DMLP generally isn’t allowed to incur debt; its partnership agreement prohibits this. That part I knew, and it isn’t being changed. But DMLP’s partnership agreement also has some weird limits on the size of acquisitions it can make.
Oversimplified, If an acquisition is made purely for units, DMLP can do a deal for as many as 26 million units (40% of outstanding units after the issuance). That isn’t changing. I don’t think DMLP has ever made a deal for anywhere near as many units as the cap would allow.
If a deal is done purely for cash (I don’t think they have ever done an acquisition for cash), they can pay no more than $ 16 million – that’s 10% of the total distributions paid over the last 12 months. I don’t think that’s changing, either.
But there are 2 changes that are being made
1. If a deal is done for a combination of cash and units, the current maximum cost that DMLP can pay is 4 million units plus $ 6 million cash. The $ 6 million cash limit is variable – it equals 5% of the total cash distributions that DMLP has paid in the last 4 quarters. Sounds weird, but apparently that’s the cap. The proposed amendment would increase the potential size of a mixed cash and units deal. I think the new limit would be 26 million units and $ 16 million in cash. So the first big change is that an acquisition for units and cash can now be much bigger.
2. Currently, if DMLP sells some of its existing acreage, the proceeds are included in the cash limits listed above unless DMLP has an existing contract to buy other acreage. That limits the amount of cash that can be used to buy replacement acreage. But part of the new proposal would allow DMLP to sell some of its acreage, escrow the proceeds and use them to buy additional acreage without the above limits applying. This would help DMLP do deferred like kind exchanges under IRC Section 1031. So it gives management another way to buy new acreage on a tax deferred basis. This is probably important because DMLP has lots of acreage that it got years ago and its tax basis in that acreage is very low. So the existing partnership agreement would require DMLP to recognize a taxable gain when it sells some of its older properties, while the new proposal would allow a sale/exchange to be done tax deferred. Not a bad idea, IMO.
So I don’t see a big problem with either proposal, except – DMLP has been doing more deals in recent years and this will enable/encourage even more deals. I don’t like that. If I wanted some nutty management to keep doing deal after deal, I would buy KRP. I own DMLP as a boring passive land owner and I don’t want them doing more deals just for the sake of growth. But I can’t really argue against the idea of the proposals.
And BTW, DMLP has been significantly increasing the stock comp it gives to top management. Their pay is way higher than it was before the pandemic, and most of the increase is grants of DMLP units. I don’t like the comp proposal.