nature-damaged assets.

Commercial property and residential property can be insured against change but the inconvenience of a destroyed home is not overcome by money, in the days around the event.

After Sunday night’s giant shake, we fielded many calls from people concerned about property-based investments.

Engineers’ reports will be released on all relevant properties in the various listed and unlisted property vehicles.  In Wellington, several buildings are seriously damaged.

New issues will proceed only if there is no damage of relevant buildings.  So far, there is no news of problems to building in which our clients have an interest.

I wrote earlier this year that, in real moments, the likes of builders, engineers, electricians, plumbers, contractors and nurses are hugely more valuable than property moguls, investment analysts or ivory tower eggheads.

Will the latest earthquake propel our thinking about real jobs, apprenticeships and essential trades?

We extend our sympathy to all readers and clients whose lives have been upset by the awful earthquakes.

 _ _ _ _ _ _ _ _ _ _ _ _

THE rapid changes occurring in the Wellington property market was signalling a long-overdue reduction in the cost of leasing office space, prior to the earthquakes.

The change was largely a reaction to the Crown’s new guideline, that public service employees should be allocated a maximum of 6.95 square metres per head, a significant edict that must lead to reduced demand for space.

One of Wellington’s most enthusiastic commercial property owners forecasts a growing conversion of what was office usage, to accommodation, where demand is growing.

Whereas demand for office space is falling, the demand for hotels, serviced apartments and apartments is close to all-time highs, and is still rising.

Occupancy rates in the sector are close to 80%.  Per night charges are often loaded, because of accommodation shortages.

And the apartment buildings report 100% occupancy, in most cases.

The probability of these changes in usage has been visible for some years.

Buildings developed to modern earthquake standards, many constructed in the 1980s, provided for more office space than is now needed in the capital, reflecting the move of head offices to Auckland.

Unable to find tenants, owners have sold to those who would convert buildings to accommodation, a process involving low initial cost, but high conversion expenses.

The new owners have benefitted, enjoying virtually 100% occupancy and stable rent, after the refurbishment and conversion.

Several examples of the pressure on the office building landlords have been displayed to me.

One of Wellington’s highly-geared property owners has reacted with a sensible approach to tenants, upgrading facilities and services, and freezing the costs of leasing.

Others have refurbished and now offer reduced rentals.

For example, those on The Terrace, in older buildings, have been paying $300-$360 per square metre yet are now being offered better space in the likes of the BNZ building in Willis Street, at costs lower than their current leases in a less desirable location.

Those who in recent times have paid high prices for buildings in the central business district will be going to extreme lengths to retain their clients.  They may have been unwise to buy.  Look out for ‘’free’’ gymnasiums and ‘’free’’ improvements to common areas.

The best of the commercial real estate brokers will be calling on all users of office space and showing them what is available in similar or better space, at lower prices, perhaps with freebies.

An increasing number of owners will be sweating on the possibility of interest rate rises, as banks react to the rising cost of deposits (overseas sources of deposits are demanding higher rates).  Insurance may also become a bigger issue for building owners.

The only property owners enjoying stability are those with long leases and low gearing, and those who have bought cheaply, converted to accommodation, and now enjoy growing demand for inner-city dwellings.

Part of the reason for the success of the accommodation conversions has been the new emphasis on inner-city campuses for tertiary education students.

In areas around Manners Street, Cuba Street and Dixon Street, converted buildings are attractive to foreign and domestic university students, as well as for those career-focussed young people who have no taste for suburbia, and anyway, may have some saving to do before they can become owners.

One example of how well these conversions have performed is with the Quantum properties, where The Wellington Company has sold to the public, ownership interests in buildings located in Boulcott Street and Manners Street, with a third offer in Dixon Street now being advertised.

The Boulcott Street building was syndicated four years ago.

Its return has lifted from an initial 8.75% to a current 9.25%, and the value of the building has risen by 20 percent.

The new offer is of a Dixon Street building, which has functioned as an accommodation provider for three years after its refurbishment, and has enjoyed 100% occupancy.  Its dividend is set at 9.25%.

Fairly clearly, The Wellington Company has found a niche in the market that makes better and more sustainable use of 1980s Wellington office space. 

Fairly clearly the Crown’s new insistence on open floor plan, with the ‘’sardine’’ open floor plan allocations, is having a drastic effect on demand for Wellington’s excessive level of office space.  This effect will increase as leases come up for renewal.

One can hardly blame new developments.  There are few cranes on view in Wellington (unlike Auckland), though the earthquake will change this, as demolition begins.

Investors in the likes of Oyster Group’s Eagle House in Victoria Street, where very few lights are on display even in the darkest days, will have discovered that not all buildings are equal.

Sadly the Eagle building is not suitable for conversion to accommodation, and is destined to be a flag-bearer for those who have always questioned that type of syndication.  I imagine Oyster has some grumpy clients.

Footnote I:  The Terrace was once the buzzing business centre for the likes of Shell, National Mutual and the major accounting and law firms.  Today one third of its buildings provide hotel accommodation, rental apartments or serviced apartments.

Will Jervois Quay be the next conversion area?

Footnote II: The earthquake’s destruction of some buildings may reduce supply of space.  We learned from the Christchurch quake that rents rise, and values rise, after a dreadful quake, providing the building has come through unscathed.

 _ _ _ _ _ _ _ _ _ _ _ _

AS financial markets continue to flounder, not knowing which of Donald Trump’s on-the-hoof plans will ever be implemented, investors have been frozen, perhaps undecided as to whether Trump wants to encourage business, or destroy it.

The only logical response has been the rise in bank swap rates and bond markets, which attempt to price uncertainty by simply rising at the first sniff of any doubt.

Currency rates have been set by emotion, share prices in different markets have moved irrationally, while property prices have reacted to the moving interest rates.

Gold prices remain heavily correlated to the value of the yuan, the Chinese having entered a deal with the IMF and the US government which seek to control the gold price.

Swap rates reflect a basis for the cost of money, and an assessment of changing access to money in the future.

It will be the future access to replacement deposits that will be on the minds of most bank treasurers.

Our banks are allowed to have a dependence on offshore funding but there is an obligation to borrow one year (or longer) money, and a limit to what percentage of a bank’s money can be raised offshore, in short term deposits.  Most domestic savings go into short-term deposits.

Offshore depositors naturally want to believe that the currency in which they are saving will be stable, so they want higher rates if there is doubt.

And right now who knows how Trump could fund his promises.

Most would infer that he plans to borrow more money, print more money, and is happy to see the US dollar lose value, making imports dearer and exports cheaper.

Who knows whether his plans can be implemented?  He does seem to have convinced the world that inflation will be restored, something no Central banks have achieved in recent years.

What financial markets do understand is his promise to be America’s Guy Fawkes, the man who demolishes the present structures and starts afresh.

The markets try to guess whether he can achieve any of this, and if so, what the changes would do.

If you ignore all the bluster, and the cretinous statements and the absence of any morality, you uncover a fellow unafraid to promise radical change.  Can he deliver on his promises?

If you view his past business behaviour as a sign of what he hopes to create as the new norm, you might expect the markets to be bewildered, and highly sceptical that his ideas might ever be implemented.  His attention span is questionable.

This all paints a picture of uncertainty and creates fear amongst those who have participated in markets and are content with incremental improvements to the status quo.

Uncertainty and fear undermine value, and destroy planning.

In New Zealand, Mercury will still see water turning turbines and people using electricity; grass will grow; hungry people will buy food; civil servants will still go to work; dividends will still be paid.

No oracle will appear, or certainly no oracle with credibility.

At the start of the year, entering a toenail into the sea of those who make annual predictions,  I noted that this year would be characterised by mayhem.

Trump will either create more mayhem or, if he knows something no one else knows, sort out mayhem.  The US electorate reckon he knows something, it seems.

 _ _ _ _ _ _ _ _ _ _ _ _

MARK Francis and the property and funds management company Augusta are seeking to revitalise and upscale the under-performing National Property Trust (NPT).

The NPT is in Augusta’s view too small, has unused ability to raise capital and debt, and is suffering from poor internal portfolio management.  It sees NPT as neglecting opportunities to grow.

The NPT board is chaired by one of New Zealand’s most credible business leaders Sir John Anderson, a strong man unmoved by the ambitions of young guns, unlikely to yield because of pressure.

Anderson will understand his obligations to represent all shareholders.  He is independent and has no NPT shareholding (of any significance).

Francis has two options to change NPT.

He could come up with a sane proposal that would clearly benefit all NPT shareholders, or he could make an all-scrip offer for NPT and thus buy control, if the NPT shareholders wanted to sell.  The latter seems unlikely.  Francis likes to manage, rather than own, properties.

Some NPT shareholders, perhaps totalling a third of the owners, are aligning with Augusta.

The Augusta proposal is that NPT raises capital and borrows money to buy three buildings that Augusta wants to sell, at a price that I expect would yield NPT around 6.5%.  One building is not built yet.

All three buildings presumably would have credible tenants with long leases.

August also wants to buy the NPT portfolio management rights for $3.5m, a figure I guess would be negotiable.

Anderson seems to have addressed this Augusta proposal with some suspicion.

He may be commissioning expert analysis of the proposal, he may be talking to other shareholders, he may be discussing other proposals, he is seeking NZX guidance on Augusta’s proposal.  He has not responded to Augusta.

I am aware of another proposal that might upscale NPT, the building vendor wanting to become a minority shareholder in the NPT, with two seats on the board.  He does not want to separate the internalised portfolio management function.

There has been at least one other proposal which apparently sought to sell to the NPT in Auckland a building that was not attracting other buyers.

My guess is that NPT will want to retain its internalised property management and will react cautiously to any proposal that increases gearing, or involves buildings yet to be built.

Anderson, now 71, is a formidable character, just the man that minority shareholders might regard as their gate-keeper.

Francis will need to mobilise shareholders now, if he wants an answer soon.  He may view Anderson as an obstacle.

Is all of this urgency signalling that property prices may be peaking?

 _ _ _ _ _ _ _ _ _ _ _ _

INVESTORS who wonder why it is taking so long to resolve the issue of compensation for the likes of the South Canterbury Finance perpetual preference shareholders, might equally be mystified by the snail-like speed with which Babcock & Brown noteholders are being satisfied.

The Deloittes liquidator must be frustrated beyond words, having raised money by successfully suing Babcock & Brown directors and other parties.  Deloittes will want to distribute what amounts to a few cents in the dollar for all investors.  The money is in its hands, now.

In the SCF case, any further progress towards compensation was delayed by the Financial Markets Authority’s decision not to pursue an investigation until the Serious Fraud Office had had its case against directors resolved in court.

The SFO botched its case.  Some might wonder the cause of its scarcely believable errors.  But the truth is that the SFO case took years to get to court, during which period the FMA did some work but made no decision.

Finally, when the SFO had completed its botched case, the FMA declined to pursue any parties involved in the SCF errors.

The Crown, Treasury, and many other parties would have been relieved.

So now nearly two years later, after nearly $600,000 of expense, SCF investors await a hopefully-imminent decision on whether any case will be brought that may lead to compensation.

Six years have passed since SCF collapsed.

In Babcock & Brown’s case the liquidators have behaved diligently, having sued guilty parties and extracted a very sizeable settlement, roughly in amount what competent people should have extracted from the directors and other parties involved with Strategic Finance and Hanover Finance.

The money awaits distribution but delays have occurred which will not be resolved till December 2017, nearly five years after the settlements were banked.

Claims from other creditors, notably other unsecured creditors, have caused the delay, exacerbated by long delays in getting those claims heard in court, further delayed by an appeal against the court rulings.

Deloittes has seen off one large claim, winning at the High Court and Court of Appeal and winning costs.

Another three claims have been heard in recent weeks, with judgement reserved and unlikely to appear till 2017.

My guess is that if those claims succeed, the payment, now expected in December next year, will be around two cents in the dollar, perhaps triple that if the claims fail.

The liquidator will not release estimates.  In theory there could be no dividend.

So far the liquidator’s fees total $3.8m and the voluntary administrator’s fees total $1.7m.

There has been little that the liquidator could do to hasten settlement but clearly his fees do not stop!

My own view is that spurious or opportunistic claims ought to be at the cost of full legal and court fees and interest relating to the delays.

In the SCF case, a decision to proceed, or not, is expected to be revealed soon. (I cannot apologise for the delay; factors unrelated to my work are the cause of the delay).

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

 

I shall be in Christchurch on Tuesday, November 22 (pm) and Wednesday 23 (am).

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Edward plans to be in Blenheim on 5 December and Nelson on 6 December.

Mike will be in Auckland on 22 November and in Hamilton on 30 November.

David Colman will be in Palmerston North and Wanganui on 7 December and New Plymouth on 8 December.

Investors wishing to make an appointment are welcome to contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 10 NOVEMBER

 

ACCORDING to international assessments of wealth, judged by assets owned and income, 53% of all New Zealand adults sit in the top 10% ‘’rich’’ people in the world.

What this means is:

1. It is, generally speaking, ungracious to bemoan our lot in life.

2. The vast majority of the world (90%) do not own a valuable house and do not have an average income of anything like NZ$47,000 per annum.

3. We would not be a caring society if we allowed some of our dysfunctional, unlucky or incapacitated people to live on the streets, or without access to food, water, health treatment, education or care.

Unfortunately, to get a picture of our individual wealth we must rely on the last published census figures, the survey conducted in 2013.

For a business like ours, which services people with surpluses for investment, the census figures of special meaning are in the sections reserved for people aged over 65, who are beyond the saving phase of their lives, and now want to invest savings and live off the proceeds.

The census findings seem to shock many people.

For example they revealed that only the top 2.5% of all NZ people aged over 65 reported an income from all sources that exceeds $80,000 after tax.

Just 35% reported an annual income greater than $40,000 after tax, nearly half of which comes from national super.

Of people in the 65 years plus age group, 25% had income solely from the pension, and 49% had gross income of less than $30,000 per annum.

In effect half of all retired New Zealanders were surviving on less than two thirds of the average income (for all age groups of New Zealanders).

Yet a very high percentage own their own homes (65%), a figure similar to the average for the richest 33 countries in the world.

Our average house value is higher than is the case in most countries, currently said to be $602,000 (source: QV).

What this suggests is that the median retired person, who lives off $30,000 per annum gross, has a house which is worth $602,000.

This in turn suggests that the median retired person is asset rich and cash-flow poor.

Does this explain the impressive growth being achieved by Heartland Bank with its home equity release product, once called Reverse Mortgages?

It is clear to me that if we are going to have a global strategy of suppressing interest rates, to prevent governments, businesses and households from being destroyed by their excessive use of debt, then we are going to have even more people slipping into the under $30,000 bracket.

If the global strategy is to print money, forcing rises in all assets, especially houses in nice countries, then the offset to lower incomes must be rising asset wealth (for homeowners).

Is not the only logical consequence for many, a need to ‘’eat your house’’?  Surely it is not logical to own a $600,000 house but be unable to afford a visit to one’s grandchildren, or a golf club subscription.

My guess is that a home equity mortgage at a rate of, say, 7.2%, might become a normal way of offsetting the lower income caused by suppressed interest rates.

My suggestion to those who arrive at Heartland’s doors to shore up their cash flow is that they do not seek a large capital sum, unless it is for a project (like a new roof, car, house painting) but that they seek a monthly sum, perhaps of $500 or $1000, to top up income.

If you believe the real estate industry mantra that houses always rise in value over time, then the cost of the borrowed money might be at least partly offset by the real estate value gain.

The logical end result of this is that the value of estates, when the retired eventually die, will be lower.

But if the alternative strategy is selling and moving into a retirement village, will the exit tax (20-30%) applied by retirement villages be even more debilitating than the cost of regularly borrowing from Heartland?

If 53% of New Zealanders make up 10% of the world’s richest people, it seems that on average our options are those of a privileged nation.

My guess is that Heartland made a smart move in becoming the bank that leads the equity release market.

 _ _ _ _ _ _ _ _ _ _ _ _

OF course home equity release products abound in other countries.

When they first arrived in New Zealand they were marketed as Reverse Annuity Mortgages (RAMs) and for a short while a tiny Wellington company, Invincible Insurance, owned by Eugene Thomas and his son Gene, was the dominant player.

The Thomas family had a bach by the beach in Raumati South, here on the Kapiti Coast, alongside a bach owned by Sid Moses, whose son Roger Moses was for a while an extremely successful salesman, the founder of Reeves Moses Hudig.  The Moses and the Thomas families had lots in common.

Reeves Moses Hudig was another version of Money Managers, a so-called financial advisory firm that morphed into selling its own clumsy and mis-managed brands of funds, all of them fee-heavy, none of them even close to matching risk with return.

Moses himself sold the concept of ‘’investment’’ advice, and was a leading light in forming the ugly and now abandoned Association of Investment Advisers and Financial Planners, of which he was a life member.

He promoted the RAM product, originally a home equity release product charging rates like 14%, funded by Invincible Insurance.

Many will recall the extraordinary and tragic end of Invincible, the two Thomas men, father and son, being shot dead in their company office on the Terrace in Wellington, in the early 1990s.

Moses himself went on to an alliance with the Hotchin family (Hanover and Nathans Finance), becoming chairman of the disgraceful Nathan company, which pretended to be a finance company but was actually a company which pulled money in from the deceived public and invested the money in a soft drink dispensing company owned by Hotchin and Nathans.  Nathans went broke, investors having been rorted.

Roger Moses was eventually jailed for various failures during his period as chairman of Nathans Finance.

Reverse mortgages, or home equity release mortgages, became mainstream years later with Sovereign Insurance being the main supplier, until it was sold to ASB, which ultimately sold its book to Heartland Bank.

Heartland also bought an Australian home equity portfolio and today has a market leading position in a product which now is respectable, and is run by highly competent, well-regulated people.

Reeves Moses employed a small number of self-focussed salesmen, and was represented on the Kapiti Coast for a short while, but now thankfully, does not exist, most of its ugly salespeople retired.

Moses, in his 70s, could probably write a most interesting book about his selling career, ending with his stint in jail.

He could argue that in the 1990s there were many dozens of figures whose behaviour had been much worse than his, yet who escaped prosecution.

He would be right.  It was an ugly era.

There are many figures, going back to the 1980s, who should have been familiar with the gates at Mt Eden, and would never have prospered at all had today’s regulations been implemented in the 1980s, when markets were deregulated by Roger Douglas.

 _ _ _ _ _ _ _ _ _ _ _ _

THE announcement by Fisher Funds founder Carmel Fisher that she is to retire from her role as managing director, could mean that she wants to see more of her family, just as she says.

If the media is right she recently bought a $22 million palace on the North Shore and at her age, approaching 60, she has earned the right to slow down, and duck away from a troubled world.

She has been a torch-bearer for women, having shown that capital markets is not the boys’ world that it used to be in the 1980s, when she was a youngster at Prudential Insurance.

Indeed I can think of very few women who have done more for their gender than Carmel Fisher.

She captured headlines in the 1980s with her extraordinarily brave approach to portfolio management.

Pursuing illiquid, low-cap stocks, first in a bull market, then in a bear market, her stag fund from memory nearly doubled in value one year, then halved the next, as she cut her teeth on the realities of buying large holdings in illiquid stock.

When she had the bravado to form Fisher Funds, she pursued a version of this somewhat heroic form of investing, but learned along the way and was clever enough to surround herself with even cleverer people, a strategy that every good business owner learns, sooner or later.

She had things to overcome, such as the need to borrow millions to buy out her star co-owner, Warren Couillault who surprised the market by leaving Carmel’s fund.

But she does not lack courage and made what has proved to be a company- transformational purchase, taking over Tower’s KiwiSaver fund, and drawing in TSB to the KiwiSaver operation.

Fisher Funds is now a big ticket operator in KiwiSaver.

Along the way she listed three investment trusts, Kingfisher, Marlin and Barramundi, and attracted some high-brow support, when the late Lloyd Morrison bought a holding in her growing empire.

Morrison/Infratil definitely gave credibility to her bold plans.

New Zealand has far too many uneconomic KiwiSaver operators, charging fees that reflect their lack of scale.

My view is that the banks, the somewhat marooned insurance companies, Milford, Fisher and Craigs offer enough variety to meet all needs, and ought in time to achieve a scale that brings fees to a level of insignificance.  I would use no other fund. 

I see little point in some of the me-too funds, or even in the zero-fee Vanguard approach where returns cannot be positive when markets correct, retreat or collapse (choose your own word).

If we had our banks, perhaps an insurance company or two, specialists like Milford or Fisher, and our leading retail sharebroker (Craigs) covering the logical investment styles, I would look no further.  We certainly need no bucket shop styles run by amateurs.

Carmel Fisher deserves great credit for carving out a niche and growing it, for proving that women can break down the old boys’ network, and she has done so without replicating the boorish behaviour one sees in Wall Street and in bucket shops.

Personally, I dislike the Kingfisher, Marlin, Barramundi models, where dividends are paid from capital, effectively allowing today’s shareholders to add risk to tomorrow’s shareholders.

Dividends from these funds come from market gains, rather than income received, effectively exaggerating the risk when markets correct or collapse.

Given that these funds focus on small and mid-cap stocks, there is enough risk anyway as such previous holdings as Rakon and Pumpkin Patch might imply.

But Fisher’s retirement, to a non-executive role, should not be judged by what might happen in the future.

She has been brave, heroic even, has promoted the ideal of client service, has been innovative and she has always been smart enough not to be ‘’one of the boys’’.

She is not the only woman who has made it in what used to be a man’s world but she is certainly one who has led the way for other women.

She has not just talked about markets or tried to preach or teach.  She has been in the middle of the capital markets and has useful knowledge.  She is not one of the many ‘’pretenders’’ who have never had the responsibility of working in capital markets.

She should enjoy a slower lifestyle in her North Shore palace and allow others to refresh her empire.

And she just might have chosen a good time to step aside, given the state of global markets, and the various geo-political risks.

 _ _ _ _ _ _ _ _ _ _ _ _

ONE argument that Carmel Fisher has generously not entered, is the braindead argument that passive funds management (index-buying) offers better value than active management.

Fisher has been a highly motivated active manager.

She will know if her good years exceed in added-value by more than her bad years detract, but she KNOWS that the argument in favour of passive management is braindead.

Passive funds management by definition delivers an average performance, as investors will soon be observing, and lamenting.

If all funds were just index-trackers, there would be no reward for those productive companies with superior plans and performance.  Index funds exist only because of the work of real fund managers.

It is obvious that the ‘’average’’ active manager cannot outperform an index, as the index is the result of all ‘’active’’ decisions, and is unaffected by the index-hugging, no value-add funds.

Active managers, like Fisher, try to establish which companies are better than average, and which deserve more capital support.

The index is just the average of their decisions.

Active managers thus play an important role in the creation of wealth for savers.

Their role is to drive good value companies upwards, to fuel those vehicles that are succeeding, and to slow down or stop those vehicles that are stopping the economy from progressing.

Their work creates the index.

The best fund managers win more than they lose, in more years than average.

The index-based funds just go with the flow.  Braindead.

No one ever will accuse Fisher of going with the flow.

 _ _ _ _ _ _ _ _ _ _ _ _

THE American people have now had delivered to them what they sought: mayhem.

Is it fair to say that the American political system is broken; in desperate need of a reform that would enable the best people to rise to leadership contention, without access to hundreds of millions of dollars?

Is it fair to say that its financial system is broken; unable to provide the American dream (whatever that might be) for those from average-income households?

Is it fair to say that its social system is broken; unable to deliver access to health and education for many, let alone all, of its people?

The election result has provided an opportunity for America’s collective leaders to freeze the frame and ask whether the future must simply be an extension of the present.

For the sake of the globe, it is to be hoped that the question is considered, rather than allow the USA to evolve into the Once United, States of America.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

 

 

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Edward plans to be in Auckland on 15 November (on Shortland Street), Auckland on 16 November (in Albany), Blenheim on 5 December and Nelson on 6 December.

Mike will be in Auckland on 22 November, Tauranga on 28 November and Hamilton on 30 November.

Investors wishing to make an appointment are welcome to contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 3 NOVEMBER

 

Augusta Capital last week sought to replace the board of the National Property Trust, sell it some property, and take over NPT’s property portfolio management.

The desire of Augusta Property to capture more funds management contracts, by leveraging its 9.26% holding in the National Property Trust, is entirely logical, If somewhat cheeky.

Funds management fees are the most certain way to enormous riches, especially in property funds management, and Mark Francis, the Augusta managing director, will be acutely conscious of this avenue to rapid and extreme wealth.

Son of the former Chase director Peter Francis, the young Francis has cleverly built Augusta, capturing fee income without the need to own the properties.

He has done this by syndicating properties to the public but retaining for Augusta the property management contract, locking in a perpetual income stream.

In my view this has taken Augusta away from the simple listed property trust model and made it into a company which should ultimately offer dividends unrelated to nett rentals.

The boldness of its attack on NPT is not surprising.

Francis is a young man who has quickly become a rich lister and if he has similar characteristics to his father, he will not hesitate to pursue unorthodox paths in a bid for greater riches.

NPT is chaired by one of New Zealand’s great business leaders, John Anderson, whose contribution to a wide range of business and social aspects of New Zealand life earned him a knighthood.

Others in business have corruptly bought knighthoods, demeaning the title, but Anderson made it via the respectable route, of service to the whole community.

Having young Francis seek to tip him off the NPT Board will not spook Anderson, now 70.

As an aside I do recall how it was Anderson’s analysis that led to the National Bank, in the mid 1980s, identifying a pack of cards that would collapse, his description of Chase Corporation.

The NBNZ was not a participant in the mindless lending to Chase and was the only major bank to avoid sharing the hundreds of millions lost when the wind blew the pack of cards to the floor.

He will not have forgotten.

Augusta is a much smarter model than Chase.

It collects fees from properties without requiring the capital and the debt that creates a property portfolio.  It thus gets upside without risk.

Not for him is the concept of high debt levels supporting someone’s idea of the value of a property.

Of course in the 1980s there were many vainglorious, and stupidly governed property companies, some building plastic and glass towers, some buying them.  Egotists and mad men ruled many companies.

Their illusions of wealth fooled many bankers, investors and especially the media, with all sorts of charlatans described as being rich listers, and promoted by wide-eyed business reporters and magazine writers. (What a childish assembly of rubbish appears in the Rich List publication.)

The truth about commercial property is that it is worth no more than a multiple of its sustainable nett rental income, plus (or minus) some recognition for the exclusivity of its location.  Valuations may mean very little in times of sobriety.  Ask the bankers who were in charge in 1988.

Young Francis and his company Augusta, by syndicating, avoiding debt and ownership (in many cases) and capturing the lucrative, arguably absurd, fees, has come up with a model that should deliver dividends for his shareholders.

Augusta gets extreme fees when it obtains an option to buy and then on-sells to the public, avoiding risk, and it gets ongoing fees with a contract that may prove unbreakable.

Curiously the other property trusts tend to perform their property management in-house, to avoid silly management contracts.

Will Francis succeed in capturing the management contract of NPT’s $360 million, moderately-performed property portfolio, once managed by St Laurence?

I suspect this little battle is irrelevant, a small dot on Augusta’s radar.

If Augusta can continue to sell expensive buildings, tenanted by companies like NZME (the NZ Herald and its group), then Augusta will continue to rake in lucrative fees.  As long as Augusta is properly governed, and its people are not overpaid, the Augusta dividend stream should grow.

NPT shareholders will not want to have their dividend reduced because of silly external funds management contracts.  Let the battle begin.  Is a 9.6% shareholding enough to win a voting war?

 _ _ _ _ _ _ _ _ _ _ _ _

THE errors made by Wynyard, referred to in Taking Stock last week, might be tested by a class action, if you believe the media.

The Dominion Post has run an article alleging that a retired financial adviser and one-time small town fund manager, Greg Marshall, is seeking to raise funds to sue the Wynyard directors, alleging incompetence or negligence.

Marshall, a former business partner of George Kerr who co-owned Logic Funds with Marshall, is not registered in NZ as a fund manager or an authorised financial adviser, but is clearly an agitator.

We need agitators in New Zealand, though it is a thankless role and an unpaid occupation, as far as I have ever noticed.

Perhaps Marshall can see a livelihood in organising class actions, in which case he would be pretty much a unique fellow.

Even if this is so, I cannot find much hope, as a Wynyard shareholder, of receiving losses by suing the Wynyard directors.  They have clearly bungled, but it is not clear to me that they have made errors that lead to compensation for share investors.

It would be an extraordinary circumstance that created liability for signing contracts that were later not honoured by any other parties, let alone governments in other parts of the world, if that were indeed the cause of Wynyard’s downfall.

Wynyard’s failure, as far as I know, is not the result of fraud, or of abuse of shareholder money, nor, as far as I saw, was the company guilty of misleading investors.  Was it guilty of errors of stupidity?  Perhaps it was.  Was it guilty of illegal behaviour?  I doubt that.

The company was guilty of believing that its ‘’sales’’ would convert to cash and that sales to the Middle East involved contracts that were as enforceable as contracts to the NZ Police.

Call this naivety, or even stupidity, but it is a stretch to call it improper.

Michael Warrington has suggested the FMA should assess the error.  That might be an efficient way of assessing allegations of director liability.

My experience in potential class actions is limited (but growing) so I am unable to state that a class action is likely to fail or succeed.

But I have learned that investigating possible actions costs many hundreds of thousands of dollars, that the courts might not produce binary outcomes and that if a claim is possible, the funding of it still remains a challenge way beyond the resources of amateurs or the faint-hearted.

If an action against the Wynyard directors is to begin with a request for investor seed-funding, the request would need to be sourced from credible parties.

Investors will look at the outcome of the Feltex action – a complete, resounding rejection by the High Court and the Court of Appeal, of a claim based on a factually incomplete prospectus, arguably prepared cynically.  If Wynyard is a story of a suspicious death, Feltex was by comparison a tale of mass murders.

Various skilled people in law believe the Feltex claim was not handled optimally and that a different outcome might have been achieved with a different approach.

To me the outcome just highlights how difficult it is in New Zealand to establish liability for failure, and highlights the need for an overhaul of our laws.

Perhaps it also highlights the need for our High Court to establish case law.

My guess is that it will not be a Wynyard class action that gets the reform underway.

Wynyard’s directors are not amateurs.  As far as I can discover Wynyard did not indulge in obviously illegal behaviour, though clearly their judgement was flawed, their strategies bordering on reckless.

I suspect the losses I endured with my Wynyard shares will be written off as the cost of investing in a high return, high risk (but highly important) sector.

Like Milford Asset Manager, and its director Brian Gaynor, I record my biggest regret is that what seemed like the sort of business that New Zealand needs has been toppled by the arrogance and duplicity of two Middle Eastern regimes, and the naivety of the Wynyard board.

Take an action against them, if you can find the way.

 _ _ _ _ _ _ _ _ _ _ _ _

IN recent days the media has brought to the attention of their readers that a major change is occurring in Australasian banking.

The change arises from a scarcely believable error made by the Australian banks, in funding a glut of unwanted concrete apartment dwellings, largely in Sydney and Melbourne, but also in Perth and Brisbane.

By some calculations the Australasian banks face property development loan write-downs of $10- 15 billion over the next two years.

If those write-downs actually occur at that level, the Australian banks will report something like 50% reductions in profitability, meaning lower dividends and perhaps more capital-raising either by rights issues, or by selling Tier One or Tier Two subordinated notes.

All of this reflects yet again the unwillingness of banks to focus first on survival, rather than on profits, dividends and bonuses.  There a primary focus on sustainable profits only after the problem became undeniable.

A glut of half-finished, or unoccupied inner-city apartment blocks will be a signal of greed over pragmatism.

But the numbers should NOT sink the banks, nor will it affect their willingness to lend on private houses, where there is still a genuine demand and ample ability to lend.  Indeed banks will lend to competent developers, in New Zealand, at least.

To illustrate this consider the BNZ announcement last week, that it has contributed a tax paid profit of $911 million to its owner, the National Australia Bank.

If NZ is roughly one-sixth of the NBNZ, that suggests the Australian parent will report a profit of around $5 billion, or $10 billion over two years, easily enough to cover its theoretical share of the apartment lending losses, its share perhaps being $2- $3 billion over two years.

The CBA bank in Australia last year made a profit of $9.2 billion.

Now is not the time to remove all cash from the banks and hide it in one’s sock drawer.

As an aside, we once employed a British lady whose parents back in the UK used to hide their savings of five pound notes, by sewing them into the hems of the curtains.

A mis-placed heater dealt to their savings as brutally as any Money Managers scheme ever did here!

The banks in Australia have reacted to their past errors by requiring their NZ subsidiaries to reduce, but not eliminate, lending to the property development sector.

They also want to see our banks increase their deposit bases, and extend the average maturities of deposits.

You can observe this strategy in the unexpected lift in bank swap rates, and you will soon see slight rises in term deposit rates, irrespective of a possible fall in the overnight cash rate.

In turn this new competition has led to a rise in credit margins for all others who seek to raise money from the public.

Auckland Airport has had to offer a rate close to 4% to attract $200 million, and the ASB’s new Tier Two note issue, with an interest rate of 5.25%, comprises a margin over swap rates that is very much higher than the margin it has offered in previous issues.

Retail investors are getting some respite.

Logically share price yields have to be higher now, meaning those with static dividends will need share price falls, to make the yield higher.

None of this helps the property sector, now facing slight rises in debt costs, and perhaps less tension in debt pricing, for some time.

I would not want to be a property mogul who borrows two-thirds of the ‘’value’’ of his property portfolio.

 _ _ _ _ _ _ _ _ _ _ _ _

THE property sector continues to face rising and profit-gouging prices for building materials.

An astute client, just back from the USA, prepared the following data, comparing price differentials on the same products, the NZ price on average 2.5 times greater than Americans pay even after adding GST to their prices, for a fair base rate for comparison.

His research (thanks Barry L) is displayed below.

What all this means is that the NZ home buyer pays too much for land, for compliance, for finance, for building materials and, given our chronic shortage of tradesmen, there is no offset in lower labour costs.

Our tax laws do not help, nor does our identical treatment of home-users, foreign investors and domestic investors.  

Domestic property speculators are taxed but I suspect many have to be caught before the tax men rope in some tax.

The changes in banking attitudes caused by their own ineptitude and greed, will slow down activity. 

I guess some will see that as a source of relief.

The pricing chart provided by BL is:

Mitre 10     US, converted both        Bunnings     to metric measure   Ratio  Item NZD Price   Size and for NZ/US $ rate Add GST @15% NZ to US cost               Insulation, roof $141.00   10.6 sq m $36.00 $41.40 3.4 Nails, 90mm $22.00   2 kg $14.00 $16.10 1.4 Timber connector $2.65   ea $1.25 $1.44 1.8 Zinnser 1-2-3 Primer $89.00   US gal $24.60 $28.29 3.1 Zinnser cover stain $72.00   US gal $23.79 $27.36 2.6 Zinnser BIN $138.00   US gal $38.90 $44.74 3.1 Paint, low end  $30.00   4l $13.00 $14.95 2.0 Paint high end $170.00   4l $56.00 $64.40 2.6 Acetone $15.78   litre $5.15 $5.92 2.7 Wallboard Primer $139.00   15 litres $42.00 $48.30 2.9 Paint thinners $8.00   litre $4.40 $5.06 1.6 Gortilla Glue $25.00   500gms $23.00 $26.45 0.9 Titebond 2 $10.00   250ml $3.44 $3.96 2.5 Copper pipe, 12mm $57.00   2.5 ms $14.00 $16.10 3.5 Ply 9mm $43.00   sheet $22.00 $25.30 1.7 Particleboard 20 mm $43.00   sheet $27.25 $31.34 1.4 Fiskars machete $69.99     $30.62 $35.21 2.0 Wallboard $19.00   sheet $10.96 $12.60 1.5 PVC conduit 12mm $14.00   4m $3.00 $3.45 4.1 PVC Conduit 25 mm $21.00   3m $4.38 $5.04 4.2 JB Weld Epoxy $22.00   tube $7.58 $8.72 2.5 2x4 studs $4.78   m $1.18 $1.36 3.5 Doors int , low end $117.00   ea $38.90 $44.74 2.6 Doors int, high end $500.00   ea $130.00 $149.50 3.3 Master lock speed padlock $48.43   ea $9.05 $10.41 4.7 Plastic outlet box $1.25   ea $0.36 $0.41 3.0 15 amp electric dual outlet $7.42   ea $1.23 $1.41 5.2 Light dimmer switch $33.00   ea $17.00 $19.55 1.7 3 core mains cable, 15A $2.55   m $0.70 $0.81 3.2 Rain-bird pop-up sprinker $50.00   ea $10.17 $11.70 4.3 Rustoleum  $13.00   can $3.89 $4.47 2.9 Paint Stripper $33.00   US qt $12.83 $14.75 2.2 Floetrol $17.00   litre $7.90 $9.09 1.9 Engineered wood flooring $65.00   sq m $37.00 $42.55 1.5

Whereas Wynyard’s collapse was a failure to convert contracts into sales revenue, and perhaps a failure to match costs with revenue collection, the failure of Pumpkin Patch is much more troubling.

This company, which once blossomed as a boutique operation producing attractive, expensive clothing for children, lost its blossom when it agreed to borrow recklessly to expand its branch network in Britain, USA, Australia and even tiny Malta.

Its governance at that time was amateurish, its worldliness child-like and its excessive use of debt quite ridiculous.

Yet when it listed its shares nearly trebled and while it was succeeding in New Zealand it seemed content, despite a lack of capital, to pay out its early gains in unusually hefty dividends, as though it did not need to retain profits to finance growth.

At one stage its youthful chairman Greg Muir won an award as New Zealand’s chairman of the year, an award as spurious and ridiculous as any corporate award I have seen in New Zealand, as I said at the time.

Perhaps it is fair to note that at that time Provincial Finance was winning awards from a national accounting firm for its speed of growth.

Was there a tiny period when the country believed growth was by definition profitable and a signal of success?

Muir, of course, was the young fellow who accepted an offer from Eric Watson and Mark Hotchin to chair the toxic Hanover Group, and accepted extreme fees and incentives to prepare Hanover to be listed on the exchange, or sold to someone (like Babcock and Brown, or perhaps Bridgecorp).

The governance of Hanover was simply dreadful.

Its lending was often to related parties, or conduits acting as a front for related parties.

It allowed its two owners, Watson and Hotchin, to strip nearly $100 million of unrealised (and unrealisable) profits from the company, and use that (borrowed from debenture-holders) money to enable Hotchin and Watson to repay the loans they had made to themselves.

Somehow this was allowed to be described as Watson & Hotchin reinvesting in Hanover.  It was no such thing.  It allowed Watson and Hotchin to be released from debt obligations.

All of these machinations clearly did not seem like poor practice to Muir and his board, leading to my conclusion that the Hanover directors should never again be in charge of companies that borrow from the public.

I also concluded that its auditors and trustees were as hopeless as any, complicit in transactions that exposed debenture-holders to extravagant risks.

Pumpkin Patch was also extravagant, borrowing large sums to test the markets in much bigger countries.

One by one those offshore ventures collapsed leaving Pumpkin Patch with impossible debt levels, enormous losses, and useless tax credits.

That it has collapsed now is surprising only in that the collapse has taken place in 2016, not 2014.

Of course Muir left the board some years ago, so the errors are not attributable to him alone.

The truth is that Pumpkin Patch has been mis-governed and mis-managed for nearly a decade.

As is the case with Wynyard, the losses are unlikely to be nailed to any mast other than the one that describes poor judgement, exuberant risk-taking and global inexperience.

The fund managers who supplied capital and raised confidence about the independent affirmation of Pumpkin Patch’s strategies, will once again be seen as being as fallible as the bankers and the directors.

Pumpkin Patch, unlike Wynyard, had a traditional business and should not have failed.  Its growth strategy, uncontrolled ambition and reliance on debt, rather than retained earnings, were clear signals of immature governance.

 _ _ _ _ _ _ _ _ _ _ _ _

THIS is an important message from Penelope, who operates our email hub, for clients who are the victim of yet another Spark failure which is interrupting our daily communication:

 

For the past two or three weeks, some of our outgoing emails to clients with @xtra.co.nz addresses have been bounced back to us, undelivered, after two or three days.

This would explain why some of you have received replies much later than we would wish, and why some replies have come from our little-used gmail address.

We assumed these problems were linked to the current transfer of Spark’s email service from Yahoo to SMX (a New Zealand-based service provider).

This has finally been confirmed, and Spark assures us our email problems have now been fixed.

However, if you have not received an expected reply to an email you have sent us in the past month, please do phone us to check.

_ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

Mike is travelling . . . away in the jungles of Laos, returning on 14 November.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Edward plans to be in Auckland on 15 November (Shortland Street), Auckland on 16 November (in Albany), Blenheim on 5 December and Nelson on 6 December.

Mike will be in Auckland on 22 November, Tauranga on 28 November and Hamilton on 30 November.

Kevin will be available in Christchurch on 17 November.

Investors wishing to make an appointment are welcome to contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


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