Published 30 August 2012
Pyne Gould Corp Ltd has made a $47.7 million after-tax loss for the June year, which managing director George Kerr said was almost entirely a non-cash result.
Mr Kerr launched a takeover bid for the listed company late last year and completed it in April. The former managing director resigned shortly after and the company’s auditors, KPMG, resigned in May.
Mr Kerr said yesterday he believed the annual accounts were the first in Pyne Gould’s 93-year history to be completed & managed by an external accounting firm: “In April we replaced the internal accounting team at PGC with Deloitte Ltd.”
Mr Kerr said the loss was non-cash and largely attributed to $46.1 million of non-cash writedowns, the largest being $20.7 million from increased expected claims under the Real Estate Credit Ltd management agreement for Marac assets and $25.4 million from mark to market of securities, of which PGG Wrightson Ltd represented $14.4 million.
In addition, Perpetual Group made a $5.1 million loss after accruals for increased legal & restructuring costs. At an operating level in its core business of Torchlight GP, Pyne Gould made a $1.6 million profit.
Torchlight Investment Group owns 100% of Torchlight GP No 1 Ltd and 17% of Torchlight Fund No 1 LP.
Torchlight Fund No 1 LP began in October 2009 and has raised & invested $150 million: “While it made a high profile investment in South Canterbury Finance in late 2009, today its principal assets are in Australia. The largest position is a senior debt position Torchlight acquired, and subsequently placed in receivership, from a major international bank’s ‘bad book’.
“The underlying assets held as security represent many thousands of residential sites spread across Australia & New Zealand. Torchlight investments are very long-term and, like other contrarian investors who are investing in residential development sites, we believe we are buying real estate assets at the bottom of the market. We are investing at a fraction of peaks from 2006 and expect to realise a substantial premium to our cost over the next decade.
“This is the opposite from the finance companies – who helped create the peaks of 2006 and funded clients to acquire land banks at record prices.
“Another major Torchlight Fund No 1 LP investment is a cornerstone investment in ASX-listed IEF Real Estate Entertainment Group, which is one of the largest freehold pub owners in New South Wales.
“Torchlight Fund No 2 LP is incubated as a ‘house fund’ and is 100% owned by Pyne Gould at this stage. It is focused on financial services. In Australia it has a cornerstone holding in well regarded Australian asset manager & research house van Eyk. In New Zealand it has, since early 2010, focused on finishing Project New Tulip, the ‘third leg’ of the finance company strategy.
“The finance company sector in New Zealand was one of the great tulip bubbles in market history. Over $4 billion of national savings was invested in finance companies, most lost forever by mum & dad New Zealanders.
“Behind this national tragedy there was a rational business model required. At a big-picture level we saw this as an opportunity to execute a coherent strategy to protect & create value for shareholders and deliver a private-sector solution to an industry that had failed its investing & borrowing clients.
“The first leg of the strategy, which became Heartland, was to create a magnet for the ‘good books’ under high quality management.
“The second leg of the strategy, as part of Torchlight Fund No 1 LP, was to create a magnet for ‘bad books’ and acquire debt of distressed borrowers.
“The third leg of the strategy, as part of Torchlight Fund No 2 LP, was the logical next step, once all the assets had gone. This was litigation funding – holding to account those responsible at the time the losses were incurred. This is a ‘mid cycle’ opportunity, but such was its importance that in early 2010 we began investing in litigation funding specialists.
“Heartland was the clear winner in the ‘good bank’ space, Torchlight 1 a significant winner in the ‘bad bank’ space (both in New Zealand & Australia) and now operates internationally. We intend Torchlight 2 to be successful, in a quieter way, by working with very experienced litigation funders on both sides of the Tasman. Clearly, this is first a business opportunity. However, we believe it is important that investors, small & large, who lost by depositing with finance companies, access justice.
“We place great reliance on expert litigation funders, to win back depositors’ money from failed finance companies via carefully researched & resourced sustained litigation.”
Mr Kerr also talked about exit non-core assets, sale of the Perpetual Group and a return & redeployment of capital currently invested in New Zealand.
Pyne Gould said on 30 July it was considering offers for Perpetual Group, which is on-going. Since balance date Pyne Gould has sold all its shares in Heartland NZ Ltd & PGG Wrightson Ltd, leaving the holding company with a totally debt-free balance sheet and access to sufficient cashflow. Mr Kerr said Pyne Gould was still evaluating its domicile.
“We can say that as the majority of future Pyne Gould investment will now only be investing offshore or via the funds it manages, we intend to return to shareholders the proceeds of the sale of Perpetual in the form of a capital return.
“The group, from its actions in the past financial year and events subsequent to balance date, is now in a position where it holds over $100 million NTA at book value, equivalent to 43c/share ,and the holding company is now debt-free.
“Our target is growth on book value over a 10-year period exceeding 15%/year. This cannot be achieved off inherited bad loans from Marac. They need to be patiently realised & reinvested in the core Torchlight business.
“The challenge is that these assets are earning low returns relative to size and, in the case of property, create cash losses while these assets are turned to cash. The objective is for all assets to be in a single operating business of Torchlight, and the cost streamlining for 2013 reflects that strategy. Torchlight, once scale is achieved, is expected to exceed 15%/year from a combination of asset returns from limited-partner positions & management fees.
“This can only be achieved by concentrating on a single profitable & highly focused business. Hence all of our activities are about exiting non-core assets and redeploying capital for greater long-term returns.”
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Attribution: Company release, story written by Bob Dey for the Bob Dey Property Report.