Taking Stock 22 May 2025

When Bob Jones donated $2 million to the cash-strapped Labour Government in the late 1980s, he negotiated the citation for his honours to include his “contribution to business” in New Zealand.

Following his recent death, after a short period of a myriad of health issues, the media commentators have rightly focused on the colour he injected to NZ, and the generosity he showed to those with troubled lives, in particular struggling media and PR people.

It seems dignified not to record those issues of his life that did not affect the audience for Taking Stock which is written for clients, not for the salacious or those who fail to differentiate criticism from defamation.

His behaviour outside of matters that affect investors can be left for others to tell.

But it is critically important that investors are made aware of, and never forget, the errors in business that destroyed what was once his billion-dollar public and bank-funded property company, Robt-Jones Investments Ltd (RJI).

For the benefit of younger investors, be aware that RJI was listed in 1982 at 50 cents a share, supported by his friend the late Eion Edgar (Forsyth Barr).

RJI raised $10 million to buy and hold New Zealand commercial properties. Its directors included his lawyer, the late Denis Thom, Edgar and friend Jack Newman and, later, Wellington’s mayor, Michael Fowler.

Before listing his company Jones negotiated a management contract for his personal company Robt. Jones Holdings Ltd (RJH) which would charge 8% of the GROSS income achieved by RJI.

The granting of this contract was a major governance error by his friends on his board, in my opinion. 

It incentivised Jones to focus on gross revenue rather than nett revenue, as I noted at the time.

Effectively if Jones could arrange to borrow $1 billion at an interest rate of say 8%, and buy properties that earned a gross rental of 8%, at least initially RJI would make no more NETT profit but the RJH management fee, based on the addition of another $80 million of gross revenue, would rise by 8% of this fee, that is $6.4m. Shareholders did not necessarily benefit from growth; they benefitted from nett profit, not gross revenue.

The transaction might add nett value only if the properties attracted more rent over the years, were sold profitably or through enhancement of value that would enable RJI to borrow more, and at better rates. They also relied on the interest rates falling.

No management fee should be based on gross revenue.

This was error number one; an error that no property company or listed property trust should replicate.

The first error led to Jones’ second error.

He could see that property valuation gains could arise not just from inflation and rental increases but by convincing valuers and the market that his property portfolio was worth more than the market believed.

He began the argument that a property’s value was linked to its replacement value. That implied that an ageing building, by definition built with ageing materials and containing ageing technology, would be worth a similar amount to a new building built on the occupied land.

Replacement value, in my opinion, is irrelevant to the value of an existing property.

Market regulators and the poorly-led NZ Stock Exchange, at that time a cooperative owned by hungry sharebroking businesses, allowed this argument to be featured in the annual reports.

The second error pointed to the third error, that of governance.  Jones had started his board with directors who did not challenge him.

It is a truism of success that real leaders always surround themselves with smart people whose collective knowledge expands that of the leader. Obsequious, subservient or fawning directors never add value.

RJI continued to rot because of this third error, a weak board without the firepower to contest any maverick ideas.

RJI lost banking syndication support, and its shares were largely spurned by institutions, leaving Jones to rely on his rhetoric to boost interest, including in the USA where for a short time he found a supporter, Grantham Mayo Otterloo & Co..

However, when Grantham himself arrived in NZ to inspect his new investment he saw what was obvious – that RJI was built on poor practices – and not only sold out, but did so after also loudly explaining his dissatisfaction, a rare response then (and now).

The rot became terminal at that point. Deeply indebted, fast-growing property companies built on short-term debt and poor access to capital rarely recover, even if they have skilled, orthodox management.

The next error was in skirting around the institutional demand that Jones appoint an independent chairman who institutions could respect, if Jones wanted institutional support.

Derisively, Jones selected a former governor general David Beattie, privately boasting that Beattie was willing to take on this task for a perfectly legal, but improbable, cash incentive.

The late Beattie was a poor chairman and probably never suited to any public company chairmanship, let alone to one dominated by an inexperienced but ambitious leader.

Jones meanwhile had made a crass error, perhaps because of cash flow issues and perhaps because of his incentive to grow his portfolio. He had cancelled the promised dividends, and introduced “bonus” shares but declared the “bonus” shares were only for those who owned shares for a year and were available only on application.

In those times shareholders received share certificates, usually a month, sometimes more, after they had acquired the shares.

To obtain the bonus shares shareholders had to send in to RJI the certificates which were dated, and would prove the shares had been owned for 12 months.

RJI’s register was dominated by retail investors. Unlike the institutions, many believed the optimistic valuations he calculated and believed his constant claims that his shares were worth far more than the daily market price.

The uneven bonus system was quite ridiculous and should never have been allowed by the Stock Exchange. Many thousands of people did not feel confident about claiming the shares, so only those in harmony with the scheme, like Jones himself, received the shares.

The bonus shares effectively created separate rewards for different shareholders.

They were two more really serious errors, born from his lack of training, lack of business mentorship, and disrespect for orthodoxy.

The most avoidable was his disdain for regulators and Stock Exchange rules.

He fought incessantly with the Securities Commission on subjects like incorrect public statements and on issues like his personal trading of shares.

When JR Wilde QC (later Chief Justice) wrote a conclusive paper proving Jones was insider trading and clearly misleading the public, the chairman of his company, by then called Trans-Tasman Properties, was Beattie. (I hold a copy of Wilde’s report.)

The former Governor General ruled that there was nothing to be gained by prosecuting the insider trading. I was gob-smacked by this ruling. Insider trading did not matter?

On one infamous occasion Jones had announced “he” was buying millions of shares because they were under-valued by the sharemarket.

The naïve media of the time front-paged this declaration.  Banned from buying its own shares by the law of the day, by then RJI had set up a legal structure known as an Employee Unit Trust, a Jones-controlled entity that was allowed to borrow money from RJI (that is, borrow from the shareholders of RJI) to buy RJI shares. This structure had been permitted by law and was also used by the likes of Fletcher Challenge. Its buying and selling was not instantly transparent.

Jones in fact had sold more than 10 million of his own (RJH) shares to the RJI EUT, a “smart” decision given the continuing fall in RJI share prices. He was not buying RJI shares as the papers recorded. Far from backing the share price, Jones was selling. The RJI shareholders were buying.

The error of disrespecting regulators and rules further diminished the institutional and banking support his company needed.

The RJI ship was clearly firing canons that boomeranged.

But the error that ruined the company, and came close to bankrupting him personally, was his decision to guarantee the future share price of RJI, to enable RJI to grow by acquiring more properties without any borrowing.

At a time when the RJI shares were $2.00, RJH might offer to buy a property for $50 million by transferring to the seller, say, 25 million shares. RJH would guarantee that within, say, three years, the shares would be worth a much greater figure, say, $3.00. RJH undertook to buy the issued shares at the guaranteed price in the defined timeline.

Had he been right the vendor would sell his property now and later make a magnificent gain, without risk, at the guaranteed price. Jones was convinced he could persuade the market to pay a price for his shares that he could dictate.

The guaranteed future price was underwritten by a facility RJH had arranged with the BNZ, meaning the property vendor would be paid out at $3.00 whatever the share price might be in three years.

A tiny and barely credible small Lower Hutt broking firm would sometimes find sub-underwriters, reducing the exposure of RJH to this nonsensical “guaranteed future share price”.

Never having worked within formal structures and with no real controls on his unorthodox ideas, Jones believed his “idea” was revolutionary. He proposed writing a book about this genius. He could not see the risk; inexperience and lack of smart co-directors were failing to reverse all the errors.

Well, when investors began to see the fabrications, the RJI share price slumped, leaving the property vendors to claim the $3.00 price, and return the shares to RJH, by then worth much less than $3.00, probably worth less than a dollar, in some cases.

The BNZ honoured the legal commitment by lending RJH the shortfall, having secured the loan in such a way that RJH and Jones, as guarantors to the BNZ, were on the hook.

RJH used its available assets but ultimately was forced to sell its lucrative management contract back to RJI, to raise the shortfall, believed to be around $75 million.

Somehow the contract was valued at the figure that equalled the debt to the BNZ or near enough. How come? Ask the valuers of the contract.

To internalise with RJI the management and escape from an uncommercial contract that figure was $75m, paid for in cash by RJI to RJH, which used the money to square off the BNZ.

The transaction ruined RJI. The $75 million of cash was RJI’s necessary cash buffer, though in public arenas Jones would argue, after his exit from RJI, that the failure of RJI was due to subsequent bad decisions by others.

I know nobody who could not see the link between failure and the cost of the crazy share price guarantee.

RJI/Trans-Tasman Properties did not go into receivership or liquidation, but its assets were acquired for a figure that represented just a few cents per share.

RJI, whose market cap had soared past $1 billion, had been destroyed, in effect.

The errors need to be recorded, published here, and must never recur. They should form a rulebook that every retail investor etches into memory cells.

Management contracts must be negotiated by experienced, independent people. Fees payable on gross income lead to absurd outcomes. Nett income determines value, not gross income.

Property valuations must be made independently and must never be compromised by the wishes of the owner.  Investors should always view valuations as being a guess of temporary value, nor a decree from “on high”.

Public companies must have independent oversight of management.  Value is not added by obsequious friends being put on boards.

Regulators, now including the NZX, are part of the necessary controls of corporate behaviour.  Constant displays of disrespect, even worse, abuse, of these controls NEVER produces a good result for investors.

Insider trading is theft from shareholders.  If alleged, it must be prosecuted.

Bonus share decisions must apply to all shareholders evenly and should not be different for any groups of investors. Uneven schemes provide wealth for some at the expense of others.

Schemes devised by committing to buy at a guaranteed future share price reflect a degree of commercial naivety that no public company shareholder or market regulator should ever allow. They reveal the lack of experience and wisdom of the guarantor and reflect poorly on the wisdom of those who underwrite such nonsense.

These seven errors should be discussed at every university or school where young people gather before they launch a business career.

Having said all of this, let me finish with some balance.

Bob Jones became an excellent landlord when he reverted to private company involvement in the mid 1990s. The banks funded him, particularly the BNZ, and helped him ride successfully the property market gains that only recently have stalled. The banks applied proper rules and oversaw his plans. They filled the role that the RJI directors failed to fill.

Jones did not “sweat the small stuff” with tenants. He had certain signature characteristics that his tenants liked.

His buildings often display modern New Zealand art pieces, classical music is often played in foyers and elevators and those who wanted to smoke, as he did for most of his life, were often built little alcoves outside their office, so they could puff away in fresh air.

His philosophy grew to attract many long-term tenants and enabled him to rebuild the wealth he had sought to make through RJI and its management contract to RJH.

Jones died after a relatively short period of ill health, at the age of 85, an age which he himself would have willingly admitted was at the extreme end of his expectations, given his colourful lifestyle.

Perhaps he did deserve the citation of his “contribution” to business, having demonstrated all the errors never to make, prior to his reversion to sole use of banks, with the implied submission to orthodox management.

Perhaps by proving to investors the cost of poorly thought out, maverick ideas, Jones has eventually made a very real contribution to Business NZ.

Let us hope his lessons of what not to do are never forgotten.

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IN TAKING Stock last week I highlighted the quite dreadful work of Covenant Trustees. It added zero value to the finance companies prior to the 2008 finance company collapse.

In more recent times, as I noted, it let down badly investors in a forestry unlisted syndicate.

I noted Covenant had become a part of the equally unimpressive Perpetual Guardian, which continues to operate in what is clearly a sunset industry.

Created by George Kerr and Andrew Barnes, with the help of expensive mezzanine debt, Perpetual Guardian has reduced debt and brought in an equity partner.

It has sold Covenant to an Asian company.

I hope the price paid reflected the fact that in these days banks, and soon the Reserve Bank (for all companies it guarantees from July) act effectively as trustees, with a great deal more expertise than any trust company could display.

Estates and trusts should find a far more skilled, more attentive and much cheaper model to serve as trustees than is offered by trust companies.

The sunset industry should be in the final twilight moments before darkness prevails.

To the overseas buyer of Covenant, a kind person would wish for them good luck.

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Chorus Limited (CNU) has announced that it is considering an offer of up to $170 million of subordinated capital notes.

Further details are expected to be released during the week of 26 May 2025, with settlement likely due at the beginning of June.

While the interest rate has not been confirmed, similar subordinated securities are currently trading at around 5.00% per annum, and we expect the Chorus notes to offer a similar return.

Chorus builds and maintains the fibre and copper lines that deliver internet and phone services to homes and businesses across New Zealand. It does not sell broadband directly to customers—instead, it provides the infrastructure used by other retail providers. Chorus recently reported that more than 70% of homes it covers have now connected to fibre, with that number expected to grow. It is a large, essential infrastructure provider with consistent demand for its services, generating earnings of over $700 million in FY2024.

Chorus is likely to cover transaction costs for this offer, meaning no brokerage would apply. This will be confirmed once the terms are finalised.

To register preliminary interest, please reply with your indicative amount and CSN. We will contact you as soon as the full terms are released.

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Travel

Auckland (North Shore) – 26 May – Chris Lee

Auckland (Ellerslie) – 27 May & 28 May am – Chris Lee

Lower Hutt – 29 May – David Colman

Napier – 9 June – Chris Lee

Tauranga – 11 June – Chris Lee

Whanganui – 11 June – David Colman

Hamilton – 12 June – Chris Lee

Christchurch – 23 and 24 June – Chris Lee

Ashburton – 24 June(pm) – Chris Lee

Timaru – 25 June – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners