I was not the only one who had noted this property deal as Thalassa’s shares had started to sell-off following news a few days earlier that the company was taking a lease on a Grade II-listed property, Eastleigh Court, near Warminster. Eastleigh Court had been purchased by chairman and 12.5 per cent shareholder Duncan Soukup on 11 July through his own company Eastleigh Court Limited (ECL) so it is a related party transaction through Aim rules.
In today’s announcement the company states: “Given that terms had not been agreed by the company with ECL in relation to leasing the office space at the property, the company had no obligation to make any announcement in relation to the lease in the July trading update; it would have been misleading to do so until the terms of the same were settled. The lease had also not been entered into at the time of the interim announcement (on 16 September) and was therefore not capable of being disclosed at that time.”
I think the company is missing an important point here: given that the chairman had already purchased the property, and the company noted in its July trading update that “it intends to lease new group headquarters near Warminster, Wiltshire”, then I believe shareholders had a right to know that the designated property for the new headquarters was in effect owned by the chairman. Moreover, this only came to light on Friday 3 October after the lease had been entered into on Wednesday 1 October. Irrespective of whether the lease terms could be agreed, or whether the independent directors feel the transaction is in the interests of shareholders, investors were being kept in the dark. Clearly, and even before I had published my article, some shareholders were voting with their feet and heading for the stock market exit. Indeed, Thalassa’s share price had fallen from 131p before the news of the property transaction was announced on Friday 3 October to 113p at close of play on Monday 6 October.
It is also telling that after my article was published that the board of Thalassa had a meeting two days later to discuss whether the property should be subsequently sold by ECL to the company at cost. The fact that the board decided at that meeting that it was not in “the company's best interests to buy the property, concluding both that the company is not a property investment company and that its resources are best concentrated on its operating businesses”, does not address several important points. Namely, the company has agreed to lease 10,000 sq ft at Eastleigh Court at £12 per square ft, a total rent roll of £120,000, on a property where “the aggregate up front and renovation costs were £1,719,500.” The question is whether shareholders would be better served long-term by owning the freehold or renting the space. It’s hardly a new concept for companies to own their own property and take a commercial loan secured on it to finance the purchase. That is not property speculation, but sensible use of shareholders' funds.
I still take the view, having read today’s release from Thalassa, that the upside from Eastleigh Court will ultimately be accrued to the chairman Duncan Soukup given the terms of the property transaction and lease. It’s also worth noting that the estimated renovation costs of £230,000 embedded in that £1.7m figure above will enhance the property rather than destroy value, so is not a sunk cost. The fact that the independent directors decided otherwise is their choice entirely, but it doesn’t necessarily make it the right one in my view.
I also note that Thalassa stated in today’s announcement that: "It is the board's policy to engage in open and transparent communications with shareholders and to this end the company will continue to keep shareholders updated on all material developments in a timely way. The board has updated the market and kept shareholders informed of developments with regard to its premises relocation as soon as possible and in accordance with its obligations under the Aim Rules.” Again, I think the company and its advisors have been naive and missed the point that outside shareholders should have been informed of Mr Soukup’s interest in the Eastleigh Court property well before any lease was eventually signed, irrespective of its obligations under Aim rules. The fact that so many have subsequently sold out speaks volumes and explains why Thalassa's share price is languishing at 80p today.
If you didn't manage to sell out, then I would hold onto the shares at the current price of 80p. That's because this month's sell-off has probably run its course as net funds of £13m now equate to two-thirds of the company's market value of £20m, and the shares are also priced 39 per cent below book value.
Please note that I have written two other columns today, both of which are available on my IC homepage...
I have also written three articles in the past week on financial markets:
Equities: Eurozone growth scare spooks investors (13 October 2014)
Monetary policy: Normalisation is coming so plan ahead (17 October 2014)
Bond markets: Lessons to learn from bond market flash crash (17 October 2014)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
