Dumbdee - The Goodmans, The Bad & The Ugly - 30% of NAV bargain?

[sculpin]

Roumell’s Q2 update…

 

http://roumellasset.com/pdf/update_2Q2018.pdf

 

Recent travels underscore our conviction that scuttlebutt (investigative journalism) provides real value

to our investors.

 

Dundee Corporation, a small (roughly $70 million capitalization) Canadian company discussed later

in this letter, is now one of RAM’s top holdings. Dundee has no active sell-side coverage, is deeply out

of favor, once boasted a $1 billion plus market cap, is difficult to understand and consequently uniquely

situated to be a source of investment value creation, in our opinion.

 

In early June, I traveled to Toronto to attend the company’s annual shareholder meeting. I was one of two investors from outside of Toronto who attended the meeting. Afterwards, I joined management and the company’s board for a wonderful

salmon dinner sourced from the company’s AgriMarine Holdings, Inc. subsidiary.

 

In addition to spending quality time with Jonathan Goodman, CEO, and Robert Sellars, CFO, I met

key management team members overseeing some of the company’s most important investments.

Richard McIntyre, COO, is heading up the company’s Vancouver Parq Casino investment. Richard seems

exceptionally well-suited, both professionally and temperamentally, to renegotiate Parq’s debt and also

to oversee the monetization of Dundee’s Blue Goose investment. He is joined by seasoned veteran L.

Geoffrey Morphy, Vice President, Corporate Development.

 

Dundee is described in greater detail below. What I can attest to is that there are some very competent management members, led by a new, albeit legacy controlling family member, CEO in Jonathan Goodman.

 

Spending three days in Vancouver this month visiting the Dundee’s Parq Casino and Hotel was one of the

nicer company visits in memory. Vancouver, rated by Mercer as being the number one North American

city to live in, and fifth in the world, is a wonderful city. The Parq property is a Class A asset with first rate

amenities. It strategically sits next to the Rogers Arena, home of the Vancouver Canucks as well as a venue

for some of the biggest concerts in the city. Parq is now the largest convention venue in Western Canada.

Joe Burnini, Parq’s President and on-site operator, provided me a detailed walk-through of the property.

I spoke with many of Parq’s line workers which gave me a good sense of their view of the property, what’s

working and what needs further attention.

 

Top Three Purchases

 

Dundee Corp., DCA-T/DDEJF. We wrote extensively about Dundee in our 1Q18 letter. After establishing

our initial position, the stock price continued to decline in the 2nd quarter. As is typical, we decided

to add to our position and average down. We believe Dundee is trading at a significant discount to a

conservative estimate of Net Asset Value.

 

Dundee is a public Canadian independent holding company, listed on the Toronto Stock Exchange

under the symbol DCA and also trades in the US under the symbol DDEJF. Through its operating

subsidiaries, Dundee is engaged in diverse business activities in the areas of investment advisory, corporate

finance, energy, resources/commodities, agriculture, and real estate. The Corporation also holds,

directly and indirectly, a portfolio of investments mostly in these key areas, as well as other select investments

in both publicly listed and private enterprises.

 

I had a face-to-face meeting with the company’s top management, including CEO Jonathan Goodman, last month and came away feeling confident in our investment. Further, as mentioned earlier, I visited one of Dundee’s significant assets, Parq Vancouver, a few weeks ago and believe that this property is extremely attractive and would garner significant interest

from other investors in the event Dundee decided it no longer wanted to own it and would rather exit. To

be clear, the company’s Parq asset is weighed down by costly debt that needs to be restructured. This debt

is non-recourse to Dundee and sits at the property level only.

 

Dundee is a prime example of an instance where RAM is acting contrary, in a major way, to the investment

community. The company is certainly “overlooked, misunderstood and out of favor.” Dundee is

a complex holding company that has destroyed massive amounts of capital in the past several years.

The company’s founder, Ned Goodman, who previously created a tremendous amount of value over

many decades, bet way too heavily on commodity-based investments during the latter period of the

financial crisis based on the belief that paper money would be destroyed by central bank actions. His son,

Jonathan, left the company in protest four years ago over deep disagreements with the company’s capital

allocation decisions.

 

To us, Dundee is a “reverse” prodigal son story— the son has returned to clean up the mess of the father.

We believe Jonathan has inherited a plethora of assets that sum to a significant premium to Dundee’s

share price. He has the vision, and team in place, to execute on a monetization plan resulting in a

streamlined business with core assets. Moreover, investors have time on their side. Dundee effectively

has permanent capital given a combination of perpetual preferred securities and one preferred series

that can be paid off in common stock. We like the investment odds on Dundee very much, particularly

at its recent price, which, from what appears to us, is the result of shareholder fatigue and capitulation.

[colinwalt]

@sculpin... Thanks!

[SafetyinNumbers]

"Moreover, investors have time on their side. Dundee effectively has permanent capital given a combination of perpetual preferred securities and one preferred series that can be paid off in common stock."

 

How much lower would the stock go if they decided to pay off the DC.PR.E with common? I would bet the other pref classes would trade off too despite their credit improving.

 

It's an interesting situation for the company. They could come back to preferred holders asking for another extension or threaten to pay in common which would be a big haircut from $25.

 

 

[Cardboard]

Man, you guys are coming up with all kinds of scary theories. Sounds quite desperate to me. I see this kind of talk on Stockhouse when a stock has been beaten up like these but, I don't recall this on CoBF...

 

Sure, they can screw investors but, what happens after? They end up pretty much locked out of the equity/debt market.

 

I would like to remind everyone that their public holdings alone are about enough to redeem all preferreds at par!

 

Cardboard

[petec]

I read the comment about the ability to repay one pref with common was a comment about liquidity, not solvency. It's a risk reducer and therefore a good thing. I may be wrong but that's what I thought he meant.

[SafetyinNumbers]

I read the comment about the ability to repay one pref with common was a comment about liquidity, not solvency. It's a risk reducer and therefore a good thing. I may be wrong but that's what I thought he meant.

 

I agree, it's about preserving the option value of the equity especially versus the current share price which shows little to no optimism!

 

FWIW, I keep buying the DC.PR.B/D as it drops.

 

At the AGM, John Goodman, also mentioned that he was interested in buying more common and preferred. Not sure why we haven't seen any insider buying unless they think they are restricted.

 

Anyone buying the DC.PR.E, yet? The YTM is looking very good at these levels if you believe they will be cash settled.

[Lakesider]

I read the comment about the ability to repay one pref with common was a comment about liquidity, not solvency. It's a risk reducer and therefore a good thing. I may be wrong but that's what I thought he meant.

 

Spot on.

[sculpin]

Based on these reviews, the Douglas & JW Marriott are doing most things right & guests seems impressed. Pricing seems to be very solid this Summer...

 

https://www.tripadvisor.ca/Hotel_Review-g154943-d12619583-Reviews-or10-The_DOUGLAS_Autograph_Collection-Vancouver_British_Columbia.html

 

https://www.tripadvisor.ca/Hotel_Review-g154943-d12619570-Reviews-JW_Marriott_Parq_Vancouver-Vancouver_British_Columbia.html#REVIEWS

[doc75]

Based on these reviews, the Douglas & JW Marriott are doing most things right & guests seems impressed. Pricing seems to be very solid this Summer...

 

https://www.tripadvisor.ca/Hotel_Review-g154943-d12619583-Reviews-or10-The_DOUGLAS_Autograph_Collection-Vancouver_British_Columbia.html

 

https://www.tripadvisor.ca/Hotel_Review-g154943-d12619570-Reviews-JW_Marriott_Parq_Vancouver-Vancouver_British_Columbia.html#REVIEWS

 

Q2 results are out.  It appears Parq generated roughly the same revenue in Q2 as it did in Q1, and they've taken a big write down on the asset.  I am surprised by how poorly it performed heading into prime tourist season.  Will be interesting to hear whether gaming revenues took a dive, because one would certainly expect hotel revs to be up.

 

I haven't dug deep, but overall looks like a very bleak quarter.

 

 

[Rod]

Q2 is out. Parq results not good--still running at an operating loss and now a writedown. Will be interesting to hear the conference call tomorrow.

[petec]

Results look pretty abysmal. Parq equity written down to nil and the preferred shares written down somewhat too, on changes to long term forecasts. They continue to contribute capital higher up the stack but there’s so much debt it doesn’t give them much protection. I struggle to believe this trophy asset could be a zero but the accounting is moving that way.

 

On the positive side there’s progress at DPM & DST, and first wells will be drilled in Chad in 3q.

 

No obvious signs of major decisions such as operations being moved into discontinued.

 

There are still significant potential writedowns to come (e.g. TauRx) and one of the two possible operating cash flow generators (Parq) doesn’t look like it’s working. The other is Chad and that’s speculative. Other holdings are illiquid or are the last things they want to sell (DPM would be a dumb sale IMHO as it’s making clear progress that isn’t in the price yet). I’d be cutting those pref dividends if I was them!

[petec]

FWIW my updated base case SOTP is $1.32/common share. I have:

 

- Listed equities at market (DPM, ECS, DST at current price and "other listed" at the 2q18 BV of 32).

- TauRx at 0

- Parq at 25 which is $60m of ebitda on 10x less debt; this ought to be conservative but at this point, who knows?

- All of other private investments, debt, Android, and Sarea at 50% of their carrying values because I don't have the visibility to know otherwise.

- Union at 75% of the value of ICC (since they can't sell it) and nothing for non-ICC assets

- Blue Goose and Agrimarine at 0

- Dundee Securities and D360 at book value

- United Hydrocarbons at 0

- Holdco cash at 20 not 30 because they have costs

 

Adds up to 325 in assets, less

- Recourse debt 10

- All prefs at par (I've considered using market but they don't have the cash to buy back and if things go right the prefs will rerate)

- 27 in other holdco liabilities

 

That feels to me like it's sufficiently conservative. There's a decent chance almost all of the assets could be worth more than I have them down for. I just want to see some real activity to convert nonperformers to cash, buy back some prefs, and focus down on the assets that are really likely to move the needle.

[Sportgamma]

Isn't this summary missing some non-core portfolio investments? According to the Q2 filing, public securities alone had a fair value of $164 m.

 

[petec]

My numbers are a mix of the MDA breakout for investments (eg Parq) and the segment breakdown at the back of the financial statements for the book values of consolidated holdings (eg Dundee Securities). Your 164 consists of direct equity holdings that aren’t consolidated and includes DPM+ECS+unspecified other. ECS has fallen since. The 164 does not include ICC (held through Union) or DST (consolidated).

 

P32 of the MD&A is useful for this.

 

It does take a bit of picking away to understand where everything is.

[Rod]

I think the chance that the E prefs will be converted to common at $2 is growing. If that were to happen it would, obviously, not be good for the E holders. The common shares would lose some risk, but at the cost of losing a lot of the potential upside. The winner in this scenario would be the B and D prefs, which would be safer and not lose any upside.

[petec]

I think the chance that the E prefs will be converted to common at $2 is growing. If that were to happen it would, obviously, not be good for the E holders. The common shares would lose some risk, but at the cost of losing a lot of the potential upside. The winner in this scenario would be the B and D prefs, which would be safer and not lose any upside.

 

There are circumstances, I think, in which that would be good for the common as well. It increases my base case NAVPS outlined above. It decreases my bull case/everything goes right NAVPS. But everything isn't going right!

[Rod]

I think the chance that the E prefs will be converted to common at $2 is growing. If that were to happen it would, obviously, not be good for the E holders. The common shares would lose some risk, but at the cost of losing a lot of the potential upside. The winner in this scenario would be the B and D prefs, which would be safer and not lose any upside.

 

There are circumstances, I think, in which that would be good for the common as well. It increases my base case NAVPS outlined above. It decreases my bull case/everything goes right NAVPS. But everything isn't going right!

 

The problems at Parq have added to the risk for the common and reduced the upside. I still think the common is a good bet. But I now believe that the B and D prefs are a better bet. You can get a double out of these and make 15% along the way with much less risk. It's hard for the common to compete with that IMO. When you throw in the growing possibility that the E prefs will be converted to common, it makes the case for the B and D even stronger. I own both the common and the prefs in about 30/70 ratio. I am pretty sure that if I didn't own any of it right now I'd only buy the prefs.

[gokou3]

Given the company is lacking cash, I think it's quite possible that management will offer to redeem the E at a discount to par, like $18 per pref, in lieu of converting to the common.  This would lessen the dilution for Goodman and stick it to the preferred holders.

[Maximu]

I actually see Parq as an existential threat to DC.  If they continue, cash calls like we have seen the past few quarters could quickly deplete all of DC's liquid equity (assumes DPM is not to be sold due to upside) and then force the firesale of DC's less liquid assets.  This issue is compounded by the looming Pfd-E redemptions.  Options at this point include: sale to or partner with another company with cash to invest and/or sell Parq to preserve any existing value, and/or convert Pfd-E to common @ $2 (an easy win, but requires acceptance that DC is no longer what it was and $2 is a ceiling price for the shares over short to mid term until this mess of z-grade companies can be sold).  While an option, I do not see suspension of the Pfd Series 2,3 dividends as helpful toward a LT solution.  Why?  DC's credit profile would weaken considerably, making future capital raises more difficult and expensive, DC is trying to get back into resource focused money management business and how you treat OPM (incl. your Pfd shareholders) matters, and the benefit is illusory as DC's problems are structural and require decisive (and fast) structural changes as opposed to short term relief that does not address the core issues. 

 

Other options:  (i) Rights offering for common and Pfd shareholders ... cash goes up, cap structure stays same, no dilution; (ii) Goodmans offer to give up dual class structure ... DC shares take off upwards ... benefitting all, including Goodmans ... and raise more common, (iii) any others?

[Rod]

I actually see Parq as an existential threat to DC.  If they continue, cash calls like we have seen the past few quarters could quickly deplete all of DC's liquid equity (assumes DPM is not to be sold due to upside) and then force the firesale of DC's less liquid assets.  This issue is compounded by the looming Pfd-E redemptions.  Options at this point include: sale to or partner with another company with cash to invest and/or sell Parq to preserve any existing value, and/or convert Pfd-E to common @ $2 (an easy win, but requires acceptance that DC is no longer what it was and $2 is a ceiling price for the shares over short to mid term until this mess of z-grade companies can be sold).  While an option, I do not see suspension of the Pfd Series 2,3 dividends as helpful toward a LT solution.  Why?  DC's credit profile would weaken considerably, making future capital raises more difficult and expensive, DC is trying to get back into resource focused money management business and how you treat OPM (incl. your Pfd shareholders) matters, and the benefit is illusory as DC's problems are structural and require decisive (and fast) structural changes as opposed to short term relief that does not address the core issues. 

 

Other options:  (i) Rights offering for common and Pfd shareholders ... cash goes up, cap structure stays same, no dilution; (ii) Goodmans offer to give up dual class structure ... DC shares take off upwards ... benefitting all, including Goodmans ... and raise more common, (iii) any others?

 

I agree about Parq. It needs to be fixed fast. Either through a full or partial sale and/or refinancing. They can't wait much longer. And that doesn't suggest that they will get great terms on any deal. This is the deal breaker for me. I am hiding out in the preferreds until there is more safety in the common.

[doc75]

I think the chance that the E prefs will be converted to common at $2 is growing. If that were to happen it would, obviously, not be good for the E holders. The common shares would lose some risk, but at the cost of losing a lot of the potential upside. The winner in this scenario would be the B and D prefs, which would be safer and not lose any upside.

 

Jonathan's comments on the CC suggest to me that cash redemption of the Es is the least likely outcome.  The very poor Parq results put them in a much more serious liquidity crunch than I previously believed.  DPM won't be sold.  Parq looks like it will require substantial ongoing capital infusions.  If the Delonex drilling doesn't go well, then I think they'll  turn off the dividends on the prefs.

 

I missed what he said about the CRA tax issue.  I looked at the financials and it appears there could be a material charge there, but not quantifiable at this time?  Anyone have further insight?

 

[sculpin]

Conference call transcript....

 

https://seekingalpha.com/article/4199547-dundee-corp-ddejf-ceo-jonathan-goodman-q2-2018-results-earnings-call-transcript

 

[sculpin]

I think the chance that the E prefs will be converted to common at $2 is growing. If that were to happen it would, obviously, not be good for the E holders. The common shares would lose some risk, but at the cost of losing a lot of the potential upside. The winner in this scenario would be the B and D prefs, which would be safer and not lose any upside.

 

Jonathan's comments on the CC suggest to me that cash redemption of the Es is the least likely outcome.  The very poor Parq results put them in a much more serious liquidity crunch than I previously believed.  DPM won't be sold.  Parq looks like it will require substantial ongoing capital infusions.  If the Delonex drilling doesn't go well, then I think they'll  turn off the dividends on the prefs.

 

I missed what he said about the CRA tax issue.  I looked at the financials and it appears there could be a material charge there, but not quantifiable at this time?  Anyone have further insight?

 

Many negatives in the quarter & on the call but there were some things that give me a glimmer of hope. At least the events at Parq are really forcing them to move on getting this cleaned up. Some of the positives on the CC were the acknowledgement of potential buyers for Blue Goose, "advanced stages" in negotiating with outside parties for solutions to Parq, moving portfolio down to 30 positions from 70 and "potential proceeds of $100mm to $200mm" from these sales, DPM doubling EBITDA over next year & Jonathan saying "at right price anything is for sale".

 

While the BC gaming industry is having a tough year, it seems as though Parq Casino is outperforming the others...

 

And the casino part – there is no question that the casino industry if you look at the other participants in the BC industry they’re down on the table drop close to 20% year-to-date.

 

We’re actually up on the edge water because - with the same number of tables and the same slots but we’re up because it's in a much nicer building. But certainly we’re up in a really tough market.

 

Need to look further into the CRA filing - could it be a disallowance of the deduction amount on a large capital gain??  DC currently has the following tax loss carry forwards which could be very valuable assuming they begin to make money again...

 

At June 30, 2018, the Corporation had operating loss carry forwards of $527,656,000 (December 31, 2017 – $505,195,000) and capital loss carry forwards of $234,396,000 (December 31, 2017 – $231,918,000).

[SafetyinNumbers]

I think they are going to use the conversion option as leverage on the DC.PR.E holders to extend their retraction feature again while keeping the coupon. Maybe they will even throw in a warrant again.

 

Basically, if preferred holders don't agree to terms, they will use their option to pay with shares which will materially hurt the preferred holders. If they agree to extend, they have a shot at getting their cash back in a few years and earning a reasonable return while they wait.

 

Dundee gets the benefit of having access to that capital for a few more years and does not dilute shareholders much.

 

It's a win-win versus paying all cash or diluting shareholders.

 

 

[Rod]

I think the chance that the E prefs will be converted to common at $2 is growing. If that were to happen it would, obviously, not be good for the E holders. The common shares would lose some risk, but at the cost of losing a lot of the potential upside. The winner in this scenario would be the B and D prefs, which would be safer and not lose any upside.

 

Jonathan's comments on the CC suggest to me that cash redemption of the Es is the least likely outcome.  The very poor Parq results put them in a much more serious liquidity crunch than I previously believed.  DPM won't be sold.  Parq looks like it will require substantial ongoing capital infusions.  If the Delonex drilling doesn't go well, then I think they'll  turn off the dividends on the prefs.

 

I missed what he said about the CRA tax issue.  I looked at the financials and it appears there could be a material charge there, but not quantifiable at this time?  Anyone have further insight?

 

Many negatives in the quarter & on the call but there were some things that give me a glimmer of hope. At least the events at Parq are really forcing them to move on getting this cleaned up. Some of the positives on the CC were the acknowledgement of potential buyers for Blue Goose, "advanced stages" in negotiating with outside parties for solutions to Parq, moving portfolio down to 30 positions from 70 and "potential proceeds of $100mm to $200mm" from these sales, DPM doubling EBITDA over next year & Jonathan saying "at right price anything is for sale".

 

While the BC gaming industry is having a tough year, it seems as though Parq Casino is outperforming the others...

 

And the casino part – there is no question that the casino industry if you look at the other participants in the BC industry they’re down on the table drop close to 20% year-to-date.

 

We’re actually up on the edge water because - with the same number of tables and the same slots but we’re up because it's in a much nicer building. But certainly we’re up in a really tough market.

 

Need to look further into the CRA filing - could it be a disallowance of the deduction amount on a large capital gain??  DC currently has the following tax loss carry forwards which could be very valuable assuming they begin to make money again...

 

At June 30, 2018, the Corporation had operating loss carry forwards of $527,656,000 (December 31, 2017 – $505,195,000) and capital loss carry forwards of $234,396,000 (December 31, 2017 – $231,918,000).

 

As someone who has owned both the common and the B/D prefs, I like to think about which offers the better risk adjusted return. As of now I feel that belongs to the prefs for the following reasons:

 

The B and D prefs have a potential upside of 2-2.5x from current prices around $9.40. I feel that to make a bet on the common you would need to have a reasonable expectation that 3x to 5x was possible, otherwise why choose the common over the preferred since the preferred is safer and pays a 15% dividend? Until problems with Parq materialized I felt that it was reasonable to think a 3x to 5x return was possible. But now with the Parq asset looking like a bust a large potential upside has been lost. Worse the cash flow problems stemming from the needs of Parq are making it more likely that the E prefs will be converted into common, which would take out an even larger part of the upside potential. At this stage I don't think the common offers enough of an upside advantage over the prefs to make it as good a bet.

 

Also, I figure even if things go well and it becomes clear that Dundee's NAV is solidifying on a decent number, say $6 per share, the stock is likely to trade at a large discount to that for a long time given the bad experience and doubts investors have about the company. So, it may not trade much above $3 even with a $6 NAV. If that happens the company would have ample opportunities to buy back cheap stock for a long time driving value growth. I would prefer to buy it then rather than now when there is so much uncertainty about it's ultimate value and the prefs are so cheap.