Pfi

[troyvdh]

This company has retuned 8.98 % pa since inception (compounding return no idea) which I believe was in the late 90's.
Anyways the latest 1-12 shares at 1.44 appeared to me at least as being a little miserly.....I believe about 66 % took advantage I believe...and I believe that all directors accepted same....which means I suppose that Mr Masfen stumped up at least $320k (?)...

On reflection...me thinks I should have invested only in PFI over the last 2 3 decades...just saying.....

guilty of ramping ..probably....

[Lewylewylewy]

Not sure where the rest of the PFI forum is... Anywho...

Anyone know whats going on with PFI these days? Price increasing, 20 people trying to buy and only 2 sellers with not much to sell...

Is there some news expected or are shareholders just content?

[Lewylewylewy]

Oop there it is... Revaluation

[Deej5]

I have always liked this stock. Up nearly 15% this year with good divies. My entry in this years stock picking comp included PFI and was the only entry to do so.

[Snoopy]

From post 1297 on the KPG thread.



Industrial property is still in great demand because its a growth industry in massive demand and supply constrained. Cap rates on industrial property are at 100 year lows, I see their portfolio at just 4.4%. I am confident that will be the last revaluation PFI investors will see. This is also reflected in the share price being below the new NTA of $3.03 despite PFI's excellent track record. I put it to you that the market is often far more forward looking than either you or I give it credit for. 90% of that gain in NTA was due to a huge move down in capitalization rates...obviously that ~ 80 cent gain in NTA resulting is reversible when cap rates firm up again. Its probably also worth noting that those cap rates were as per valuation in December 2021. A lot has happened in the market since then including inflation numbers here and overseas that were shocking and higher interest rates.

In terms of capital preservation...I believe for the foreseeable future investors in all REIT's are skating on very thin ice.

From AR2021 (that is the one issued in February 2002) P61:

Valuation of Investment Properties at EOFY2021: $2,158.940m
Valuation of investment Properties at EOFY2020: $1,524.785m

=> Average over year FY2021 = ($2,158.94m+$1,524.785m)/2 = $1,841.9m

SNOOPY

[Recaster]

My basic recast analysis of this company may be of interest:

https://recastinvestor.substack.com/p/basic-analysis-property-for-industry

[Snoopy]

My basic recast analysis of this company may be of interest:

https://recastinvestor.substack.com/p/basic-analysis-property-for-industry

Nice bit of work there Recaster. I hope you don't mind me echoing part of your conclusion:

"The company has a great balance sheet but it relies on unrealised revaluations of its properties over the years to create it."
"The company is liquid and financially sound with regard to cash flows and profits."
"One day there may be a correction in commercial property prices but the company is pretty conservative in everything except its massive revaluations."

Given Beagles 'warning' that I quoted in my previous post, I think the day of commercial property correction you refer to may already be upon us. It is just that the property companies have not reported it yet.

Yet the price of PFI since 31st December has not plunged (well OK it is down a bit from $2.98 to $2.71, as the market has fallen a similar amount). But even if the price of underlying assets does plunge, what does that matter? It isn't as if PFI is planning a wholesale sell down of their portfolio. So if values fall but there is no pressure to sell, what difference does it make? As you have said yourself, the company is financially sound with regards to cashflows, with 100% of properties tenanted.

I am inclined to think 'forget about the property valuations'. Focus on the cashflows only.

SNOOPY

discl: do not hold

[Snoopy]

I am inclined to think 'forget about the property valuations'. Focus on the cashflows only.


One more comment on property revaluations. I found this little gem nestled inside note 2.1 in AR2021, on the subject of the capitalised valuation approach to property valuation. 'Capitalised valuation' is an approach that takes a predicted future 'rent yield' and derives a capital value based on that rent income value'

"When calculating the direct capitalisation approach, the market rental has a strong interrelationship with the adopted market capitalisation rate given the methodology involves assessing the total market rental income receivable from the property and capitalising this in perpetuity to derive a capital value. In theory, an increase in the market rent and an increase in the adopted market capitalisation rate could potentially offset the impact to the fair value. The same can be said for a decrease in the market rent and a decrease in the adopted market capitalisation rate. A directionally opposite change in the market rent and the adopted market capitalisation rate could potentially magnify the impact to the fair value."

Translation (well, my take on what this means)

PFI has a 100% tenanted property portfolio. The weighted average lease term is 6.7 years.

From AR2021 p4
"Despite lockdown pressures, the strength of our tenant base meant that there was a low level of deferrals and abatement through the year."

Furthermore, I had a look in the annual report 2021 for the term 'default' and 'bad' (as in loan or debt) and found nothing. Dig into the AR financial reporting notes under section 2.3, and we find the 'rent deferred and abated' over the year was $0.366m. Compared to the $92.271m of rent received this represents a default rate of:

$0.366m / $92.271m = 0.4%

With rents locked in, and probably ratcheted to inflation, a strong tenant base and minimal rent defaults, I think there is an argument to be made that the property valuations of recent times will stick, and not drop.

SNOOPY

[Sideshow Bob]

Buyback

PFI Share Buyback Programme to Commence - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/392653)

roperty for Industry Limited (PFI or the Company) advises that it will commence an on-market share buyback programme on Tuesday, 31 May 2022.
PFI’s Chair, Anthony Beverley, noted “As outlined at PFI’s recent annual meeting, at year end PFI’s balance sheet was strong. PFI’s net tangible assets were 303.4 cents per share, a significant premium to PFI’s current share price. Based on the information we’ve received from valuers to date, despite rising interest rates and the potential implications on the wider property market and on the basis we don’t experience a significant deterioration in economic and market conditions, we are not anticipating any material change in valuations for the upcoming half year results.”

[Snoopy]

From AR2021 (that is the one issued in February 2022) P61:

Valuation of Investment Properties at EOFY2021: $2,158.940m
Valuation of investment Properties at EOFY2020: $1,524.785m

=> Average over year FY2021 = ($2,158.940m+$1,524.785m)/2 = $1,841.9m


From AR2022 (that is the one issued in February 2023) p61:

Valuation of Investment Properties at EOFY2021: $2,158.940m
Valuation of investment Properties at EOFY2022: $2,096.200m

=> Average over year FY2022 = ($2,158.940m+$2,096.200m)/2 = $2,127.6m

SNOOPY

[Snoopy]

There are special accounting standard reporting provisions for taking into account depreciation (or not in this instance) on property owning entities, such as 'Property for Industry'.

From AR2022 Note 2.1
"No depreciation or amortisation is provided for on investment properties. However, for tax purposes, depreciation is claimed on building fit-out and building structure. Deferred tax is recognised to the extent that tax depreciation recovery gain or loss on disposal is calculated on the fit-out and building structure components separately. See section 5.2 for more details."

Not reporting depreciation in the results (even when depreciation is recognised by the IRD) can give a distorted picture of the actual tax rate being paid. The objective of this post is to reintroduce the IRD allowed depreciation into the reported result. This change enables investors to make more sense of the actual tax rate being paid.

The annual depreciation charge is not even stated in the respective annual report(s). But we can work out what it is by looking at the notes from the AR section 5.2 on tax. There is a note there that discloses various factors in the prima-facie reduction to income tax, of which one ingredient is 'depreciation'. To get the actual depreciation charge for any year from this 'adjustment' figure, you have to divide this 'depreciation ingredient' figure by the company tax rate of 0.28. As an example, the depreciation charge for FY2022 was: $5.834m/0.28 = $20.836m. If we include these depreciation charges in the profit results, a very different - but more believable - picture of profitability to that reported in the annual result(s) emerges.




FY2018FY2019
FY2020FY2021FY2022Total



Reduction of prima facie income tax from depreciation (AR Note 5.2, Tax) (1)$2.620m
$2.598m
$4.439m$4.917m$5.834m



Profit before other expense/income and income tax (as declared)
$89.816m$96.109m
$97.395m$108.655m$110.921m



less Depreciation Charge
$9.357m$9.279m
$15.854m$17.561m$20.836m



less Property Costs
$12.507m$14.850m
$16.262m$16.753m$17.598m




less Interest Expenses & Bank Fees
$18.766m$19.008m
$18.233m$20.106m$24.638m



less Administrative Expenses
$4.679m$5.072m
$5.851m$7.465m$8.508m




equals IRD Profit before other expense/income and income tax {A} (2)
$44.507m$47.900m
$41.465m$46.770m$39.341m


less Current tax expense (AR Note 5.2 'Tax') {B}
$8.886m$13.106m
$10.066m$10.605m$10.525m$53.188m


equals IRD Operational Net Profit After Tax
$34.794m$34.794m
$31,399m$36.165m$28.816m



f
Tax paid - cashflow statement
$0.049m$9.044m
$19.681m$10.300m$11.080m$50.154m



Incremental Deferred Taxation Benefit (P&L cashflow reconciliation)
$3.316m$0.985m
$12.875m$9.412m($3.114m)$23.474m



Implied Current tax rate {B}/{A}
20.0%27.4%
24.3%22.7%26.8%



Notes

1/ As part of the assistance package offered by the Government on 25 March 2020 due to the impact of the COVID-19 pandemic, depreciation allowances were re-introduced for commercial building structures effective from 1 April 2020, backdated to 1 January 2020.
This has been reflected in the increased depreciation allowance for FY2020, FY2021 and FY2022 in the table above. Note that the financial year for PFI corresponds to the calendar year.

2/ 'Other expenses and income' includes 'Net change in fair value of investment properties', 'Gains on disposal of investment properties' and 'Net Change in fair value of derivative financial instruments.' None of these adjustments refer to operational income, and none are included in the above table.

3/ On 21 April 2019, 314 Neilson Street, Penrose sustained fire damage. The fire has resulted in both business interruption claims and material damage claims. Insurance payments relating to these events were received across three years as follows. (None of these payments have been incorporated in the income table above):
3i/ FY2021.: Loss of rent $0.170m, Material Damage $0.900m
3ii/ FY2020: Loss of rent $0.227m, Material Damage $5.242m
3iii/ FY2019: Loss of rent $0.177m, Material Damage $1.125m

4/ PFI internalized their management contract in 2017. That means the above five years of results tabulated cover the whole period since the management contract has been internalized. The low amount of tax handed over in FY2018 (Tax paid,cashflow statement, above table) is likely to be related to the much reduced profits over FY2017 (due to the payment needed -and resultant loss of income- needed to buy out the management contract) which would have seen too much provisional tax paid in advance to cover tax obligations in FY2017. The excess provisional tax paid for FY2017 was likely to be rolled over into the tax bill for FY2018. That in turn would mean only a small amount of money actually needed to be handed over in FY2018 to fully extinguish the FY2018 taxation obligations.


------------------------------

There is a need to pay provisional tax based on previous years earnings. However previous years earnings are not always an accurate guide to current years earnings: Tax may need to be retrospectively 'topped up' is actual earnings are greater than expected, or refunded (or rather than refunded carried forward to meet future tax obligations in subsequent years). Thus current tax obligations and actual tax paid as recorded in the cashflow statement do not necessarily match. However, over several years, the sum of the current year tax obligations does tend to converge towards the actual tax payments handed over. The 'totals' column in the above table illustrates this.

One reason the calculated tax rate paid is less than the company tax rate (28%) is that sometimes there is income that is 'tax exempt'. However I am struggling to understand why this might have occurred in this case of PFI.

The New Zealand Accounting Standard IAS12 for Income Taxes may be found here:
https://www.xrb.govt.nz/dmsdocument/1017

I am not sure why I have included the 'Deferred Tax Benefit' change for each year in the above table. But it could have something to do with the definition of 'Deferred Tax Assets' in the above standard.

SNOOPY

[Snoopy]

From AR2022 Note 2.1
"No depreciation or amortisation is provided for on investment properties. However, for tax purposes, depreciation is claimed on building fit-out and building structure. Deferred tax is recognised to the extent that tax depreciation recovery gain or loss on disposal is calculated on the fit-out and building structure components separately. See section 5.2 for more details."




FY2018FY2019
FY2020FY2021FY2022Total


Current tax expense (AR Note 5.2 'Tax') {B}
$8.886m$13.106m
$10.066m$10.605m$10.525m$53.188m

f
Tax paid - cashflow statement
$0.049m$9.044m
$19.681m$10.300m$11.080m$50.154m


Incremental Deferred Taxation Benefit
$3.316m$0.985m
$12.875m$9.412m($3.114m)$23.474m



------------------------------

There is a need to pay provisional tax based on previous years earnings. However previous years earnings are not always an accurate guide to current years earnings: Tax may need to be retrospectively 'topped up' is actual earnings are greater than expected, or refunded (or rather than refunded carried forward to meet future tax obligations in subsequent years). Thus current tax obligations and actual tax paid as recorded in the cashflow statement do not necessarily match. However, over several years, the sum of the current year tax obligations does tend to converge towards the actual tax payments handed over. The 'totals' column in the above table illustrates this.

One reason the calculated tax rate paid is less than the company tax rate (28%) is that sometimes there is income that is 'tax exempt'. However I am struggling to understand why this might have occurred in this case of PFI.

The New Zealand Accounting Standard IAS12 for Income Taxes may be found here:
https://www.xrb.govt.nz/dmsdocument/1017

I am not sure why I have included the 'Deferred Tax Benefit' change for each year in the above table. But it could have something to do with the definition of 'Deferred Tax Assets' in the above standard.


I am hoping that the 'Deferred Tax Benefit' might help explain the below expected rate of tax paid. IOW the IRD recognises the 'Deferred tax Benefit' as some kind of pre-payment that reduces current tax obligations. Is that a feasible explanation for the less than 28% rate of tax being paid?

From section 5 of NZIAS12

---------------------------

Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences;
(b) the carry-forward of unused tax losses; and
(c) the carry-forward of unused tax credits.

Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.
Temporary differences may be either:
(i) taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or
(ii) deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.

The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

-------------------------

PFI has been profitable for as long as I can remember. So I think we can rule out explanation (b) above. I am not sure what 'unused tax credits' (explanation (c)) refers to. Are we talking about imputation credits here? The standard reads in an ambiguous way, because it does not explain what entity has not used the tax credits. Is the standard talking from a company or shareholder perspective? I don't know.

As for the explanation of 'deductible temporary differences', this is liable to refer to a situation where buildings are revalued for reporting purposes but not for taxation purposes. As an example:

1/ A building is on the balance sheet at cost at $100m with an IRD tax depreciation deductability allowance of $2m per year.
2/ The building is revalued to $200m and annual depreciation charges, as a result, are increased to $4m for reporting purposes, (in proportion to the increased valuation of the asset).
3/ This means the reported operational profitability of the building owner has decreased because the depreciation charge has increased.
4/ However, the IRD does not recognise the property value increase for tax purposes. As far as the IRD is concerned, the tax deduction available for depreciation is still $2m. This means the property owning company, which is making more money than it reports, has a higher tax liability than the said same property owning company writes up, (i.e. they have to pay more income tax to the IRD than they report they owe).
5/ There are thus two perspectives on the tax bill for the year.:
5i/ The IRD get paid the full amount of tax that they are owed, and they are happy.
5ii/ The property owning company reports a smaller income tax payment liability that they have fully discharged. However in real life they have paid more tax than that, to match the IRD's 'tax demand'. And the 'extra' tax that they have paid which is not reported as income tax paid is instead recorded in the company accounts as a 'deferred tax asset'.

This is my understanding of how a 'deferred tax asset' works. A hint that I might be on the right track may be found in AR2022 p73
"Income tax expense comprises current and deferred tax and is recognised in the Consolidated Statement of Comprehensive Income for the year."

"Deferred tax
Investment properties are valued each year by independent valuers (as outlined in note 2.1). These values include an allocation of the valuation between the land and building components. The calculation of deferred tax on depreciation recovered places reliance on the land and building split in the valuation provided by the valuers. The building value is then split between fit-out and structure based on the proportion of the tax book values of each."

If any tax accountants are reading this and can clearly point out that my explanation is somehow wrong, please feel free to correct me. OTOH If my explanation is broadly correct it would be nice to get some affirmation as well. What I have presented is the 'dog brain version' of what is happening, and is my way of explaining why the rate of declared income tax is less than the company rate of 28%. IOW I think the explanation is (a)(ii) "deductible temporary differences."

SNOOPY

[Snoopy]

Let's line up the 'what actually happened table' against the 'what would have happened table' and see what the differences might have been.

The 'what actually happened table' includes FY2018 and FY2019, two years where the depreciation allowance on buildings was not allowed to be claimed. Yet there was still some depreciation allowed for in the accounts. It appears from this quote from AR2022 p73 that this 'residual depreciation' may be from the building fit out.
"The calculation of deferred tax on depreciation recovered places reliance on the land and building split in the valuation provided by the valuers. The building value is then split between fit-out and structure based on the proportion of the tax book values of each."

So under a new 'building depreciation is no longer tax deductible' regime, 'building fit out' items, like movable interior divisions and air conditioning systems, would still be tax deductible, even if the structural elements of the building were not. To reflect this element, I am going to assume that even with building depreciation disallowed in our hypothetical FY2020-FY2022 alternative 'what would have happened' scenario (i.e. where there is no 'building depreciation' in any year), there would be a residual annual depreciation charge of $9.300m (my estimate, as used in the first table below in calculations, note 3) that would remain.

What actually happened



i/ Building Depreciation Allowed FY2020,FY2021,FY2022FY2018FY2019FY2020FY2021FY2022[/TD]Total



Profit before other expense/income and income tax (as declared)
$89.816m$96.109m
$97.395m$108.655m$110.921m



less Depreciation Allowance (1)
$9.357m$9.279m
$15.854m$17.561m$20.836m


less Property Costs
$12.507m$14.850m
$16.262m$16.753m$17.598m


less Interest Expenses & Bank Fees
$18.766m$19.008m
$18.233m$20.106m$24.638m


less Administrative Expenses
$4.679m$5.072m
$5.851m$7.465m$8.508m


equals IRD Profit before other expense/income and income tax {A}
$44.507m$47.900m
$41.195m$46.770m$39.341m



less Income Tax expense @ 28% (this calculated scenario) (2)$12.462m$13.412m$11.535m$13.096m$11.015m$61.520 m



equals IRD Operational Net Profit After Tax$32.045m$34.488m$29.660m$33.674m$28.326m



add Cashflow from 'Structural Depreciation' not reinvested (3)$0m$0m$6.554m$8.261m$11.536m
For


equals 'Cash Earnings' available for distribution$32.045m$34.488m$36.514m$41.935m$39.96 2m



(Reference Only) Current tax expense (AR Note 5.2 'Tax')
$8.886m$13.106m
$10.066m$10.605m$10.525m$53.188m




Notes

1/ The annual depreciation charge is not even stated in the respective annual report(s). But we can work out what it is by looking at the notes from the AR section 5.2 on tax. There is a note there that discloses various factors in the prima-facie reduction to income tax, of which one ingredient is 'depreciation'. To get the actual depreciation charge for any year from this 'adjustment' figure, you have to divide this 'depreciation ingredient' figure by the company tax rate of 0.28. As an example, the depreciation charge for FY2022 was: $5.834m/0.28 = $20.836m. If we include these depreciation charges in the profit results, a very different - but more believable - picture of profitability to that reported in the annual result(s) emerges.

2/ For the purpose of this exercise I have used the legislated company tax rate of 28%, when I calculate 'income tax expense'. I have done this because I believe it is the best way to look at the 'change in profitability' between the two scenarios that I am about to outline in detail. I don't fully understand how the exact dollars of tax are calculated in the published accounts. So it makes no sense to try and replicate a calculation process that I do not fully understand. Better to take a calculation method I do understand, and record the tax differences from two alternative sets of input assumptions.

3/ The figure I have used of $9.300m for the depreciation of 'building fittings' is an eyeball average of the actual figures used in FY2018 ($9.357m) and FY2019 ($9.279m), two reporting periods where this figure was known definitively. I use this figure to calculate the structural depreciation that does not have to be, which can therefore go towards adding to the declared dividend.
3a/ Calculation for FY2020: ($15.854 - $9.300)m = $6.554m
3b/ Calculation for FY2021: ($17.561 - $9.300)m = $8.261m
3c/ Calculation for FY2022: ($20.836 - $9.300)m = $11.536m



What would have happened

In the alternative legislative scenario below, where depreciation from buildings is no longer allowed to be offset against profits, the subset of 'structural depreciation' switches from being 'a tax deductible expense' to a disallowed charge. This will increase the declared profit of the business, and consequently increase the government's income tax take (+$7.379m over three years, a $7.379m/$35.646m= a 20.7% rise).



ii/ If Building Depreciation DisAllowed
FY2018FY2019FY2020FY2021FY2022[/TD]Total



Profit before other expense/income and income tax (as declared)
$89.816m$96.109m
$97.395m$108.655m$110.921m



less Depreciation Allowance (scenario for FY2020-FY2022)
$9.357m$9.279m
$9.300m$9.300m$9.300m


less summed Property, Administration and Interest Costs
$35.952m$38.930m
$40.346m$44.324m$50.744m


equals IRD Profit before other expense/income and income tax {A}
$44.507m$47.900m
$47.749m$55.031m$50.877m


less Income Tax expense @ 28% (this calculated scenario)$12.462m$13.412m$13.370m$15.409m$14.246m$ 68.899m



equals IRD Operational Net Profit After Tax$32.045m$34.488m$34.379m$39.622m$36.631m





This is the point where removing building depreciation as a tax deductible asset starts to do my head in. It is quite clear when comparing the two tables that IRD recognized profit has gone up, with the removal of building depreciation deductability. It is also clear that the income tax paid to the government has gone up (which would be the whole point of the touted government tax law change: Rich building owners would pay more tax, to pay for tax cuts to the 'squeezed middle'). So the way I see things, dividends to unit holders should now increase because the profits to unit holders have increased. But this is only true if all of the past situation dividends are sourced from earnings. And as we have now learned (refer forwards to post 30) not all of the past dividends have come from earnings!

The counter argument to all of this is that -actually- buildings still do depreciate over time. So when the time comes around for the building to be re-clad (or whatever), then PFI will be required to front up with 'new capital' to do the re-cladding. But under the old regime, where depreciation was allowed, no 'new capital' would be needed, because the 'tax not paid' (the tax paid under the old regime was lower because of lower profits with building depreciation allowed) could be used to refurbish the building without budgeting to put in 'new capital' for the refurbishment. So where will this 'new capital' come from? By reducing the dividend in the future of course (one way of raising it)!
Yet all this 're-cladding' (as an example) could be many years away. In the meantime, the more tax the company pays, the better off unit holders are, because the company is making more profit and paying the extra tax on potentially higher dividends on the unit holders behalf!!?!!

Have I got that logic right? Help me out here.....
(Addendum 15-01-2023: One thing that was missing from this argument is that the cashflow from building structure depreciation, which is not earnings, was nevertheless being added to the dividend. This was prior to any 'change in law' that might see structural depreciation on buildings disallowed as a tax deductible expense)

SNOOPY

[Snoopy]

Building Depreciation Allowed FY2020,FY2021, FY2022FY2018FY2019FY2020FY2021FY20225 year Total



Dividends Paid during Financial Year (1) $37.902m$37.654m$37.961m$38.723m$39.886m$192.126m



Profit before other expense/income and income tax (as declared)
$89.816m$96.109m
$97.395m$108.655m$110.921m


less Depreciation Allowance
$9.357m$9.279m
$15.854m$17.561m$20.836m



less summed Property, Administration and Interest Costs
$35.962m$38.930m
$40.346m$44.324m$50.744m



equals IRD Profit before other expense/income and income tax
$44.507m$47.900m
$41.195m$46.770m$39.341m



less Income Tax expense @ 28%$12.462m$13.412m$11.535m$13.096m$11.015m



equals IRD Operational Net Profit After Tax$32.045m$34.488m$29.660m$33.674m$28.326m$158.19 3m












Dividends reinvested during year (1)$0.0m$0.0m$6.585m$11.649m
$0.0m[/TD]$18.234m



New long term incentive shares paid up$0.0m$0.270m$0.500m$0.313m
$0.164m[/TD]$1.247m



Building revaluations and sales proceeds during year$66.370m$125.193m$72.546m$395.133m($56.160m)$6 03.082m


New Capital raised during year (2)($8.658m)($8.658m)



EOFY shareholder equity {A}$915.135m$1.054.037m$1,136.613m$1,562.662m$1,50 0.338m


EOFY total assets {B}$1,358.898m$1,522.696m$1,687.359m$2,217.006m$2, 162.787m


Equity Ratio {A}/{B}67.3%69.2%67.4%70.5%69.4%



Notes

1/ Dividends paid and dividends reinvested over the financial year are taken from each respective 'Consolidated Statement of Changes in Equity' in the Annual Reports.
2/ Negative capital raised during the year indicates a share buyback.

-------------------------

Earnings will naturally vary from year to year. Companies set up as 'income generating vehicles', a category into which 'Property Owning PIEs' -like Property for Industry- fall, will often look through annual income perturbations, to distribute to their unit holders a predictable income stream. This means that rather than taking an 'annual view', comparing how income relates to dividends over a five year period seems more appropriate. For the five years in the above table, dividends have exceeded operational earnings by: 192.126/158.193= 21%, or $33.933m.

The only way for this to occur in practice is for the difference to be made up by paying out some supplementary funds, most likely shareholder equity. So was the shareholder equity run down over that five year period? No, it was built up:
$1,500.338m - $915.935m = $584.403m

But I note that if you take away the net cumulative property revaluations over that period from the above sum, then that answer is negative:
$584.403m - $603.082m = -$18.679m

This means the balance sheet over the last five years has been entirely dependent on property revaluations to shore it up. The question is, are these property revaluations sustainable in terms of the dollar value allocated to the buildings? "full occupancy and rents up by a healthy margin" (AR2022 p1), so YES answers that question for the medium term (in the medium term the most important factor in calculating the worth of a property is the discounted cashflow sum of future earnings) . Looking back over the last 5 years, the equity ratio of the company (see table above) has not changed substantially (in fact it has improved a little). This means that supplementing the dividend payment by adding some shareholder capital has not weakened the financial position of the company.

Consider a counterfactual position where dividends were based strictly on earnings and not supplemented by shareholder capital. That would have resulted in the capital position of PFI getting measurably stronger. But such a scenario may have resulted in PFI becoming less 'capital efficient', while unit holders would have received a lower dividend.

Stacking up what actually happened with the dividend against the counterfactual scenario, one can see why the directors have opted for the dividend policy they have. I hadn't considered this before tonight. But could part of the reason that residential property has been an apparently far superior investment to commercial property over the last few years be that some of those capital gains in commercial property have been pulled out of those entities as dividends before the commercial property (or shares in it) was cashed up?.

Residential Property: Rent=Rent, Capital gain is what you make when you sell.

Commercial Property: Rent=Rent plus a slice of Capital gain. Capital gain is what you make when you sell, with the price being lower than what you might expect because part of your capital gain has already been received as rent.

SNOOPY

[FTG]

Are your numbers correct Snoopy?

PFI's FY22 AR shows Divi's at $39.886M so your table above appears correct. But PFI's FY21 reported dividends paid at $27.073M, yet above you have it at $38.723M?

Prior years' numbers on your table aren't passing the sniff test (admittedly a glib sniff on my part). I think you will find PFI has been slowly but steadily increasing Divi's over the last few years; certainly lower than $38M 5 years ago.

BTW. In your "drivel' comments section you refer to Investore, yet this is meant to be PFI. Perhaps just a simple typo?

[Snoopy]

Hi FTG, thanks for keeping me honest



Are your numbers correct Snoopy?

PFI's FY22 AR shows Divi's at $39.886M so your table above appears correct. But PFI's FY21 reported dividends paid at $27.073M, yet above you have it at $38.723M?

Prior years' numbers on your table aren't passing the sniff test (admittedly a glib sniff on my part). I think you will find PFI has been slowly but steadily increasing Divi's over the last few years; certainly lower than $38M 5 years ago.


For FY2021, dividends paid over that financial year amount to $11.281m (Q4 FY2020), $9.044m (Q1 FY2021),, $9.064m (Q2 FY2021) and $9.334m (Q3 FY2021). That adds up to $38,723m, the same figure in my table. HOWEVER, if you look further down my table you will see $11.649m of dividends were reinvested by the dividend holders in that same year in the dividend reinvestment plan. If I take that figure off the dividend entitlement payout, then I get the actual cash paid out by the company to be:

$38.723m - $11.649m = $27.074m

Add in a rounding error and that is the figure you quoted. So you are correct as well.

The printed answer depends on whether you choose to net off any dividend reinvestment funds or not. I chose not to do that and listed the dividend reinvestment funds separately further down the table. I did that because PFI do not have control over whether their unit holders choose to participate in the DRP or not. But I am not saying your approach is wrong.

Looking at AR2019, and the retrospective information relating to FY2018, I get the dividends paid during FY2018 to be:
$10.723m+$8.977m+$8.977m+$9.225m= $37.902m, which is the figure I had in my table. And yes it is lower that $38M as you said ;).



BTW. In your "drivel' comments section you refer to Investore, yet this is meant to be PFI. Perhaps just a simple typo?


No, at the time you read the post (which I designated as a 'work in progress' and was unsigned) the text you read was actually drivel :). If you reread the now updated post now, you will see that I have changed the text to have relevance to PFI. So it is no longer drivel.

The reason this happened is that I pulled a post from the Investore thread to use as a template for the post you read. I often do such things with my 'works in progress'. And if you read it before I had finished editing it, then you will indeed be reading stuff about Investore which has little or no relevance to PFI!

SNOOPY

[FTG]

Thanks for clarifying Snoopy.

[Snoopy]

Property For Industry (PFI) is a big box property owning company, focussed tightly on servicing the industrial sector. As finding new greenfield properties with the right long term return profile becomes more difficult, PFI is moving towards already built up properties, where an existing site has potential for enhanced development (brownfield properties). Over FY2022, some properties were sold outside of Auckland to make way for new brownfield developments at Bowden Road (various warehousing projects, Tokyo Food signed up) and Springs Road (for Fisher & Paykel Healthcare), within NZ's largest city, Auckland. 83.2% of the PFI property portfolio by value is located in Auckland as at the FY2022 balance date. 81% of all lease rental contracts were varied, newly leased or reviewed over FY2022.

The aim of PFI is to provide reliable and steadily increasing dividend returns based on the concept of 'AFFO', which stands for Adjusted Funds From Operations. There is no internationally recognised standard outlining exactly how to calculate AFFO. But the general technique is to start from the property owning company's 'funds from operations' (FFO), and make adjustments consistent with retaining the quality of a company's underlying assets over time from that base.

FFO = net income + amortization + depreciation - capital gains from property sales

Adjustment's to FFO in order to calculate AFFO could typically be:

AFFO = FFO + rent increases - capital expenditures - routine maintenance amounts

Note the capital expenditure referred to is to maintain the quality of the company's existing properties, rather than being comprehensive budgets for new projects. PFI are not clear on exactly what method they use to calculate AFFO, although they do give us 'the numbers' (8.83cps over FY2022).

Auckland's industrial property vacancy is at an all time low. PFI estimates that 11% of their property portfolio is currently leased at 'under market rents.' Furthermore the 5 year forecast is for rents for prime industrial land to rise at 5% per year on top of that. Furthermore construction costs are forecast to ease as supply chains free up. This means there are favourable tailwinds for industrial property net income to increase in the coming years. The EOFY2022 balance date (31-12-2022) valuation for the PFI portfolio was $2,117.2m.

Other 'big box' listed property owning aggregators listed on the NZX include the Goodman Property Trust (GMT) with a property portfolio valuation of $4,791.2m (EOFY2023, 31-03-2023) and Argosy Property (ARG) with an industrial property portfolio valuation of $1,128m (EOFY2023, 31-03-2023, note only 53% of Argosy's portfolio is classified as industrial). Both of these other players are likewise Auckland focussed with their big box portfolios. However, the GMT portfolio is focussed more on warehousing and logistics spaces. Given this, PFI is clearly the largest listed industrial property owner in New Zealand.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

Earnings Per Share = (Net Operational Profit After Tax) / (Number of shares on issue at the end of the year)

Call me old fashioned but I don't buy those AFFO declared earnings figures. What is wrong with the old 'net profit after tax'? Those are the figures I am using here, but with one caveat. I am adjusting earnings to reflect the incoming tax regime of 'no tax deductions' for the depreciation of building structures being allowed. These earnings adjustments I have detailed in post 13, the second table titled "If Building Depreciation DisAllowed". Reported profits are adjusted for the years FY2020, FY2021 and FY2022. No adjustment was needed for years FY2018 and years FY2019, as building depreciation was not claimable over those years.

FY2018: $32.045m / 498.723m = 6.4cps
FY2019: $34.488m / 498.723m = 6.9cps
FY2020: $34.379m / 501.303m = 6.9cps
FY2021: $39.622m / 505.494m = 7.8cps
FY2022: $36.631m / 502.050m = 7.3cps

A steadily increasing net profit for each share on issue is apparent, until that trend was interrupted in FY2022. But one setback is allowed. The 'setback' can largely be put down to the disposal of the mixed use Carlaw Park properties in December 2021. This was in line with the companies future direction to become a pure industrial property manager. The redeployment of the capital from Carlaw Park into brownfield industrial developments may take a few years to become visible on 'the bottom line'.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

Return on Equity = (Net Operational Profit After Tax) / (Equity at the end of the Year (excluding property revaluations) )

FY2018: $32.045m / ($915.135m - $66.423m - R) = 6.07%
FY2019: $34.488m / ($1,054.037m - $195.744m - R) = 6.35%
FY2020: $34.379m / ($1,136.613m - $268.290m - R) = 6.21%
FY2021: $39.622m / ($1,562.662m - $663.445m - R) = 6.78%
FY2022: $36.631m / ($1,500.338m - $607.285m - R) = 6.34%

Notes

1a/ Cumulative property revaluations AND gain on property sales over these last five reported years sum as follows:

FY2018: $66.423m
FY2019: $66.423m + $129.321m = $195.744m
FY2020: $66.423m + $129.321m + $72.546m = $268.290m
FY2021: $66.423m + $129.321m + $72.546m +395.155m = $663.445m
FY2022: $66.423m + $129.321m + $72.546m +395.155m - $56.160m = $607.285m

1b/ Cumulative property valuations prior to FY2018 are calculated below from historical records to derive the number 'R' in the above calculations. 'R'=+$314.916m

1c/ Historical re(de)valuations prior to FY2018 were as follows:



FY2017+$43.595m


FY2016+$88.214m


FY2015+$46.471m


FY2014+$36.286m


FY2013+$12.326m


FY2012+$12.302m


FY2011+$3.653m


FY2010+$2.590m


FY2009($28.371m)


FY2008($43,128m)


FY2007+$26.463m


FY2006+$33.493m


FY2005+$33.933m


FY2004+$29.972m


FY2003+$7.128m


FY2002+$7.408m


FY2001+$0.790m


FY2000($5.353m)


FY1999($0.443m)


FY1998($0.479m)


FY1997+$6.275m


FY1996 $0


FY1995+$1.539m


FY1994+$0.252m


Total 'R'=+$314.916m



Conclusion: FAIL TEST

SNOOPY

[Snoopy]

Net Profit Margin = (Net Operational Profit after Tax) / (Rental and Management Fee Income)

FY2018: $32.045m / $89.710m = 35.7%
FY2019: $34.488m / $96.051m = 35.9%
FY2020: $34.379m / $97.392m = 35.3%
FY2021: $39.622m / $108.653m = 36.5%
FY2022: $36.631m / $110.909m = 33.0%

I am struck by how extraordinarily consistent the net profit margin after tax is! We did gain a bit between FY2018 and FY2021, only to slide back to five year lows in FY2022 (albeit the margin is still good in absolute terms). I believe the FY2022 margin drop could be because PFI is preserving capital in preparation for the brownfields projects at Bowden Road and Springs Road in industrial Auckland. PFI is in a strong enough position to 'look through' one off earnings downturns in view of an improving future earnings picture. Despite 'earnings per share' dropping over FY2022, PFI said this (from AR2022 p4):

"Overall, dividends continued to trend upward. Assessed over a three-yearly framework, the 2022 dividend looks past the higher earnings in 2021, which were a result of record low interest rates and holding the Carlaw Park properties until the end of that year. Dividends rose to 8.10 cents per share (cps)."

I can't argue that margins did not improve over the years FY2018 to FY2021, even if the margin improvement was small.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

We fell at the third hurdle! - the old 'return on equity' test. This is no surprise for an asset heavy property company. But even with this 'failed' test (and remember it is important to clear all four of the Buffett hurdles for the likes of Buffett to be interested - 3 out of 4 is not good enough), some positives stand out.

If we compare 'Property for Industry' (PFI) with what some might see as a more glamorous property owning company: Investore (IPL) -the supermarket owning specialist-, those 'dull industrial sheds' look to be making twice the return on shareholder equity, compared to the supermarket big boxes. Helping the ROE figures is the fact that PFI will celebrate its thirtieth year in business in 2024. Why does that make a difference? Because when I calculate 'return on equity', I remove from that calculation any 'property revaluation equity' that has occurred over the years. And thirty years of such cumulative re-valuatiuons, (even including the six years over which valuations went backwards), add up to a lot if revalued equity. This 'revalued equity' is 'free incremental equity' from a unit holder perspective.

Look across to the net profit margin for the five years under our 'Investorscope'. Five years ago, PFI was five percentage points above IPL (35.7% vs 29.8%). By 2023 it was twelve percentage points higher (33.0% vs 21.0%)! IPL has stores on the property market in a bid to shore up their capital position. PFI is under no such pressure. In fact over the whole 30 year history of PFI, unit issues of new capital have only been used to acquire significant property assets that has made PFI incrementally larger. Never to satisfy the capital ratio concerns of the company's funding banks.

PFI gets very little discussion on this forum, and as a result is probably a candidate for being the most boring of NZX listed shares. But in the world of investment, being boring is not such a bad thing. For new investors, the less hype in the share price the better! Sometimes managers who go about their jobs doing ordinary things are the true investment champions. And thirty years of 'sticking to your knitting' without going off on any headline grabbing 'fashion inspired tangents' I think is a kind of record to be proud of. Plus being a PIE, means that PFI has a tax advantage for dividends paid to earners in those higher tax brackets.

In summary, while I don't expect Warren will be appearing on the share register of PFI any time soon, compared to other options in the property sector, I think fundamentally there is a lot to like here. But what would be a fair price to pay for PFI units under an alternative 'non Buffett' investment criteria? That is the question I will tackle next.

SNOOPY

discl: do not hold

[Valuegrowth]

PFI gets very little discussion on this forum, and as a result is probably a candidate for being the most boring NZX listed share. But in the world of investment, being boring is not such a bad thing. For new investors, the less hype in the share price the better! S

SNOOPY Boring is beautiful. I was able to survive in the investment world thanks to boring stocks. Coming period is going to be good for Boring stuff.

[Snoopy]

The financial year for Property for industry is the same as the calendar year. Thus the figures below is the latest comparative data available.



DividendGross (cps)Net (cps)Imputation Credits (cps)No. Shares on Issue (2)Net Total PayoutAnnual Total



Q3 FY2022 ex10-11-20221.806 (1)1.8500.5058503.275m$9.311m


Q2 FY2022 ex29-08-20222.3791.8000.5793504.759m$9.087m


Q1 FY2022 ex12-05-20221.9461.8000.1460505.494m$9.100m


Q4 FY2021 ex28-02-20222.7002.4500.2501505.494m$12.388m$39.886m


NPAT over FY2022 (refer post 13 table 1)$28.326m




Notes

1/ This particular dividend is unusual in that the 'Gross taxable amount' is greater than the 'Net Taxable amount' (the dividend actually paid). How is this possible? The actual net payment included an 'excluded amount' of 0.549cps. An 'excluded amount' generally means a profit that is non-taxable, like capital profits from asset sales. This excluded amount of $2.76m is part of the reason the company could afford to pay more in dividends than their NPAT earnings.

2/ There was a share buyback which started during the year, which explains why the number of shares, after May, is changing at each ex-dividend date after that.

-------------------

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.5058+0.5793+0.1460+0.2510) / (1.806+2.379+1.946+2.700) = 16.8%

Something does not sit right with me here. 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 16.8% over the same period on those same earnings.

Oh and about those 'same earnings'. Apparently only $28.236m of profits were earned over the period, yet nearly $12m more ($39.886m) than that in tax paid dividends were paid out. Where did that phantom $12m difference in tax paid earnings paid out come from?

If I was an investment advisor, I would caution against clients investing in PFI. This is because PFI management are issuing pieces of paper that allow rich unit holders to claim tax paid that is in excess of the actual tax paid by the company. I would report PFI to Inland Revenue as a 'scam outfit' cheating the taxpayers of New Zealand. However, in this instance the loop hole that has allowed this 'scam' to take place is the PIE tax regime, which is administered by the IRD itself. So it would appear that Inland Revenue are just scamming themselves, and the whole arrangement is perfectly legal for unit holders after all!

I would love it if a tax lawyer or tax accountant was willing to explain how all of this works.

SNOOPY

[Snoopy]

Reconciliations are a bit hard to do over a single financial year. That is because the earnings behind dividends and tax paid can spill over into adjacent years. So here is what happened over FY2021. I wonder if that will make the multi-year picture clearer?



DividendGross (cps)Net (cps)Imputation Credits (cps)No. Shares on Issue (2)Net Total PayoutAnnual Total



Q3 FY2021 ex11-11-20212.4851.8500.6348504.455m$9.311m



Q2 FY2021 ex26-08-20212.4091.8000.6088503.478m$9.087m



Q1 FY2021 ex12-05-20212.3921.8000.5921502.493m$9.100m



Q4 FY2020 ex01-03-20212.7642.2500.5141501.303m$12.388m$38.723m


Cumulative Shares bought back over FY2021 (1)($11.649m)



NPAT over FY2021 (refer post 13 table 1)$33.674m




Notes

1/ These shares have been bought back as a result of unit holders participating in the dividend reinvestment plan. This total should be subtracted from cumulative dividend total paid over the year to get the 'net cash outflow' for the year to unit holders.

2/ There was a dividend reinvestment plan in operation during the year. This explains why the number of shares on issue is changing at each ex-dividend date.

-------------------

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.5141+0.5921+0.6088+0.6348) / (2.764+2.392+2.409+2.485) = 23.4%

This means PFI paid a greater percentage of income tax than occurred in FY2022, the subsequent year. Nevertheless 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 23.4% over the same period on those same earnings. And once again my calculated earnings, as recognised by the IRD lag behind the dividend payout in size (the old pay out more than you earn trick).

I had thought that excess earnings from FY2021 might have flowed through into FY2022, to help explain the very high payout ratio in that year (payout ratio for FY2022 was $39.886m/$28.326m= 141%). However, this did not happen, because, over FY2021, PFI paid fully imputed dividends were significantly in excess of underlying earnings as well ($38.723m/$33.674m= 115%). It looks like the 'self scamming scheme' managed by Inland Revenue has some more history! I am still none the wiser as to 'how they can get away with it' though! At least over FY2021, the dividend reinvestment scheme did reduce the net dividend outlay in cash to below earnings.

SNOOPY

[Snoopy]

I think it is worth doing this exercise on a third year of operations, to see if we can gain more insights into how the PIE system of earnings is operating.



DividendGross (cps)Net (cps)Imputation Credits (cps)No. Shares on Issue (2)Net Total PayoutAnnual Total



Q3 FY2020 ex06-11-20202.3851.8500.5351500.595m$9.311m



Q2 FY2020 ex10-09-20202.2911.8000.4906499.855m$9.087m



Q1 FY2020 ex14-05-20202.2931.8000.4925498.723m$9.100m



Q4 FY2019 ex23-02-20202.9522.1500.8015501.303m$10.724m$37.961m


Cumulative Shares bought back over FY2021 (1)($6.585m)



NPAT over FY2020 (refer post 13 table 1)$29.855m




Notes

1/ These shares have been bought back as a result of unit holders participating in the dividend reinvestment plan. This total should be subtracted from cumulative dividend total paid over the year to get the 'net cash outflow' for the year to unit holders.

2/ There was a dividend reinvestment plan in operation during the year, from the May dividend forwards. This explains why the number of shares on issue is changing at each ex-dividend date.

-------------------

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.8015+0.4925+0.4906+0.5351) / (2.952+2.293+2.291+2.385) = 23.4%

This means PFI paid a greater percentage of income tax than occurred in FY2021, the subsequent year. Nevertheless 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 23.4% over the same period on those same earnings. And once again my calculated earnings, as recognised by the IRD lag behind the dividend payout in size (the old pay out more than you earn trick).

This means that for the third year in a row, dividend payments have exceeded earnings this time by $37.961m/$29.855m= 27%. Obviously a company cannot go on paying out such significant dividends above earnings for year after year. Something is going to break in the end if they keep doing that. So I conclude there is something about the PIE earnings regime that I do not fully understand.

One hint as to what might be happening is that some dividends (e.g. the one with the ex date 14-05-2020) report gross payments that include an 'excluded amount'. I believe that 'excluded amount' indicates that this part of the payment is technically not a dividend at all. It is merely PFI giving their unit holders some of their capital back. The dividend statement is worded as though this is a 'special thing' that is applicable to listed PIEs only. But any company is allowed to make a capital repayment free of tax deductions. So I don't see what is 'unique' to PIEs in giving unit holders their own capital back.

Practically, over FY2020, the dividend reinvestment scheme did reduce the net dividend outlay almost to cash earnings (as it did in FY2021). So the DRP managed to steady the cashflow ship. But I am not comfortable with the DRP being used to close the cash deficit on a regular basis. If enough investors pull out of the DRP, doesn't that make PFI's cash distribution policy unsustainable?

SNOOPY

[JeffW]

The financial year for Property for industry is the same as the calendar year. Thus the figures below is the latest comparative data available.



Dividend
Gross (cps)
Net (cps)
Imputation Credits (cps)
No. Shares on Issue (2)
Net Total Payout
Annual Total


Q3 FY2022 ex10-11-2022
1.806 (1)
1.850
0.5058
503.275m
$9.311m


Q2 FY2022 ex29-08-2022
2.379
1.800
0.5793
504.759m
$9.087m


Q1 FY2022 ex12-05-2022
1.946
1.800
0.1460
505.494m
$9.100m


Q4 FY2021 ex28-02-2022
2.700
2.450
0.2501
505.494m
$12.388m
$39.886m


NPAT over FY2022 (refer post 13 table 1)





$28.326m



Notes

1/ This particular dividend is unusual in that the 'Gross taxable amount' is greater than the 'Net Taxable amount' (the dividend actually paid). How is this possible? The actual net payment included an 'excluded amount' of 0.549cps. An 'excluded amount' generally means a profit that is non-taxable, like capital profits from asset sales. This excluded amount of $2.76m is part of the reason the company could afford to pay more in dividends than their NPAT earnings.

2/ There was a share buyback which started during the year, which explains why the number of shares, after May, is changing at each ex-dividend date after that.

-------------------

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.5058+0.5793+0.1460+0.2510) / (1.806+2.379+1.946+2.700) = 16.8%

Something does not sit right with me here. 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 16.8% over the same period on those same earnings.

Oh and about those 'same earnings'. Apparently only $28.236m of profits were earned over the period, yet nearly $12m more ($39.886m) than that in tax paid dividends were paid out. Where did that phantom $12m difference in tax paid earnings paid out come from?

If I was an investment advisor, I would caution against clients investing in PFI. This is because PFI management are issuing pieces of paper that allow rich unit holders to claim tax paid that is in excess of the actual tax paid by the company. I would report PFI to Inland Revenue as a 'scam outfit' cheating the taxpayers of New Zealand. However, in this instance the loop hole that has allowed this 'scam' to take place is the PIE tax regime, which is administered by the IRD itself. So it would appear that Inland Revenue are just scamming themselves, and the whole arrangement is perfectly legal for unit holders after all!

I would love it if a tax lawyer or tax accountant was willing to explain how all of this works.

SNOOPY

The company's taxable profit is less than their cash profit, by virtue largely of depreciation. The mismatch you're talking about is in essence the partial distribution of the depreciation.

[Snoopy]

The company's taxable profit is less than their cash profit, by virtue largely of depreciation. The mismatch you're talking about is in essence the partial distribution of the depreciation.


Firstly JeffW, thanks for your response.

There is a distinction in the accounts mentioned between depreciation of 'building fit out' and 'building structure' (AR2022 p64). The former is a regular wear and tear item (for example carpets that have to be rep[laced every few years). The latter you could argue does not depreciate in a day to day use sense. If money does not have to be spent regularly updating the 'structure' of a building, then you can argue this money is 'cash income' over and above what the accounts are telling you the building has earned over the year. Is this what you are referring to as the incremental 'cash profit' JeffW?

I have estimated this incremental cash income, based on building structure depreciation claimed, for PFI over FY2022 to be:
$20.836m - $9.300m = $11.536m (refer my post 13).
This is enough to bridge the gap between 'dividends paid' over FY2022 and 'profit earned' over FY2022, as you suggest JeffW, However this "incremental cash profit" does not have imputation credits attached to it, because no incremental income tax has been paid on this "incremental cash profit". So where do the imputation credits come from to allow a dividend payout of "cash income' to be fully imputed? This is the question that I find so baffling.

SNOOPY

[JeffW]

Firstly JeffW, thanks for your response.

There is a distinction in the accounts mentioned between depreciation of 'building fit out' and 'building structure' (AR2022 p64). The former is a regular wear and tear item (for example carpets that have to be rep[laced every few years). The latter you could argue does not depreciate in a day to day use sense. If money does not have to be spent regularly updating the 'structure' of a building, then you can argue this money is 'cash income' over and above what the accounts are telling you the building has earned over the year. Is this what you are referring to as the incremental 'cash profit' JeffW?

I have estimated this incremental cash income, based on building structure depreciation claimed, for PFI over FY2022 to be:
$17.958m - $9.300m = $8.658m (refer my post 13).
This is enough to bridge most of the gap between 'dividends paid' over FY2022 and 'profit earned' over FY2022, as you suggest JeffW, However this "incremental cash profit" does not have imputation credits attached to it, because no incremental income tax has been paid on this "incremental cash profit". So where do the imputation credits come from to allow a dividend payout of "cash income' to be fully imputed? This is the question that I find so baffling.

SNOOPY

Yes, that's what I was referring to. For a NZ Tax Resident investor, if there are not sufficient imputation credits, then that part which is not 28% imputed is an "excluded dividend" and not taxable irrespective of the tax rate of the recipient.

[Snoopy]

For a NZ Tax Resident investor, if there are not sufficient imputation credits, then that part which is not 28% imputed is an "excluded dividend" and not taxable irrespective of the tax rate of the recipient.


I have been thinking about JeffW's comment above, believing it cannot be correct. Yet when I check the official IRD reference document on the subject:

https://www.ird.govt.nz/-/media/project/ir/home/documents/forms-and-guides/ir800---ir899/ir860/ir860-2021.pdf?modified=20220119011852&modified=20220119011852
From p19
Distributions or dividends from listed PIEs to shareholders
Distributions or dividends to New Zealand resident natural persons and New Zealand resident trustees that are shareholders in a listed PIE are excluded income unless the shareholder includes the dividend in their tax return. The amount of any distribution or dividend that is not fully imputed is also considered excluded income of the shareholder. ('Excluded income' is more commonly used as a term for a capital repayment where no tax payment would be due anyway). These dividends are not liable for Resident Withholding Tax nor NRWT

...it appears JeffW is 100% correct!

This is watershed post for me in better understanding the PIE dividend system.

I had conjectured that PFI tax paid PIE income could only come from tax paid by the underlying parent company (PFI). Wrong!

What JeffW is saying here is that surplus cashflow being made available from depreciation, -cashflow which has not been taxed- (in fact this depreciation money has been used as an expense reducing the income tax bill of the PFI company), can be paid out as a dividend under exactly equivalent conditions as if this cashflow was tax paid profit! (when in fact no tax had been paid on this non-existent 'profit'). I think it is worth stopping for a moment and contemplating this point for a time......

This 'depreciation money' -that has been used to reduce company income tax- is being paid out to shareholders as cash 'earnings' (sic), which amounts to the same net payment as those shareholders would have got had those 'earnings' (sic) been 'tax paid', with a 28% slice of tax removed (which was NOT done). Unbelievable! 'Mr tax man' has been hit over the head not just once, but twice!

And no-one gives a fig......(although maybe Nicola Willis does as she looks to sort out those double dipping tax dodging PIE property owners)

SNOOPY

[JeffW]

cancel that - I've re-read!

[Snoopy]

Now that I know more about how the PIE income distribution system works, it is time to revisit this topic



Building Depreciation Allowed FY2020,FY2021, FY2022FY2018FY2019FY2020FY2021FY20225 year Total


Dividends Paid during Financial Year (1) $37.902m$37.654m$37.961m$38.723m$39.886m$192.126m


less Dividends reinvested during year (2)$0.0m$0.0m$6.585m$11.649m
$0.0m[/TD]$18.234m


equals Net dividends paid during year$37.902m$37.654m$31.376m$27.074m
$39.886m[/TD]$173.892m



IRD Operational Net Profit After Tax (2)$32.045m$34.488m$29.660m$33.674m$28.326m$158.19 3m


'Cash Earnings' available for distribution (3)$32.045m$34.488m$36.514m$41.935m$39.962m$184.94 4m




Notes

1/ Dividends paid and dividends reinvested over the financial year are taken from each respective 'Consolidated Statement of Changes in Equity' in the Annual Reports.
2/ Refer post 14.
3/ Refer post 13.


-------------------------

Earnings will naturally vary from year to year. Companies set up as 'income generating vehicles', a category into which 'Property Owning PIEs' -like Property for Industry- fall, will often look across annual income perturbations, to distribute to their unit holders a predictable income stream. This means that rather than taking an 'annual view', comparing how income relates to dividends over a five year period seems more appropriate. For the five years in the above table, declared dividends have exceeded operational earnings by: 192.126/158.193= 21%, or $33.933m. However, a significant portion of these dividends have been clawed back via the dividend reinvestment scheme.

Further to this, the 'cash earnings' of PFI (which is not a term I like because some of these 'earnings' are not earnings but rather 'behave as such' by the way certain cash flows are treated under the PIE regime) have substantially exceeded the IRD recognised net profit after tax over the five years. Thus, in reality, these 'cash earnings' more than cover the net 'cash paid out in dividends'. The cashflow picture is looking a lot more stable than I had first imagined!

Nevertheless, the removal of the ability to offset 'structural building depreciation' will have a negative effect on cash flows, and hence potentially dividends going forwards. Given it is only the ability to offset 'structural building depreciation' that is being mooted as being disallowed, that effect may not be as great as some think in the overall picture. Increased profits from this change in policy should partially offset the former 'structural building depreciation' accounting entry that used to flow straight through to the dividend. The effective cash lost to unit holders in this policy change will be the increased government tax take on the increased profits. That's how I now see things anyway.

SNOOPY

[FTG]

Nevertheless, the removal of the ability to offset 'structural building depreciation' will have a negative effect on cash flows, and hence potentially dividends going forwards. Given it is only the ability to offset 'structural building depreciation' that is being mooted as being disallowed, that effect may not be as great as some think in the overall picture. Increased profits from this change in policy should partially offset the former 'structural building depreciation' accounting entry that used to flow straight through to the dividend. The effective cash lost to unit holders in this policy change will be the increased government tax take on the increased profits. That's how I now see things anyway.

SNOOPY

Lest not forget that the ability to claim structural building depreciation was actually removed over 10 years ago now (2010)!
Yes, it was reintroduced in 2020 (as part of the Govt Covid Stimulus Package), but at lower rates than previously applied; pre2010.

Therefore, the commercial property market business model (including, for example, valuation methodology & lease negotiating/structuring ) has evolved & adapted - at least for the bigger & smarter operators. Whilst some property owners may have had a faint hope that a change of Govt would make the 2020 introduced regime permanent, the seasoned operators have kept the bigger & more long term picture firmly in the viewfinder. I would suggest that with the depreciation related tax regime basically reverting back to pre2020 settings, there should be no negative effects on PFI's dividends.

Continued financing cost increases - now that could be a different story.

[Snoopy]

The aim of PFI is to provide reliable and steadily increasing dividend returns based on the concept of 'AFFO', which stands for Adjusted Funds From Operations. There is no internationally recognised standard outlining exactly how to calculate AFFO. But the general technique is to start from the property owning company's 'funds from operations' (FFO), and make adjustments consistent with retaining the quality of a company's underlying assets over time from that base.

FFO = net income + amortization + depreciation - capital gains from property sales

Adjustment's to FFO in order to calculate AFFO could typically be:

AFFO = FFO + rent increases - capital expenditures - routine maintenance amounts

Note the capital expenditure referred to is to maintain the quality of the company's existing properties, rather than being comprehensive budgets for new projects. PFI are not clear on exactly what method they use to calculate AFFO, although they do give us 'the numbers' (8.83cps over FY2022).


I am on record as saying I don't like AFFO as a measure. However, even though I don't like it, PFI seem determined to use it. So it then becomes imperative that I put some effort into understanding AFFO, from a PFI perspective.

AR2022 p89 tells us that:
a/ AFFO for FY2022 was $44.6m.
b/ The weighted average number of shares on issue over FY2022 was 504.719m

That means AFFO per share amounted to $44.6m/504.719m = 8.83cps over FY2022

I prefer to use the number of shares at the end of the year when looking at earnings per share figures. So from my perspective:
AFFO = $44.6m/502.050m = 8.88cps.

Compare this to my calculated 'earnings per share' for the year of 7.30c (my post 19).

What are the other changes, besides 'net profit' that might effect AFFO? I have identified 3 possibilities below:

i/ Structural building depreciation for the year I put at $11.536m (my post 13). This equates to $11.536m/502.050m = 2.40cps

ii/ From AR2022 p6
"Divestments saw four properties – 39 Edmundson Street in Napier, 330 Devon Street East and 20 Constance Street in New Plymouth, and 8A & B Canada Crescent in Christchurch –transacted at a combined gross sales price of $33.4 million. On average, these properties realised 8% above their most recent book value."
The gain in book value from these property sales amounts to 0.08x$33.4m= $2.672m or $2.672m/502.050m = 0.53cps
Note that gains in property sales are subtracted from AFFO.

iii/From AR2022 p49 (The cashflow statement) there was a: $23.766m - $19.157m = $4.609m reduction in the tax deductible expense of 'expenditure on investment properties', or 0.72$4.609m/502.05= 0.66cps

Put these three adjustments onto my earnings per share and I get: 7.30c+2.40c-0.53c+0.66c= 9.83cps. Given that this figure is significantly higher than the 8.88cps AFFO quoted, we might conclude that there are plenty of opportunities to increase 'cash earnings' above 'net profit'. An alternative conclusion might be that I have no idea what I am doing. But since PFI isn't exactly forward with how it achieves its own AFFO earnings figures, this is the best I can do today, given the information disclosed in the annual report.

SNOOPY

[Snoopy]

Lest not forget that the ability to claim structural building depreciation was actually removed over 10 years ago now (2010)!
Yes, it was reintroduced in 2020 (as part of the Govt Covid Stimulus Package), but at lower rates than previously applied; pre2010.


I was vaguely aware of structural building depreciation being allowed in the past, prior to it being reintroduced as a Covid stimulus package measure. I wasn't aware of deductions being allowed at a higher rate prior to 2010 though. I may be misunderstanding this. But I (simplistically?) thought that deductions of structural building depreciation as set during Covid would have been set at 100%. Yet you are saying that prior to 2010 the depreciation allowed was MORE than this? Can you expand please?

SNOOPY

[Snoopy]

The commercial property market business model (including, for example, valuation methodology & lease negotiating/structuring ) has evolved & adapted - at least for the bigger & smarter operators. Whilst some property owners may have had a faint hope that a change of Govt would make the 2020 introduced regime permanent, the seasoned operators have kept the bigger & more long term picture firmly in the viewfinder. I would suggest that with the depreciation related tax regime basically reverting back to pre2020 settings, there should be no negative effects on PFI's dividends.


I notice that in the FY2022 report on p6, written early in 2023 before election policies were announced:
"The projection for next year (FY2023) is a dividend of 8.10 to 8.30 cps, a further increase of up to 2.5%."

These guys at PFI aren't just 'possum in the headlights' slaves to government policy. They are working quietly and incrementally to improve the business all the time.

If I am right that it is only the 'tax take on the structural depreciation' from which unit holders will take a hit (because that is the only new money being taken out of the system), then we are looking at a hit on distributions, from an FY2022 perspective, amounting to something like 0.28x$11.538m = $3.231m. That equates to $3.231m/502.050m= 0.6cps going forwards. If PFI have been true to their forecasts, then 0.2cps the forecast 'new tax earnings dip' has already been made up over FY2023 in increased dividends.

Dividends paid so far relating to FY2023 include Q1 1.95c, Q2 1.95c and Q3 1.95cps. Those are above the respective quarterly payout figures of 1.80c, 1.80c and 1.85c for the previous year, the summed increase being 0.4cps for the year so far already. If PFI continue to be able to increase their underlying 'cash earnings' like that, then you may very well be right FTG. We get a flat year of dividend payouts for FY2024. Not the disastrous 'downsizing of payouts' that some were predicting.

SNOOPY

[Snoopy]

Continued financing cost increases - now that could be a different story.


Just taking a look at the 'composition of borrowings', as shown in Section 3 Funding in the annual report for FY2022, I total $403.705m out of the $603.705m total or 67% of borrowings to be at 'floating rates'. That is a lot. Moving onto the cashflow statement from the interim result for FY2023, interest payments rose from $10.566m to $13.904m, a rise of 31.6% for the half year period! But asset sales were up by a staggering $20.069m - $9.069m= $11.000m in the half year period too, so no worries. Plenty of assets there to sell so that PFI can keep paying those divvies!

Going back five years to FY2018 shows drawn bank facilities of $201.500m, to go alongside the PFI010 and PFI020 bonds with $100m of bond capital in each. Back then only 50.4% of borrowings were behest to the banks. So your hint is quite right. Maybe interest rate management skills need sharpening at PFI?

SNOOPY

[Snoopy]

The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed. While this was the case in FY2018 and FY2019, I have had to make adjustments to the free cashflow of the company, and hence money available for dividends in FY2020, FY2021 and FY2022. Post 13 provides detail on what these assumptions are. Dividends are considered in the financial year they are paid.





Per Share Dividends
Div Q1Div Q2Div Q3Div Q4Depn. Tax Adjustment (1)Annual Total



FY2018
2.15c1.80c1.80c1.85cN/A7.6c



FY2019
2.10c1.80c1.80c1.85cN/A7.55c



FY2020
2.15c1.80c1.80c1.85c(0.4c)7.2c



FY2021
2.25c1.80c1.80c1.85c(0.5c)7.2c



FY2022
2.45c1.80c1.80c1.85c(0.7c)7.2c


Five Year Total
36.75c



Notes

1/ 'Depreciation Adjustment' adds the incremental taxation element of 'structural building depreciation'. This 'structural building depreciation' is extra money over and above earnings as measured by NPAT that would previously have been part of what is sometimes described as 'cash earnings'.

If structural building depreciation is no longer allowed, this increases profits and hence the tax take, in comparison with the real situation of tax deductability over FY2020, FY2021 and FY2022 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 13. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.

FY2020: $13.370m - $11.535m = $1.835m. $1.835m/501.303m = 0.4cps
FY2021: $15.409m - $13.096m = $2.313m. $2.313m/505.494m = 0.5cps
FY2022: $14.426m - $11.015m = $3.411m. $3.411m/503.275m = 0.7cps

I am a newbie looking at these property PIEs. I think this is the right way to adjust the 'cash earnings' as they apply to dividends calculations, but I am prepared to be corrected. My Take: The 'helicopter view' of the cashflow, is that the only extra cash taken out of this money system by changing the depreciation rules goes to the government. So this means there is still some 'depreciation money' in the system that can be added to cashflow and be paid out in addition to net profit after tax earnings, even with the depreciation tax law changes. This means that dividends can still perpetually continue to be higher than NPAT. Just less so than before.

------------------------




Total modelled average net dividends over five years: 36.75c / 5 = 7.35c

As I write this the PFI010 and PFI020 bonds are trading around on the secondary market at the 6.5% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2022 capitalised valuation for PFI to get my required rate of return works out as:

(7.35c/0.72)/0.075 = $1.36

I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:

(7.35c/0.72)/0.065 = $1.57

We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.57 x 1.075 = $1.69

An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of PFI shares to $1.57 x 1.18 = $1.85

Even this is still well below current market prices of $2.24 though. My conclusion is that PFI as a head share on the market today, with soaring construction costs in brownfield development project risk, is looking too expensive. With interest rates as they are, and PFI in my judgement most unlikely to default on bond interest payments, it is looking to me like the PFI010 and PFI020 bonds might be a better investment bet than the shares on today's market.

SNOOPY

[FTG]

Snoopy, if you are wanting a blow by blow (timeline) account of NZ's tax policies relating to building depreciation, including applicable rates & methodology (SL, DV etc), then Dr Google should suffice. At least much better than I can articulate here with brevity.

Other than from the IRD itself, I'm sure you will find also various papers addressing your questions, published by the Big 4 etc.

[Snoopy]

Snoopy. Long term property investors would argue that the long run attractiveness of investing in property is that not only do you get the net rent but over time property values rise with inflation. Does your ROE calculations account for inflation increasing the value of the assets over time?


Pinching a good thought from kiwikeith on the IPL thread, because it is equally applicable here.

The direct answer to this question is that I remove any property value gains from the shareholder equity, before I look at the return on that shareholder equity. If I didn't do that, then any calculated return on equity would be penalised, because a property happened to have gone up in value. Clearly as property investors, we want our properties to go up in value. So to say your return on equity, i.e. rental yield, is going down simply because you have been very successful in selecting your property that has gone up in value, would be a nonsensical way to go about evaluating your property returns. The question becomes more nuanced when you ask how total returns are measured, in light of increasing asset values.

Prior to CY2021, we had the very favourable situation for property investors with steady rises in the value of rental contracts, coupled with a concomitant rise in the value of the underlying assets reflecting amongst other things, their ability to earn more rent. Then when interest rates rose suddenly, even as rents held steady, the value of investor's properties started to fall and in some instances fall significantly. In most instances though, this was due to a rise in capitalisation rates reducing the present value of future earnings. Far more worrying than that, would have been tenants going broke and leaving the landlord with empty buildings that were not easy to re-rent. Thankfully this hasn't happened with PFI. And with the supply of land in industrial Auckland being 'tight', I don't think it is likely to happen. Capitalisation rates tend to be cyclical. So over the longer term, you can argue that changes in investor property values do reflect its improved rentability, and are not a result of capitalisation rates 'blowing in the wind'. Furthermore although such revaluations are not an immediate cash benefit, to the property investor, such increased valuations can be 'borrowed against', - a process that allows cash to be raised. Furthermore if such revalued buildings are sold then cash is raised, albeit at the expense of the loss of the income stream in the future that gave rise to that 'cash revalued upward property' in the first place.

The point of my musings here, is to bring up the idea of 'double counting'. If we measure the same benefit twice, both as 'increased income', and as an increased value of the property itself, are we just 'kidding ourselves' into believing we are doing twice as well as we really are? My answer is 'yes' and 'no' depending on the specific situation.

A property is valued on its future earnings capacity. So if you have updated your property to improve its rent-ability, for example pulled down an old warehouse and built a new one with rent-able office space above it, then yes you have improved the rent-ability of that property. Another growth scenario might be that you do nothing to your property. But the city your warehouse serves grows around you. Thus your site becomes a more valuable prospect to a multitude of operators, which starts a bidding war to raise the rent of your tired old warehouse in the marketplace. I bring up this second example, to show that you don't have to spend money on a property for the increase in its value to be real. However in my third example, say you have a warehouse in a steady state town when interest rates fall, pushing the book value of your property up. I would argue that in this situation you have not made a capital gain. All that is happening is that a cyclical drop in interest rates is resulting in a temporary rise in value of your building. An interesting corollary of this thinking is to consider what might happen if interest rates drop to 'once in a generation' lows (as happened during Covid) and now start to rise again, depressing property valuations as a result.

Are those big falls in commercial property we have been seeing over the last year or two real? Using the previous paragraphs line of thinking, I would argue they are not real. But neither were the rises in property prices resulting from very low interest rates pushed through during Covid real either. My philosophy: In an environment where interest rates are swinging so violently, it is probably best to focus on the income generating ability of those property assets. This is where I have got to myself, valuing property today. If the income generation potential of a property does not marry up with its capital value on the balance sheet, then it is likely the capital value on the balance sheet that is wrong.

One advantage of PFI being around in its current form for 30 years this year is that these interest rate investment cycle variables that I have been talking about do tend to average out. And that means that the gains in net asset backing over the years at PFI, most likely are real. So that means we should take these gains into account when determining our investor returns at PFI. Post 20 in this thread puts those gains at: $314.916m + $607.285m = $922.201m to date.

Over 30 years, that works out at a 30 year annual compounding rate 'r' of:

($1,500.328m - $922.201m)(1+r)^30 = $1,500.338m
=> $578.127m (1+r)^30 = $1,500,338m
=> (1+r)^30 = 2.595
=> r=1.03, or 3% per annum.

What happens if we decide to add that into our valuation model?

SNOOPY

[Snoopy]

The gains in net asset backing over the years at PFI, most likely are real. So that means we should take these gains into account when determining our investor returns at PFI. Post 20 in this thread puts those gains at: $314.916m + $607.285m = $922.201m to date.

Over 30 years, that works out at at 30 year compounding rate 'r' of:

($1,500.328m - $922.201m)(1+r)^30 = $1,500.338m
=> $578.127m (1+r)^30 = $1,500,338m
=> (1+r)^30 = 2.595
=> r=1.03, or 3% per annum.

What happens if we decide to add that into our valuation model?


There is a real question as whether I should include compounding property valuations in my assessment of PFI going forwards. I sum up both sides of the argument as follows:

FOR: PFI has an unenviable record of 30 years of property investment growth. Throughout the company's time as a listed entity, the name 'Property for Industry' has not changed. Neither has the mission. The company is very focussed on being a specialist property owner 'for industry'. With the sale of their last investment property with non-industrial connections, Carlaw Park, in FY2021, the company's laser like focus on their core business mission now has no distractions. Property investors can make one or two strategic decisions and 'get lucky'. You could argue that PFI has had thirty years of 'good luck'. Or maybe there is an alternative explanation: Like good management actually knowing what they are doing! Thirty years of 'doing what they say they would do' and 'doing it well' is a record that can't be ignored. You would have to bet on this continued industrial property growth model, continuing to grow and succeed.

AGAINST: Buffett is in the business of identifying long term growth opportunities. A key pillar in all of this is extracting maximum value out of shareholder equity. A high return on shareholder equity means you can explore different growth paths, have not all of them succeed, and yet still come out ahead. An ROE in the mid 6 percent range is simply not high enough to guarantee compounding returns for the long term. If you think that sounds hypothetical, consider this. PFI have admitted that finding new investment properties at the right price that meet their investment criteria has become very difficult. So much so that PFI are now pivoting towards 'brownfield developments', or redeveloping and repurposing existing sites. This is a major shift, from 'property investor' to 'property developer'. This is not necessarily a bad thing if PFI know their tenants and know those tenant's requirements (which for most sites they do). But because property development requires construction risk, this introduces a whole new risk profile into PFI that was not there before. Plus, of course, we are just coming out of a period of massive stimulus for the property market in general. It might be unwise to consider even five year historical property growth trends as a mark of what to expect into the future. So by all means enjoy your property capital growth returns into the future PFI unit holders. But consider any such returns to be 'a bonus'. Not a substitute for what would otherwise be a very modest market yield return on what have become 'overhyped assets.'

Does FOR or AGAINST make the better case?

SNOOPY

[Snoopy]

Total modelled average net dividends over five years: 36.75c / 5 = 7.35c

As I write this the PFI010 and PFI020 bonds are trading around on the secondary market at the 6.5% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2022 capitalised valuation for PFI to get my required rate of return works out as:

(7.35c/0.72)/0.075 = $1.36

I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:

(7.35c/0.72)/0.065 = $1.57

We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.57 x 1.075 = $1.69

An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of PFI shares to $1.57 x 1.18 = $1.85




Over 30 years, that works out at at 30 year compounding rate 'r' of:

($1,500.328m - $922.201m)(1+r)^30 = $1,500.338m
=> $578.127m (1+r)^30 = $1,500,338m
=> (1+r)^30 = 2.595
=> r=1.03, or 3% per annum.

What happens if we decide to add that into our valuation model?





There is a real question as whether I should include compounding property valuations in my assessment of PFI going forwards. I sum up both sides of the argument as follows:

Does FOR or AGAINST make the better case?


I can't make up my mind whether FOR or AGAINST makes the better case. I have decided that the best thing to do is 'split the risk down the middle'. In this case, that means assuming there will be some continual capital growth going forwards. But it will at be:

(3%+0%)/2 = 1.5% per annum.

Note that this 1.5% is a 'tax paid' return. The incremental equivalent gross return is 1.5%/0.72 = 2.08%. Because we are modelling this 2.08% return as 'baked in', it means we can reduce our acceptable gross target dividend income by this amount. This means my 7.5% targeted total gross return becomes equivalent to an 'income return' of: 7.5% - 2.08% = 5.42%

Thus my 'fair value' for the PFI share price, using the 'dividend fair value earnings' of 7.35c as derived in post 38, becomes: (7.35c/0.72)/0.0542 = $1.88.

The 33% marginal taxpayer adjustment increases the fair value to: [(1-0.28)/(1-0.33)] x $1.88 = $2.02
The 39% marginal taxpayer adjustment increases the fair value to: [(1-0.28)/(1-0.39)] x $1.88 = $2.22

PFI is trading at $2.245 as I write this.

SNOOPY

[Snoopy]

Let's line up the 'what actually happened table' against the 'what would have happened table' and see what the differences might have been.

The 'what actually happened table' includes FY2018 and FY2019, two years where the depreciation allowance on buildings was not allowed to be claimed. I expect from July 2024 that the depreciation allowed will return to the FY2018 and FY2019 regime. Yet there was still some depreciation allowed for in the accounts of FY2018 and FY2019. It appears from this quote from AR2022 p73 that this 'residual depreciation' may be from the building fit out.
"The calculation of deferred tax on depreciation recovered places reliance on the land and building split in the valuation provided by the valuers. The building value is then split between fit-out and structure based on the proportion of the tax book values of each."

So under a new 'building depreciation is no longer tax deductible' regime, 'building fit out' items, like movable interior divisions and air conditioning systems, would still be tax deductible, even if the structural elements of the building were not. To reflect this element, I am going to assume that even with building depreciation disallowed in our hypothetical FY2020-FY2023 alternative 'what would have happened' scenario (i.e. where there is no 'building depreciation' in any year), there would be a residual annual depreciation charge of $9.300m (my estimate, as used in the first table below in calculations, see note 3) that would remain.

What actually happened



i/ Building Depreciation Allowed FY2020 - FY2023FY2018FY2019FY2020FY2021
FY2022FY2023
[/TD]Total



Profit before other expense/income and income tax (as declared)
$89.816m$96.109m
$97.395m$108.655m
$110.921m$114.787m



less Depreciation Allowance (1)
$9.357m$9.279m
$15.854m$17.561m$20.836m$19.857m


less Property Costs
$12.507m$14.850m
$16.262m$16.753m$17.598m$22.695m

www.stocktalk.co.nz
less Interest Expenses & Bank Fees
$18.766m$19.008m
$18.233m$20.106m$24.638m$29.160m


less Administrative Expenses
$4.679m$5.072m
$5.851m$7.465m$8.508m$10.336m


equals IRD Profit before other expense/income and income tax {A}
$44.507m$47.900m
$41.195m$46.770m$39.341m$32.739m



less Income Tax expense @ 28% (this calculated scenario) (2)$12.462m$13.412m$11.535m$13.096m$11.015m$9.167m
$70.687m



equals IRD Operational Net Profit After Tax$32.045m$34.488m$29.660m$33.674m$28.326m$23.572 m



add Cashflow from 'Structural Depreciation' not reinvested (3)$0m$0m$6.554m$8.261m$11.536m$10.557m
For


equals 'Cash Earnings' available for distribution$32.045m$34.488m$36.514m$41.935m$39.96 2m$34.129m



(Reference Only) Current tax expense (AR Note 5.2 'Tax')
$8.886m$13.106m
$10.066m$10.605m$10.525m$5.601m$58.789m




Notes

1/ The annual depreciation charge is not even stated in the respective annual report(s). But we can work out what it is by looking at the notes from the AR section 5.2 on tax. There is a note there that discloses various factors in the prima-facie reduction to income tax, of which one ingredient is 'depreciation'. To get the actual depreciation charge for any year from this 'adjustment' figure, you have to divide this 'depreciation ingredient' figure by the company tax rate of 0.28. As an example, the depreciation charge for FY2022 was: $5.834m/0.28 = $20.836m. If we include these depreciation charges in the profit results, a very different - but more believable - picture of profitability to that reported in the annual result(s) emerges.

2/ For the purpose of this exercise I have used the legislated company tax rate of 28%, when I calculate 'income tax expense'. I have done this because I believe it is the best way to look at the 'change in profitability' between the two scenarios that I am outlining in detail. I don't fully understand how the exact dollars of tax are calculated in the published accounts. So it makes no sense to try and replicate a calculation process that I do not fully understand. Better to take a calculation method I do understand, and record the tax differences from two alternative sets of input assumptions.

3/ The figure I have used of $9.300m for the depreciation of 'building fittings' is an eyeball average of the actual figures used in FY2018 ($9.357m) and FY2019 ($9.279m), two reporting periods where this figure was known definitively. I use this figure to calculate the structural depreciation that does not have to be, which therefore becomes cashflow that can go towards adding to the declared dividend.
3a/ Calculation for FY2020: ($15.854 - $9.300)m = $6.554m
3b/ Calculation for FY2021: ($17.561 - $9.300)m = $8.261m
3c/ Calculation for FY2022: ($20.836 - $9.300)m = $11.536m
3d/ Calculation for FY2023: ($19.857 - $9.300)m = $10.557m



What would have happened

In the alternative legislative scenario below, where depreciation from buildings is no longer allowed to be offset against profits, the subset of 'structural depreciation' switches from being 'a tax deductible expense' to a disallowed charge. This will increase the declared profit of the business, and consequently increase the government's income tax take (+$7.379m over three years, a $7.379m/$35.646m= a 20.7% rise).



ii/ If Building Depreciation DisAllowed
FY2018FY2019FY2020FY2021
FY2022FY2023
Total



Profit before other expense/income and income tax (as declared)
$89.816m$96.109m
$97.395m$108.655m$110.921m$114.787m



less Depreciation Allowance (scenario for FY2020-FY2022)
$9.357m$9.279m
$9.300m$9.300m$9.300m$9.300m


less summed Property, Administration and Interest Costs
$35.952m$38.930m
$40.346m$44.324m$50.744m$62.191m


equals IRD Profit before other expense/income and income tax {A}
$44.507m$47.900m
$47.749m$55.031m$50.877m$43.296m


less Income Tax expense @ 28% (this calculated scenario)$12.462m$13.412m$13.370m$15.409m$14.246m$ 12.123m
$81.022m



equals IRD Operational Net Profit After Tax$32.045m$34.488m$34.379m$39.622m$36.631m$31.173 m



The key figures in the above two tables are the last row in each respective table that I have highlighted in bold. Compare those two and you will see the difference in 'cashflow available' to 'service the dividend' under each alternative taxation scenario. Thus if the mooted removal of structural depreciation as a tax deductible expense had occurred over the FY2020 to FY2023 years, then the 'dividend pool' would have been reduced as follows:

FY2020: $34.379m - $36.514m = ($2.135m) or -$2.135m/501.303m = -0.4cps
FY2021: $39.622m - $41.935m = ($2.313m) or -$2.313m/505.494m = -0.5cps
FY2022: $36.631m - $39.962m = ($3.331m) or -$3.331m/503.275m = -0.7cps
FY2023: $31.173m - $34.129m = ($2.956m) or -$2.956m/502.129m = -0.6cps

[Snoopy]

The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed. While this was the case in FY2018 and FY2019, I have had to make adjustments to the free cashflow of the company, and hence money available for dividends in FY2020, FY2021 and FY2022. Post 13 provides detail on what these assumptions are. Dividends are considered in the financial year they are paid.





Per Share Dividends
Div Q1Div Q2Div Q3Div Q4Depn. Tax Adjustment (1)Annual Total



FY2018
2.15c1.80c1.80c1.85cN/A7.6c



FY2019
2.10c1.80c1.80c1.85cN/A7.55c



FY2020
2.15c1.80c1.80c1.85c(0.4c)7.2c



FY2021
2.25c1.80c1.80c1.85c(0.5c)7.2c



FY2022
2.45c1.80c1.80c1.85c(0.7c)7.2c


Five Year Total
36.75c



Notes

1/ 'Depreciation Adjustment' adds the incremental taxation element of 'structural building depreciation'. This 'structural building depreciation' is extra money over and above earnings as measured by NPAT that would previously have been part of what is sometimes described as 'cash earnings'.

If structural building depreciation is no longer allowed, this increases profits and hence the tax take, in comparison with the real situation of tax deductability over FY2020, FY2021 and FY2022 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 13. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.

FY2020: $13.370m - $11.535m = $1.835m. $1.835m/501.303m = 0.4cps
FY2021: $15.409m - $13.096m = $2.313m. $2.313m/505.494m = 0.5cps
FY2022: $14.426m - $11.015m = $3.411m. $3.411m/503.275m = 0.7cps

I am a newbie looking at these property PIEs. I think this is the right way to adjust the 'cash earnings' as they apply to dividends calculations, but I am prepared to be corrected. My Take: The 'helicopter view' of the cashflow, is that the only extra cash taken out of this money system by changing the depreciation rules goes to the government. So this means there is still some 'depreciation money' in the system that can be added to cashflow and be paid out in addition to net profit after tax earnings, even with the depreciation tax law changes. This means that dividends can still perpetually continue to be higher than NPAT. Just less so than before.

------------------------




Total modelled average net dividends over five years: 36.75c / 5 = 7.35c

As I write this the PFI010 and PFI020 bonds are trading around on the secondary market at the 6.5% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2022 capitalised valuation for PFI to get my required rate of return works out as:

(7.35c/0.72)/0.075 = $1.36

I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:

(7.35c/0.72)/0.065 = $1.57

We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.57 x 1.075 = $1.69

An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of PFI shares to $1.57 x 1.18 = $1.85

Even this is still well below current market prices of $2.24 though. My conclusion is that PFI as a head share on the market today, with soaring construction costs in brownfield development project risk, is looking too expensive. With interest rates as they are, and PFI in my judgement most unlikely to default on bond interest payments, it is looking to me like the PFI010 and PFI020 bonds might be a better investment bet than the shares on today's market.


The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed. While this was the case in FY2019, I have had to make adjustments to the free cashflow of the company, and hence money available for dividends in FY2020, FY2021, FY2022 and FY2023. Note 3 in Post 43 provides detail on what these assumptions are. Dividends are considered in the financial year they are paid.





Per Share Dividends
Div Q1Div Q2Div Q3Div Q4Depn. Tax Adjustment (1)Annual Total




FY2019
2.10c1.80c1.80c1.85cN/A7.55c



FY2020
2.15c1.80c1.80c1.85c(0.4c)7.2c



FY2021
2.25c1.80c1.80c1.85c(0.5c)7.2c



FY2022
2.45c1.80c1.80c1.85c(0.7c)7.2c



FY2023
2.65c1.95c1.95c1.95c(0.6c)7.9c




Five Year Total
37.05c



Notes

1/ 'Depreciation Tax Adjustment' adjusts for the incremental taxation element of 'structural building depreciation' being removed as a tax deduction. This 'structural building depreciation' is extra money over and above earnings as measured by NPAT that would previously have been part of what is sometimes described as 'cash earnings'.

If structural building depreciation is no longer allowed, this increases profits and hence the tax take, in comparison with the real situation of tax deductability over FY2020, FY2021, FY2022 and FY2023 being allowed over those years. The difference in tax paid under each tax scenario (tax deductability 'allowed' or 'not allowed') may be found in post 43. The per share distributable earnings adjustment figures are calculated in that post.

------------------------


Total modelled average net dividends over five years: 37.05c / 5 = 7.41c

As I write this the PFI010 and PFI020 bonds are trading around on the secondary market at the 6.9% and 6.6% levels respectively. For equity risk, I require a gross level of return greater than that : 7.5%. This means my FY2023 capitalised valuation for PFI to get my required rate of return works out as:

(7.35c/0.72)/0.075 = $1.36

I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:

(7.41c/0.72)/0.065 = $1.58

We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.58 x 1.075 = $1.70

An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of PFI shares to $1.58 x 1.18 = $1.86

Even this is still well below current market prices of $2.225 though. My conclusion is that PFI as a head share on the market today, with soaring construction costs in brownfield development project risk, is still looking too expensive. With interest rates as they are, and PFI in my judgement most unlikely to default on bond interest payments, it is looking to me like the PFI010 and PFI020 bonds might be a better investment bet than the shares on today's market.

SNOOPY

[Snoopy]

Historical Cumulative property re(de)valuations are listed below from the respective annual reports:



FY2023($140.830m)


FY2022($56.160m)


FY2021+$395.155m


FY2020+$72.546m


FY2019+$129.321m


FY2018+$66.423m


FY2017+$43.595m


FY2016+$88.214m


FY2015+$46.471m


FY2014+$36.286m


FY2013+$12.326m


FY2012+$12.302m


FY2011+$3.653m


FY2010+$2.590m


FY2009($28.371m)


FY2008($43,128m)


FY2007+$26.463m


FY2006+$33.493m


FY2005+$33.933m


FY2004+$29.972m


FY2003+$7.128m


FY2002+$7.408m


FY2001+$0.790m


FY2000($5.353m)
you

FY1999($0.443m)


FY1998($0.479m)


FY1997+$6.275m


FY1996 $0


FY1995+$1.539m


FY1994+$0.252m


Total =+$781.371m



One advantage of PFI being around in its current form for 30 years this year is that interest rate investment cycle variables do tend to average out. And that means that the gains in net asset backing over the years at PFI, most likely are fundamental and real. So that means we should take these gains into account when determining our investor returns at PFI. I have calculated these gains to sum to $781.371m to the end of FY2023.

Over 30 years, that works out at a 30 year annual compounding rate 'r' of:

($1,360.269m - $781.371m)(1+r)^30 = $1,360.269m
=> $578.898m (1+r)^30 = $1,360.269m
=> (1+r)^30 = 2.350
=> r=1.02888, or 2.88% per annum.

What happens if we decide to add that information into our valuation model?


SNOOPY

[troyvdh]

Snoopy.
Great work and I for one really appreciate your efforts.
Im sorry but could you determine the return on say 10k invested since inception.

Im an old nurse (psych).Retired.
Im guessing the return is probably greater than a succession of bank deposit returns.
Cheers troy.

Needless to say Im a great believer in KISS.

[Snoopy]

Snoopy.

Great work and I for one really appreciate your efforts.
I'm sorry but could you determine the return on say 10k invested since inception.

I'm guessing the return is probably greater than a succession of bank deposit returns.
Cheers troy.

Needless to say I'm a great believer in KISS.


Yes it is interesting to see a company celebrating 30 years as a listed entity in 2024, concentrating on doing exactly what the company name says: Managing properties for various industrial and logistical firms in largely big box entities. No drama. No sidetracking into 'hot opportunities' along the way. Just boringly carrying out their stated mission, and I use that adjective as an expression of high praise. Boring is good for investors, if the company management are tightly focussed on their underlying purpose and execute well. PFI tick these boxes. Given there is little drama to discuss, this is probably why the PFI thread is one of the shortest on sharetrader. And given these background circumstances, this is no bad thing.

And yet, I feel for the first time in PFI history, we are at a crossroads. PFI have admitted that their supply of readily attainable industrial land in their key Auckland market - at the right price- has dried up. So PFI are transitioning from 'greenfield development' to 'brownfield development': the redevelopment of existing properties into adaptable expansion projects to better fulfill the developing needs of existing customers. This is a change in strategy, albeit along a complimentary path, rather than a wholesale change to a new direction. But a change in risk profile nevertheless. If anyone can execute such a change well, I suspect it will be PFI. But I think for PFI investors, some vigilance will be required 'just in case' the changing path forwards does not execute exactly to plan.

I am afraid I cannot give you the return from $10k invested in PFI from inception to date, troyvd, because I do not have all the historical dividend information needed to calculate that. And of course there is that old adage, past returns do not necessarily reflect future returns. I would have no doubt that PFI returns have beaten bank term deposit returns over the 30 year period, because I don't think there is a single comparative period where the PFI dividend yield has dipped below the alternative time equivalent term deposit rates on offer, as measured on a gross basis. History is good to look back on. But I am much more focussed on future returns which -while I expect to be good-, I do not expect will rise to 10% gross per year averaged over the long term going forwards. In compensation for not so heady numbers going forwards, I do expect PFI future returns to be predictable. So I see PFI as a good ingredient for that 'retirement portfolio', as part of a diversified share ownership package.

SNOOPY

discl: Not yet invested in PFI myself, but doing my homework and thinking about it (just trying to get those numbers to add up, by picking the right entry price)

[Snoopy]

Over 30 years, that works out at a 30 year annual compounding rate 'r' of:

($1,360.269m - $781.371m)(1+r)^30 = $1,360.269m
=> $578.898m (1+r)^30 = $1,360.269m
=> (1+r)^30 = 2.350
=> r=1.02888, or 2.88% per annum.

What happens if we decide to add that into our valuation model?


To account for 'brownfield execution risk', I am going to assume that the capital growth in property values in the future is only half the growth rate of property under management over the first 30 years.

(2.88%+0%)/2 = 1.44% per annum.

Note that this 1.44% is a 'tax paid' return. The incremental equivalent gross return is 1.44%/0.72 = 2.00%. Because we are modelling this 2.00% return as 'baked in', it means we can reduce our acceptable gross target dividend income by this amount. This means my 7.5% targeted total gross return becomes equivalent to an 'income return' of: 7.50% - 2.00% = 5.50%

Thus my 'fair value' for the PFI share price, using the 'dividend fair value earnings' of 7.41c as derived in post 44, becomes: (7.41c/0.72)/0.055 = $1.87.

The 33% marginal taxpayer adjustment increases the fair value to: [(1-0.28)/(1-0.33)] x $1.87 = 1.075 x $1.87 = $2.01
The 39% marginal taxpayer adjustment increases the fair value to: [(1-0.28)/(1-0.39)] x $1.87 = 1.18 x $1.87 = $2.21

PFI is trading at $2.245 as I write this. Just above 'fair value' for those 39% marginal taxpayers.

SNOOPY

[Snoopy]

If the mooted removal of structural depreciation as a tax deductible expense had occurred over the FY2020 to FY2023 years, then the 'dividend pool' would have been reduced as follows:

FY2020: $34.379m - $36.514m = ($2.135m) or -$2.135m/501.303m = -0.4cps
FY2021: $39.622m - $41.935m = ($2.313m) or -$2.313m/505.494m = -0.5cps
FY2022: $36.631m - $39.962m = ($3.331m) or -$3.331m/503.275m = -0.7cps
FY2023: $31.173m - $34.129m = ($2.956m) or -$2.956m/502.129m = -0.6cps


I always like to double check my workings when 'official information' becomes available. This from the just released AR2023 on page 9:
"However, changes to depreciation rules, which are likely to impact PFI from 1 July 2024, will see the company’s tax bill rise by about $2 million a year."

This is a little less than the $2.135m to $2.956m I was estimating, should such a new depreciation rules have been applied to the FY2020 to FY2023 financial years, - albeit still "within the ball park". The actual figure depends on the split in the size of the 'overall building depreciation charge' and the split between the 'structural building depreciation' (no longer tax deductible) and the 'building ancillaries depreciation' (still tax deductible).

I don't know how the 'overall building depreciation charge' is expected to change between FY2023 and FY2025 and beyond (FY2024 will be for a transitory six month period). But if buildings are being sold to finance the purchase of land for future development, then the overall building depreciation charge could easily go down in FY2025. It could also be that the proportion of structural building depreciation goes down because of the new 'brownfields development approach'. By this, I mean that while the structural shell of an investment property remains, the internal re-organisation of that space with temporary divisions and new building ventilation equipment (as examples) is where a greater proportion of capital spend is being made. Thus a greater proportion of the overall 'building depreciation bill' remains tax deductible. In turn the structural depreciation adjustment (a tax deduction that is lost) becomes smaller than expected, which means the incremental tax bill payable to the IRD as a result of 'removing depreciation as a tax deduction' is less than expected. This is a possible explanation for why PFI's estimate of the incremental extra tax they will be paying in FY2025 is less than my estimates of the same thing over FY2020 to FY2023, should the change in 'building tax deductability' have occurred over those years.

SNOOPY

[Alekhine]

Hi Snoopy


Could you please tell me where you get the 0.72 from in your dividend model?


Thanks

[Snoopy]

Hi Snoopy

Could you please tell me where you get the 0.72 from in your dividend model?

Thanks


Sure. NZ companies pay out dividends, after they have paid their own tax bill to the government. The general principle of dividend imputation is that shareholders do not pay tax on the same profits twice. So shareholders get a credit for the tax paid by the company when they receive their dividend payments. The company tax rate is 28%, which means the IRD gets 28% of the net profit before tax and shareholders are paid the rest: 100%-28%=72%. 72% expressed as a fraction is 0.72.

This means that in order to calculate the 'gross dividend payment' before any tax is taken off it (the 100% referred to above), you have to take the dividend that arrives in your bank account (which is normally 72% of the gross dividend payment for a PIE investment like PFI) and divide that dividend figure that arrives in your bank account by 0.72. This is how you calculate your 'gross dividend payment'. In the real situation you will not have to do this maths, because the company will issue you with a dividend statement where this calculation is done for you.

I choose to look at 'gross dividends' rather than 'net dividends', because it makes for a more straightforward comparison with alternative investments like bank term deposits, where returns quoted are always gross returns. HTH

SNOOPY

[Alekhine]

Great. Thank you. I really enjoy reading your posts.