IPL - Investore Property

[Snow Leopard]

We cringe at the name but we may want to buy shares, and if we own Stride then we get shares anyway.


To get the PDS & more:

click the link >> http://www.business.govt.nz/disclose/

hit Search Offers

type Investore in the Issuer Name Box and hit Search

hit the link

hit the Documents tab

hit the Product Disclosure Statement.pdf link

Bingo

Best Wishes
Paper Tiger

[fungus pudding]

We cringe at the name but we may want to buy shares, and if we own Stride then we get shares anyway.


To get the PDS & more:

click the link >> http://www.business.govt.nz/disclose/

hit Search Offers

type Investore in the Issuer Name Box and hit Search

hit the link

hit the Documents tab

hit the Product Disclosure Statement.pdf link

Bingo

Best Wishes
Paper Tiger


Thanks PT. That works. Can't say I've got my head around this deal so far. A bit of reading to do, or maybe just sit back and hope the deal lifts divs and/or price. That sounds easier.

[Snow Leopard]

...To get the PDS & more:

...

There is :t_up:.

Click this Link >> http://www.shareoffer.co.nz/Documents/Investore-PDS-NZ.pdf


But wait, There is more :eek2:

There is this Site >> http://www.shareoffer.co.nz/investore


Best Wishes
Paper Tiger

[axe]

highlights for me.

• Investore's interest expense representsapproximately 29% of revenue in FY18. Managingdebt and interest rates are a key driver ofInvestore's profitability. ( will do well as long as interest rates stay low )

Exposure to significant tenant: General Distributors Limited ("GDL") is Investore's largest tenant constitutingapproximately 84% of Investore's Contract Rental as at 30 April 2016. If GDL's performance materiallydecreases or if GDL fails to meet its lease obligations, this could affect Investore. (PS axe thinks that if 84% of revenue if coming from one customer they have your n*ts in a very tight grip when it comes to negotiating rent increases.)

[fungus pudding]

highlights for me.

• Investore's interest expense representsapproximately 29% of revenue in FY18. Managingdebt and interest rates are a key driver ofInvestore's profitability. ( will do well as long as interest rates stay low )

Exposure to significant tenant: General Distributors Limited ("GDL") is Investore's largest tenant constitutingapproximately 84% of Investore's Contract Rental as at 30 April 2016. If GDL's performance materiallydecreases or if GDL fails to meet its lease obligations, this could affect Investore. (PS axe thinks that if 84% of revenue if coming from one customer they have your n*ts in a very tight grip when it comes to negotiating rent increases.)


I still don't understand the point of the stapled shares. Stride shareholders will be issued around 35% of shares in investore, and stride will hold 19.9%. Remainder (approx. 45%) will be offered in IPO. Could anyone a little less thick than me explain why stride doesn't just offer 45% in IPO? :confused:

[Baa_Baa]

I still don't understand the point of the stapled shares. Stride shareholders will be issued around 35% of shares in investore, and stride will hold 19.9%. Remainder (approx. 45%) will be offered in IPO. Could anyone a little less thick than me explain why stride doesn't just offer 45% in IPO? :confused:

It's something to do with tax advantages. Maybe the tax accountants here can shed some light on this complicated divestiture.

[fungus pudding]

It's something to do with tax advantages. Maybe the tax accountants here can shed some light on this complicated divestiture.

I hope so. Assuming these properties are worth purchasing, why not just purchase outright under stride's existing structure? There'd be ways of financing the purchase less complicated than this, and surely just buying some more buildings would not impact on stride's PIE status.

[winner69]

I hope so. Assuming these properties are worth purchasing, why not just purchase outright under stride's existing structure? There'd be ways of financing the purchase less complicated than this, and surely just buying some more buildings would not impact on stride's PIE status.

Need to separate property management and property owning businesses to main full PIE status - if split not approved your returns diminish

The property management part was just getting too big

[fungus pudding]

Need to separate property management and property owning businesses to main full PIE status - if split not approved your returns diminish

The property management part was just getting too big

Surely the management grows in proportion percentage wise to the portfolio.Anyway management is internal so if left intact management wouldnt provide income.

[winner69]

fp - Stride did say the restructure would allow it to expand the management arm while preserving its favourable tax status. There is a cap on non-qualifying income (in this case management fees) if one wants to be a PIE

No doubt you will suss it one day but in meantime have to trust them doing the right thing for you.

[fungus pudding]

fp - Stride did say the restructure would allow it to expand the management arm while preserving its favourable tax status. There is a cap on non-qualifying income (in this case management fees) if one wants to be a PIE

No doubt you will suss it one day but in meantime have to trust them doing the right thing for you.

Yes, I'm sure they will be. Augusta lost PIE status because of proportional title scheme management. I can't help wondering if stride are planning something along similar lines in future. I think there's more to this announcement than has been released.

[winner69]

Yes, I'm sure they will be. Augusta lost PIE status because of proportional title scheme management. I can't help wondering if stride are planning something along similar lines in future. I think there's more to this announcement than has been released.

Reading a bit more about PIEs and Strides announcements I think you may be right here fp.

[Snow Leopard]

The spin-out of Investore from Stride may not only be a necessary condition of the proposed new purchase, but is also probably desirable as the large format retail has a significantly? different risk to reward ratio from the rest of the Stride portfolio.
I am not saying better, I am not saying worse, just that it is different.

Whether it is a good idea to be pumping your money into new shares depends upon, among other considerations, how you see property valuations going forward.

So you will have two separate and independent shares (one vanilla and one-stapled) and you can take your choice of what mix of holding you want to pursue.


The split of Stride into a property owning company and a property management company is highly desirable for tax purposes and maximizing shareholder returns.

The directors and senior staff will probably do OK as well.

Best Wishes
Paper Tiger

[fungus pudding]

The spin-out of Investore from Stride may not only be a necessary condition of the proposed new purchase, but is also probably desirable as the large format retail has a significantly? different risk to reward ratio from the rest of the Stride portfolio.
I am not saying better, I am not saying worse, just that it is different.

Whether it is a good idea to be pumping your money into new shares depends upon, among other considerations, how you see property valuations going forward.

So you will have two separate and independent shares (one vanilla and one-stapled) and you can take your choice of what mix of holding you want to pursue.


The split of Stride into a property owning company and a property management company is highly desirable for tax purposes and maximizing shareholder returns.

The directors and senior staff will probably do OK as well.

Best Wishes
Paper Tiger


But they're not independent. It will not be possible to hold only str, although you could hold only investore shares.

[Snow Leopard]

But they're not independent. It will not be possible to hold only str, although you could hold only investore shares.


..So you will have two separate and independent shares (one vanilla and one-stapled)...

Sigh, Sometimes I am strangely overcome with feelings of despair :( which leads me to seek the company of other Tigers:

http://news.asiaone.com/A1MEDIA/news/06Jun12/20120608.112953_asiapacificbreweries_tigerbeer.jpg

Best Wishes
Paper Tiger

Drink alcohol products only in moderation, if at all.

[Joshuatree]

Seems excessive?
Management fees and operating costs


The management fee payable to the Manager
will equate to 8.1% and 9.6% of revenue in FY17and FY18 respectively and be a material cost.
Investore incurs other operating expenses,primarily in relation to repairs and maintenanceand valuations.

[RRR]

External management is a big negative as you have mentioned JT! Leverage is also higher than other LPT's (conflict of interest?) - 45-50% compared to 35-40 for other (internally managed) LPT's - so clearly higher risk than other LPTs and no wonder they have priced it accordingly. IPO price is close to book value - other LPTs currently trade at a premium to book value. I am in two minds about this one!

[Joshuatree]

cheers RRR. I make average age of buildings @ 14 years. Anecdotely (sp), have heard Countdown the least favourite supermarket for some. I shop at one because its so quiet hence easy to get groceries from.
Attractive carrot, the IPO price.

[axe]

just a quick thought on the fees. The below is PFI's fee structure - fees as % go down as assets under management go up.

https://www.propertyforindustry.co.nz/about-pfi/fee-structure/

The current management fee structure was introduced following shareholder approval in 1999.
PFI's management fee structure is designed to align the interests of the manager and shareholders and to reward the manager for outperformance in the growth of shareholder wealth over time. PFI pays a base management fee plus an incentive fee calculated on total shareholder returns.
The base fee is calculated as:


0.725% of total tangible assets under management up to $425 million;
0.450% of total tangible assets under management above $425 million and below $775 million; and
0.350% of total tangible assets under management above $775 million

The incentive fee is calculated as 10% of the change in shareholder wealth above 10% per annum (2.5% per quarter) and under 15% per annum (3.75% per quarter), calculated and payable on quarterly basis.
The fee is calculated as 10% of the actual increase in shareholder returns which is above 2.5% in a quarter. Where shareholder returns exceed 3.75% in a quarter, no payment is due for the actual amount of the increase above 3.75% but the amount of the increase above 3.75% can be carried forward and added to the calculation of shareholder returns in later quarters. However, if shareholder returns are less than 2.5% in a quarter, the deficit can also be carried forward and subtracted from the calculation of shareholder returns in later quarters.
The management fee is an all-up cost – there are no additional property services or property management fees.
The fees paid to the manager are disclosed in PFI’s annual and interim reports (https://www.propertyforindustry.co.nz/investor-centre/reports-and-presentations/) to shareholders.

[fungus pudding]

Restructure a rip-off?

Article in NBR today calls Stride's latest a flawed scheme . It's a paywalled aticle so will try and buy a copy later. Anyone got access?

http://www.nbr.co.nz/

Stride [NZX: STR], formerly DNZ Property Fund, arrived on the NZX in 2010 after a remarkable rescue effort that praised it from the grasp of a parasitical management contract. Six years later, the property company is again trying to imprison shareholders in a lemon-squeezing scheme, writes Tim Hunter.

[RGR367]

Restructure a rip-off?

Article in NBR today calls Stride's latest a flawed scheme . It's a paywalled aticle so will try and buy a copy later. Anyone got access?

http://www.nbr.co.nz/

Stride [NZX: STR], formerly DNZ Property Fund, arrived on the NZX in 2010 after a remarkable rescue effort that praised it from the grasp of a parasitical management contract. Six years later, the property company is again trying to imprison shareholders in a lemon-squeezing scheme, writes Tim Hunter.

It says it's for "NBR PRINT" today. I see no other locked online article mentioning it.

[fungus pudding]

It says it's for "NBR PRINT" today. I see no other locked online article mentioning it.


You require paid access or a print copy to read full write up.


What's in your National Business Review print edition this week.

Staff Reporter


NZ share prices give analysts the jitters, Watson company plans $US10m IPO, Stride’s flawed offer

Fri 17 Jun

[kiora]

Restructure a rip-off?

Article in NBR today calls Stride's latest a flawed scheme . It's a paywalled aticle so will try and buy a copy later. Anyone got access?

http://www.nbr.co.nz/

Stride [NZX: STR], formerly DNZ Property Fund, arrived on the NZX in 2010 after a remarkable rescue effort that praised it from the grasp of a parasitical management contract. Six years later, the property company is again trying to imprison shareholders in a lemon-squeezing scheme, writes Tim Hunter.

Sounds like another RJI ?

[Joshuatree]

A few lemon squeezing negative snippets from NBR which i nipped down and got just now for you (plus latte:)

"Stride forgets its history with flawed offer"

MER for Stride re 7.5%
Investore re 9% plus performance fees ( if quarterly returns are above 2.5%)and operating and admin expenses.

EXTERNAL manager more expensive than Strides INTERNAL manager.

Termination rights. only the manager has the right to exit th deal and manager has right to appoint half of the directors, NZXwaiver because chairman is independant.Investore is contractually tied to stride , shareholders CAN"T seek another manager if things go bad.

.

The history of Stride paying huge fees to extract itself ($32 mill !) from external managers should be ironically noted

Some positivity re the rest of the deal.

[fungus pudding]

A few lemon squeezing negative snippets from NBR which i nipped down and got just now for you (plus latte:)

"Stride forgets its history with flawed offer"

MER for Stride re 7.5%
Investore re 9% plus performance fees ( if quarterly returns are above 2.5%)and operating and admin expenses.

EXTERNAL manager more expensive than Strides INTERNAL manager.

Termination rights. only the manager has the right to exit th deal and manager has right to appoint half of the directors, NZXwaiver because chairman is independant.Investore is contractually tied to stride , shareholders CAN"T seek another manager if things go bad.

.

The history of Stride paying huge fees to extract itself ($32 mill !) from external managers should be ironically noted

Some positivity re the rest of the deal.

Thanks for that. Don't want to purchase investore shares in addition to the stapled issue, but overall do they see it as good or bad for Stride shareholders? Str shares have lifted against the tide since announcement of this.

[Joshuatree]

Going from the title its negative for the reasons i outlined.and
"If stride had confidence in its management skill, this restriction would not be necessary and Investore would be a better offer.Instead greed got in the way"
From what i read,Its done the split so that if it wanted to it could increase management fees without endangering its PIE status

I think that fees based on REV is better than NTA

[fungus pudding]

Going from the title its negative for the reasons i outlined.and
"If stride had confidence in its management skill, this restriction would not be necessary and Investore would be a better offer.Instead greed got in the way"
From what i read,Its done the split so that if it wanted to it could increase management fees without endangering its PIE status

I think that fees based on REV is better than NTA

If they increase management fees that will benefit stride shareholders to the detriment of investore, so should only affect investore share holders who are not str shareholders. What I can't understand is why they are doing anything at all? Surely everything could remain under str ownership - PIE status would not be effected.

[Joshuatree]

I think they can extract more fees this way .Im also looking at it as a new investor in Investore i don't hold Stride.

[fungus pudding]

I think they can extract more fees this way .Im also looking at it as a new investor in Investore i don't hold Stride.

If stride retained all buildings there would be no fees. Investors will pay stride to manage investor properties. Doesn't explain the logic of the split.

[stevevai1983]

If they increase management fees that will benefit stride shareholders to the detriment of investore, so should only affect investore share holders who are not str shareholders. What I can't understand is why they are doing anything at all? Surely everything could remain under str ownership - PIE status would not be effected.

lot of reasons.
my guess:
1: they want to buy more countdowns so they need money. STR had just capital raised once already so it's hard to capital raised again within such short amount of time
2: Investore alone might have better valuation due to it's super long lease contracts.

[Joshuatree]

Don't be stingy fp;) buy the NBR

[fungus pudding]

Don't be stingy fp;) buy the NBR


Broke - penniless - destitue :-(

[RRR]

Craigs have been a vocal critic of externally managed LPTs and in the past have termed the arrangement "outdated". It is ironic that they are the co-managers of this IPO. I suppose they can't let go this money-making opportunity.

[Joshuatree]

Broke - penniless - destitute (sp fixed):-(

Thats not a good promotion of prop stocks fp.:mellow: You're 100%? in prop stocks, getting extra juicy divs from holding longterm,what yields are you on out of interest btw?.
Go on buy a sub to NBR,Hot Cars, Foodies Bible ,and The Greenland Ice Sheet Melting Will Raise Sea Levels By 7 Metres!

Yeah RRR aint that the truth; conflicts of interest, bias, never let the truth get in the way of a good story; a real estate agent in your ear when you hesitate;stop bidding ;at a live auction, money talks; goes around, corruption is the norm. Farmers sales are actually at recommended retail prices etc etc,what a wonderful world

Louis Armstrong - What A Wonderful World - YouTube (https://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&ved=0ahUKEwjA-dKJkLDNAhULGpQKHd_OA5kQtwIIUzAH&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DoG mRKWJdwBc&usg=AFQjCNELGoRulLB03iSZPAuX7TJcEegOdw&sig2=_ojfRWVzzWhvwALVgY0VYA)

[noodles]

There is some discussion on nbr radio
Listen to Hunter’s Corner: Stride forgets its history with flawed offer by NBR Radio #np on #SoundCloud
https://soundcloud.com/nbr-radio/hunters-corner-stride-forgets-its-history-with-flawed-offer

[fungus pudding]

I think they can extract more fees this way .Im also looking at it as a new investor in Investore i don't hold Stride.

The way it looks to me, it would be better to buy stride and forget investore.

[RRR]

I shall stay well clear of both these LPTs. This sort of arrangement is perfectly legal (buyers beware) but it gives you a hint about the management. There are other better opportunities in the LPT space where investor and management interests are aligned and where investors don't feel ripped off.

[axe]

I shall stay well clear of both these LPTs. This sort of arrangement is perfectly legal (buyers beware) but it gives you a hint about the management. There are other better opportunities in the LPT space where investor and management interests are aligned and where investors don't feel ripped off.

Well put RRR - in my eyes this deal looks more structured to maximise fees rather than shareholder returns.

[fungus pudding]

Well put RRR - in my eyes this deal looks more structured to maximise fees rather than shareholder returns.

But the fees go to stride which will benefit the stride shareholders at the detriment of investore. Stride is internally managed so don't pay fees to any manager. I can't get my head around why they are doing this.

[fungus pudding]

Thats not a good promotion of prop stocks fp.:mellow: You're 100%? in prop stocks, getting extra juicy divs from holding longterm,what yields are you on out of interest btw?.


An investment of just under 1 mill gives me an annual return of 64k which is equivalent to 96k taxable as I am a 33% marginal taxpayer, so a nit's-nat under 10%. Current value is 1,270,000 so a lower return on current value. I'll take your comments aboard and start saving for a copy of the NBR.

[percy]

There is some discussion on nbr radio
Listen to Hunter’s Corner: Stride forgets its history with flawed offer by NBR Radio #np on #SoundCloud
https://soundcloud.com/nbr-radio/hunters-corner-stride-forgets-its-history-with-flawed-offer

Thank you for the link.
I do respect Tim Hunter's view,and will not bother with this IPO.

[McGyro]

Thanks for the link. Much appreciated.

[Joshuatree]

An investment of just under 1 mill gives me an annual return of 64k which is equivalent to 96k taxable as I am a 33% marginal taxpayer, so a nit's-nat under 10%. Current value is 1,270,000 so a lower return on current value. I'll take your comments aboard and start saving for a copy of the NBR.

Thanks fp although i always ignore shareholding numbers posted by anyone and think its generally unprofessional to do so;( just my opinion ) althoughi don't believe you are big noting or out to impress however..
Thats a great example of buy and hold, there f/p,with your G/Yield now re 10%; fantastic:).I have 1 aussie stock like that; TIX that is giving me the same %( no franking as its stapled ) from buying and holding a while .
Some would look at the value of your portfolio now and say well whats the return you are getting on your value now($1.27 mill) and thats the fig to work with(Snappity methinks:) but i disagree ; the yield on your original investment; i believe for income its all about being in a great company that steadily year after year grows the div at a low risk; the prob being that these stocks can be priced at high multiples and seldom cheap.The Craigs prop article re price compression in prop stocks suggests now is not the time to build a portfolio of prop stocks though as folks have chased these yields down putting s/p at high multiples. Averaging in over a period of time may be a good option. Thanks for sharing,JT

[fungus pudding]

Thanks fp although i always ignore shareholding numbers posted by anyone and think its generally unprofessional to do so;( just my opinion ) althoughi don't believe you are big noting or out to impress however..
Thats a great example of buy and hold, there f/p,with your G/Yield now re 10%; fantastic:).I have 1 aussie stock like that; TIX that is giving me the same %( no franking as its stapled ) from buying and holding a while .
Some would look at the value of your portfolio now and say well whats the return you are getting on your value now($1.27 mill) and thats the fig to work with(Snappity methinks:)

I very deliberately post values occasionally in the hope that others will. It gives weight to their comments - nothing to do with big-noting.
I know the value is the figure to work with, but I'd rather put my energy into building income - buy and get on with the next purchase by stacking up income producing assets. That's just my way, I do not like selling things that earn reasonable money.
Besides that, I don't want to blemish my tax status as a non-trader. Not the ultimate perhaps, but dead easy for someone like me who knows nothing about the share market, but has great faith in commercial real estate. I couldn't bring myself to invest in the dime a dozen listed widget manufacturers.
Also I think of my lpts as just another building, but without the management hassle, the inevitable vacancy to deal with, let alone the expense of reletting. The odd bit of maintenance etc. Those things are okay when you're young and energetic but the risk spread among hundreds of buildings, and thousands of tenants makes this a sensible set up as I approach my dotage.:scared:

[troyvdh]

JT with all due respect....re it being unprofessional to declare holdings....I find that quite bizarre.Isnt it not normal practice ...in most if not all commercial circles..to disclose ...surely...especially financial commentators.Its my practice to look,at any disclosure first in order to determine the validity of same.Again...it was my practice to ask any sharebroker ...when discussing shares to buy or sell..how many he/she held.Normally they none...nix that's when I stopped doing business with them.cheers troy

[Joshuatree]

I very deliberately post values occasionally in the hope that others will. It gives weight to their comments - nothing to do with big-noting.
I know the value is the figure to work with, but I'd rather put my energy into building income - buy and get on with the next purchase by stacking up income producing assets. That's just my way, I do not like selling things that earn reasonable money.
Besides that, I don't want to blemish my tax status as a non-trader. Not the ultimate perhaps, but dead easy for someone like me who knows nothing about the share market, but has great faith in commercial real estate. I couldn't bring myself to invest in the dime a dozen listed widget manufacturers.
Also I think of my lpts as just another building, but without the management hassle, the inevitable vacancy to deal with, let alone the expense of reletting. The odd bit of maintenance etc. Those things are okay when you're young and energetic but the risk spread among hundreds of buildings, and thousands of tenants makes this a sensible set up as I approach my dotage.:scared:

Building income is sensible esp as we get older; you've got a great example for all to see fp.Im slowly slowly moving that way but i love the hunt, the searching the excitement of finding something new to get my teeth into , throw ideas around with friends and maybe take the plunge; not ready to let go of that and have all income stocks yet but i will at some point

Any one taking up Investore then;interest seems lukewarm on here?. Yields and pricing near NTA the positives; external management and quality of buildings; & price paid for them not so good ?Brokers putting in numbers beginning tomorrow.

[Joshuatree]

A summary•Thanks , Noodles,axe,RRR PT and FP(for the filler:) et all

Investore's interest expense representsapproximately 29% of revenue in FY18. Managingdebt and interest rates are a key driver ofInvestore's profitability. ( will do well as long as interest rates stay low ) but.....

Exposure to significant tenant: General Distributors Limited ("GDL") is Investore's largest tenant constitutingapproximately 84% of Investore's Contract Rental as at 30 April 2016. If GDL's performance materiallydecreases or if GDL fails to meet its lease obligations, this could affect Investore. (PS axe thinks that if 84% of revenue if coming
from one customer they have your n*ts in a very tight grip

when it comes to negotiating rent increases.)

Long term leases of 15 years for Countdown stores good and they want to grow the portfolio.(i think)

Quality of Countdown props etc. Bayleys syndicated some of the Countdown props including a newish one in Tauranga; are we being offered the Tired doggies old as 26 years.Average age of all buildings re 14 years.

Management structure and fees. The BIG:t_down: negative with external manger you can't get rid of.Fees higher than other LPT's. Benefits Stride.

Leverage higher than other LPT's, 45 to 50% compared to internal managed 35 to 40%

Overall negative review from Tim Hunter NBR as well as AT LEAST one broker that i know of.https://soundcloud.com/nbr-radio/hun...h-flawed-offer (https://soundcloud.com/nbr-radio/hunters-corner-stride-forgets-its-history-with-flawed-offer)

Priced close to NTA whereas most LPTs are way above currently in the chase for yield which is good. re 7.7 to 8% Gross, est

Did /Are I nvestore paying too much for the countdown portfolio being purchased at a premium to book value from SCP (ASX listed)

Prop values in a bubble or extremely high atm; why buy near a top?

Critique, correction, feedback, agree /disagree thanks JT

[fungus pudding]

A summary•Thanks , Noodles,axe,RRR PT and FP(for the filler:) et all

Investore's interest expense representsapproximately 29% of revenue in FY18. Managingdebt and interest rates are a key driver ofInvestore's profitability. ( will do well as long as interest rates stay low ) but.....

Exposure to significant tenant: General Distributors Limited ("GDL") is Investore's largest tenant constitutingapproximately 84% of Investore's Contract Rental as at 30 April 2016. If GDL's performance materiallydecreases or if GDL fails to meet its lease obligations, this could affect Investore. (PS axe thinks that if 84% of revenue if coming
from one customer they have your n*ts in a very tight grip

when it comes to negotiating rent increases.)

Long term leases of 15 years for Countdown stores good and they want to grow the portfolio.(i think)

Quality of Countdown props etc. Bayleys syndicated some of the Countdown props including a newish one in Tauranga; are we being offered the Tired doggies old as 26 years.Average age of all buildings re 14 years.

Management structure and fees. The BIG:t_down: negative with external manger you can't get rid of.Fees higher than other LPT's. Benefits Stride.

Leverage higher than other LPT's, 45 to 50% compared to internal managed 35 to 40%

Overall negative review from Tim Hunter NBR as well as AT LEAST one broker that i know of.https://soundcloud.com/nbr-radio/hun...h-flawed-offer (https://soundcloud.com/nbr-radio/hunters-corner-stride-forgets-its-history-with-flawed-offer)

Priced close to NTA whereas most LPTs are way above currently in the chase for yield which is good. re 7.7 to 8% est

Did /Are I nvestore paying too much for the countdown portfolio being purchased at a premium to book value from SCP (ASX listed)

Prop values in a bubble or extremely high atm; why buy near a top?

All points worth considering. The one that stops me in my tracks is this.

'Management structure and fees. The BIG negative with external manger you can't get rid of.Fees higher than other LPT's. Benefits Stride'.

Don't overlook the benefit to Stride. Maybe I've got it all wrong, but it seems to me that stride may be a better purchase.

[Kelvin]

I currently hold Stride and still undecided on what to do.

If I do nothing, I end up with a tiny amount of Investore shares which isn't ideal.

I could just sell my Stride shares and take a small profit.

I am currently leaning towards buying Investore shares in the IPO to top up the small amount I'll get in the Stride demerger. Although 84% of revenue comes from GDL, Countdown is a pretty stable brand and it's not that easy for them to find new sites for stores so there is some sort of lock-in. But it's still not the most attractive LPT out there, so perhaps I'd be better off buying GMT or VHP

[Kelvin]

Indicative price for Investore was $1.37-$1.49

Final price has been set at $1.49!!!

[Joshuatree]

Parched Yield seekers finding a waterhole.

[Beagle]

http://www.nbr.co.nz/article/strides-investore-ipo-priced-top-range-b-190646

[Joshuatree]

Cheers guys. i hear one broker was scaled back to 30%. Im not a partaker but the yield alone has been enough to create FOMO ,me too demand, by the looks. Be int to see where it settles in a few weeks after listing.Must be a number on here who have put orders in.

[fungus pudding]

Cheers guys. i hear one broker was scaled back to 30%. Im not a partaker but the yield alone has been enough to create FOMO ,me too demand, by the looks. Be int to see where it settles in a few weeks after listing.Must be a number on here who have put orders in.

I'm one number on here who won't be putting in. :D As I understand it there is a buyer prepared to buy up the alllocation reserved for shareholders if the shareholders don't scoop them up. So the IPO migh not be up for grabs to the average Joe Sixpack.

[GR8DAY]

....can someone clarify what Im supposed to be doing with all this paperwork Ive received on this matter. My dear old mum has 20,000 stride and Im supposed to be looking after them. Cant be bothered scrolling thru all this rubbish (rather go fishing) In a nutshell please what are my (our) options........is do nothing one of them or is that going to cost us?? (yes I know........lazy bugger) Cheers in advance!

[Kelvin]

....can someone clarify what Im supposed to be doing with all this paperwork Ive received on this matter. My dear old mum has 20,000 stride and Im supposed to be looking after them. Cant be bothered scrolling thru all this rubbish (rather go fishing) In a nutshell please what are my (our) options........is do nothing one of them or is that going to cost us?? (yes I know........lazy bugger) Cheers in advance!

If you do nothing, you'll get 1 Investore share for every 4 Stride shares you hold on 8 July. So that's 5,000 Investore shares you'll get. The number of Stride shares you have stays the same, but I guess they'll reduce in value by the value of the Investore shares you get (that's 5000x$1.49 = $7450).

You can also buy additional Investore shares (I think in $1000 increments) under the Stride Shareholder offer which closes on 5 July.

Or you could just sell the Stride shares in which case you don't have to deal with Investore at all.

[GR8DAY]

.........thanks Kelvin, all makes sense now. My elderly mother will now be very impressed with my research efforts!! LOL

[fungus pudding]

If you do nothing, you'll get 1 Investore share for every 4 Stride shares you hold on 8 July. So that's 5,000 Investore shares you'll get. The number of Stride shares you have stays the same, but I guess they'll reduce in value by the value of the Investore shares you get (that's 5000x$1.49 = $7450).

.

The 1 for 4 investore shares Stride holders receive are stapled to the head share and therefore all stride shares from the demerger date will include the investore shares. So it's hard to see why str would have its own separate value, although investore will have. Stride value will be inclusive.

[GR8DAY]

The 1 for 4 investore shares Stride holders receive are stapled to the head share and therefore all stride shares from the demerger date will include the investore shares. So it's hard to see why str would have its own separate value, although investore will have. Stride value will be inclusive.

......so how does this "stapling" work FP? Does that mean that any Stride shares sold after the demerger will AUTOMATICALLY carry a (1 for 4) INVESTORE share with them (surely not)??

[Kelvin]

Pretty sure the Investore shares are unstapled and can be bought and sold separately to STR under a new NZX listing. That's why after the demerger your STR shares reduce in value, as they no longer contain the Investore portion.

However, you will get 1 Stride Investment Management Limited for every STR you own, these are stapled to STR so can't be sold or bought separately, and has no separate value .

[777]

Sounds like a messy way of doing it if this is the case.

[GR8DAY]

.......no wonder I didnt read it!, sounds ridiculous but certainly doing good things to the STRIDE SP so shouldnt complain. Thanks guys.

[fungus pudding]

......so how does this "stapling" work FP? Does that mean that any Stride shares sold after the demerger will AUTOMATICALLY carry a (1 for 4) INVESTORE share with them (surely not)??

No, sorry - I misunderstood the proposal but finally got around to reading the guff. The shares stapled to stride are shares in the management company, SIML, issued 1 for 1. The investore shares will be able to be traded separately, so what Kelvin says is correct I think. So stride shareholders will receive 1000 shares in mngmnt company (SIML) and 250 shares in investore for every 1000 stride shares they currently hold.
Looks a good deal to me for stride shareholders, but I would't rush out and buy more investore shares personally. Stride will retain ownership of a chunk of investore anyway so along with my 1 for 4 offer I've got enough and I'll wait and see what develops, but I'd say (and I'm no expert) that stride will benefit at the expense of investore.

[GR8DAY]

.........all gud, making a bit of sense now. Thanx again. Gr8day.

[Kelvin]

Leaning towards selling my Stride shares so I don't have to deal with Investore. IPO price is at the higher end and I think there are better places to put my money such as TIL or GMT. Large format retail is a nice sector but Investore being almost completely made up of Countdowns is a bit ridiculous.

[fungus pudding]

Leaning towards selling my Stride shares so I don't have to deal with Investore. IPO price is at the higher end and I think there are better places to put my money such as TIL or GMT. Large format retail is a nice sector but Investore being almost completely made up of Countdowns is a bit ridiculous.


Just sell the investore shares then Sounds like demand will be high.

[Kelvin]

Sorry, I'm just a novice but why do you suggest that demand will be high? There may be plenty of current STR holders like me looking to get rid of their Investore shares.

Don't really want to see my Investore shares fall under $1.49.

[Joshuatree]

Yield Yield and Yield

[fungus pudding]

Sorry, I'm just a novice but why do you suggest that demand will be high? There may be plenty of current STR holders like me looking to get rid of their Investore shares.

Don't really want to see my Investore shares fall under $1.49.

Apparantely the brokers' allocations have been scaled back because of demand. Also there is a back up offer for those investore shares reserved for stride holders that are not taken uo, if any.
If investore shares fall beloe 1.49 wouldn't that make for a rise in stride? Obviously the combnined value of 1 str and .25% of an investore share is $2.35 according to today's market.

[Kelvin]

OK, thanks for your thoughts on Investore

This article from sharechat seems to support your view on the high demand http://www.sharechat.co.nz/article/ebeac436/stride-property-s-investore-subsidiary-to-join-nzx-50-after-bookbuild.html

Might just keep my STR shares and see what happens to Investore. Don't mind keeping them for the medium term but there are probably some better property shares out there

[Kelvin]

Anyone know how long it takes for funds to be transferred to Computershare?

I was a bit unorganised and won't be able to transfer my Investore money to them until tomorrow morning. The application closes at 5pm tomorrow so wondering if I could get away with transferring my funds so late. I'm with Westpac who are pretty fast processing transfers so hoping it will be ok

Also haven't noticed ASB or ANZ securities offering any Investore IPO shares?

[fungus pudding]

Anyone know how long it takes for funds to be transferred to Computershare?

I was a bit unorganised and won't be able to transfer my Investore money to them until tomorrow morning. The application closes at 5pm tomorrow so wondering if I could get away with transferring my funds so late. I'm with Westpac who are pretty fast processing transfers so hoping it will be ok

Also haven't noticed ASB or ANZ securities offering any Investore IPO shares?

I have no idea about other banks, but I do know transfers from Westpac to Westpac are instant. Any online deposits to Westpac are now instant also. I can't imagine any problem as long as payment is made before close off on last day, but the answer may depend on which bank account computershare uses. However if you are concerned about timing of funds why not ring your bank manager, explain that you might be outside your arrangements for a day and why, and you'll probably be okay to pay today.

[GR8DAY]

.....so FP, just to clarify (as a current STRIDE S/Holder) we dont have to do anything at all and we automatically receive the INVESTORE 1:4 allocation?? (hate to get this wrong for my dear old Mum but busy on the boat at the mo!) Cheers

[fungus pudding]

.....so FP, just to clarify (as a current STRIDE S/Holder) we dont have to do anything at all and we automatically receive the INVESTORE 1:4 allocation?? (hate to get this wrong for my dear old Mum but busy on the boat at the mo!) Cheers

Yes, that's absolutely clear in the proposal.
You will automatically receive shares in the management company and also in investore.
You do not need to do anything; however as a stride shareholder you are entitled to buy more investore shares if you want. Read Kelvin's post above - sounds like tomorrow is final day.
So for every 1000 stride shares you will receive 1000 shares in management company, Stride investment management company (SIML), and 250 shares in Investore.
This will mean dividends from Investore and Stride will continue as PIEs but dividends from SIML will not be PIEs.
If you have a copy of product disclosure statement or a PDF of same if you have elected electronic communication, then page 15 gives timeline or key dates.

That's how I read it anyway.

[Kelvin]

Friday is the record date, so any Stride shares you hold at the end of Friday will automatically get the SIML/Investore allocation.

[GR8DAY]

.....thanx FP, just checking.

[fungus pudding]

.....thanx FP, just checking.

There's a mention in NBR about some fund manager - critical of investore being one sided. I'm not a subscriber so not sure what it says, but it seems to me stride shareholders will benefit more than investore from the demerger.

http://www.nbr.co.nz/

[Kelvin]

Seems like high demand for Investore shares under the Stride Shareholder offer - over $45m of applications for $15m worth of shares.

so:
- All applications fully allocated up to 3,000 shares
- Beyond this, a scaling rate of 21.7% was applied, subject to a maximum allocation of 10,000 shares :eek2:

[fungus pudding]

Seems like high demand for Investore shares under the Stride Shareholder offer - over $45m of applications for $15m worth of shares.

so:
- All applications fully allocated up to 3,000 shares
- Beyond this, a scaling rate of 21.7% was applied, subject to a maximum allocation of 10,000 shares :eek2:

It will be interesting to see price of investore and stride tomorrow. Will they add up to more than last str price of $2.35 ? :confused:

[Kelvin]

Investore opened at $1.60, Stride opened at $1.97, so that's equivalent to $2.37 pre-demerger (I think)

[fungus pudding]

Investore opened at $1.60, Stride opened at $1.97, so that's equivalent to $2.37 pre-demerger (I think)

Stride now $2. About $2.39 I think - about 2% gain.
ANZ securities site still shows old stride listing as well as the new names. - makes me look quite wealthy, not sure why I don't feel it..

[777]

(1*1.61+4*2)/4=2.4025

[GR8DAY]

"STRIDE" now morphed into what must be the longest Publicly Listed company name on the planet??..........."STRIDE PROPERTY AND STRIDE INVESTMENT MANAGEMENT STAPLED SECURITY".........OMG..........what a mouthfull to swallow.........in fact I think I might get stapled myself so I dont have to.......GULP!

[Joshwnz]

For those on ASB securities who need to manually update their portfolio:

Realised gain for Stride = 2.35 (being the last traded price last week), less purchase price. I just deleted the stock from my portfolio.
Cost price for Stride Stapled = 2.35 less (1/4 * 1.49) = 1.9775.
Cost price for Investore = 1.49.

Please feel free to correct me..

[fungus pudding]

For those on ASB securities who need to manually update their portfolio:

Realised gain for Stride = 2.35 (being the last traded price last week), less purchase price. I just deleted the stock from my portfolio.
Cost price for Stride Stapled = 2.35 less (1/4 * 1.49) = 1.9775.
Cost price for Investore = 1.49.

Please feel free to correct me..

That's the result I came to as well. Someone will tell us we're both wrong. :(

[777]

That calculation does not reflect the cost of your original purchase of STR so your unrealised profit/loss begins as of yesterday.

[Kelvin]

I didn't consider my capital gain on STR as realised, so have my cost price for SPG as: cost of my STR - number of IPL shares * 1.49

So very roughly that's a cost price of $1.85 for SPG and about 6% of unrealised capital gain at the current price of $1.98.

[fungus pudding]

That calculation does not reflect the cost of your original purchase of STR so your unrealised profit/loss begins as of yesterday.

You are right of course. I hold 200,000 str at purchase price of 149.929 purchase value of 299,857. I entered investore at 1.49 (50,000 x 149 = 80,500)
Deducted 80,500 from cost value then divided by 200,000 to show original cost price of 113. Cost value at 226,000
It adds up as it should but cost value is wrong.
Seems to me the only way to do it to keep unrealised gain % accurate.

[GR8DAY]

........ALL i know is my dear old mums 20.000 stride were up about 3k just before the split and now the same total investment is up about 4k.....so she's happy. If only she understood.

[axe]

http://www.asx.com.au/asxpdf/20160725/pdf/438rvx6324hsrm.pdf

Hopefully the 6 Countdown closures scheduled for NZ aren't Investore sites.

[Snow Leopard]

As I (may have) said before they listed I ended up with a silly amount of shares in IPL. So it was either buy more or sell them and use the money elsewhere.
After a little consideration I came to the conclusion that elsewhere was better.

So today I sold them all.
I still have the Stride holding but I have no intention of topping that up at the moment either.

Best Wishes
Paper Tiger

[Joshuatree]

Capital Raise to Provide Funding Flexibility for Growth (https://www.nzx.com/announcements/352270)

[Sideshow Bob]

Successful Completion of $85 Million Placement


30/4/2020, 8:30 amOFFER
Investore Property Limited (Investore) advises that it has successfully completed the $85 million placement of new shares which forms part of the $100 million capital raising announced on 29 April 2020. The placement had been fully underwritten at $1.59 per share and was allocated to investors at the final price of $1.65 per share, representing a 6.8% discount to the last closing price of Investore's shares on NZX.
Mike Allen, Chairman of Investore, said “The Board is delighted with the outcome of the placement, with the full $85 million fully allocated, following strong support from our existing institutional shareholders and shareholders who are clients of wealth management firms. The capital raising strengthens the balance sheet during this period and provides the funding flexibility to continue Investore's strategy to grow its portfolio, positioning it well to secure investment opportunities that may arise and continuing its objective of maximising distributions and total returns to investors over the medium to long term.”
Settlement and allotment of the new shares issued under the placement is expected to occur on 5 May 2020.
Goldman Sachs New Zealand Limited acted as sole lead manager, placement agent, bookrunner and underwriter of the placement.
Share Purchase Plan opens on Tuesday
Eligible shareholders will receive their personalised application forms to apply for up to $50,000 of new shares in the share purchase plan component of the offer from 5 May 2020. Shareholders can apply online at www.shareoffer.co.nz/investore (http://www.shareoffer.co.nz/investore) until 5.00pm (NZT) on 14 May 2020.
Record Date: 5.00pm (NZ time) 28 April 2020
Announcement of Offer: 29 April 2020
Share Purchase Plan Opening Date: 5 May 2020
Offer Document and Application Form sent to eligible shareholders: 5 May 2020
Share Purchase Plan Closing Date (last time for online applications, or for receipt of an Application Form, with payment): 14 May 2020, 5pm
Share Purchase Plan issue price announced: 15 May 2020
Allotment of new shares under the Share Purchase Plan and commencement of trading: 20 May 2020

[Joshuatree]

So currently 7c in the green but new shares not tradeable until 20th may. Applicants got less then 10% that they applied for ive heard.Every raise is having voracious FOMO funds just thrown in, looking for a bit of arbitrage or gain, anything to earn even a little regardless of the real world calamities around us, the divergence continues!

[winner69]

Seismic issues at Bunnings Mt Roskill see stores closed

Thought seismic was a Wgtn / CHCH problem.

[Snoopy]

Seems excessive?
Management fees and operating costs


The management fee payable to the Manager will equate to 8.1% and 9.6% of revenue in FY17and FY18 respectively and be a material cost.
Investore incurs other operating expenses,primarily in relation to repairs and maintenance and valuations.



Wild dog truth No. 28: If you sense a good feed, make sure the hyenas haven't beaten you to the dinner table.

I was contemplating this very matter, as it relates to 'Investore', managed by 'Stride Investment Management Services' (SIML), a subsidiary of the Stride Property Group. On the Stride Property thread, I figured out that the $8.393m in management fees charged to Investore over FY2021, worked out to be 0.868% of assets under management.

Or to translate to Joshuatree language (based on 'gross rental income' of $64.514m):

$8.393m/$64.515m = 13% of revenue (gross rental income)

I guess Joshuatree would describe that as 'more than excessive'. But what do Investore get for their money? A fair go? Or are these high fees just double milking the cash cow?

SNOOPY

[Snoopy]

Wild dog truth No. 28: If you sense a good feed, make sure the hyenas haven't beaten you to the dinner table.

I was contemplating this very matter, as it relates to 'Investore', managed by 'Stride Investment Management Services' (SIML), a subsidiary of the Stride Property Group. On the Stride Property thread, I figured out that the $8.393m in management fees charged to Investore over FY2021, worked out to be 0.868% of assets under management.

Or to translate to Joshuatree language (based on 'gross rental income' of $64.514m):

$8.393m/$64.515m = 13% of revenue (gross rental income)

I guess Joshuatree would describe that as 'more than excessive'. But what do Investore get for their money? A fair go? Or are these high fees just double milking the cash cow?

SNOOPY



What does SIML do?

From the Investore Annual Report for FY2021, page 48:
"Investore has appointed SIML as its exclusive provider of ongoing real estate investment management services. Investore does not have any employees, accordingly, there are no senior managers of Investore who have a relevant interest in the shares of Investore."

Even I would have to admit that 'zero employees' sounds like a tightly run ship. So could it be that some of the SIML Hyenas are actually wearing working suits?

From AR2021 p8
"The Manager and Management Fees Investore’s Manager, Stride Investment Management Limited (SIML), has provided an excellent level of service during the period impacted by COVID-19, which presented a number of challenges. SIML undertook negotiations with tenants that were forced to close due to COVID-19 lockdown restrictions, and the Board is pleased with the outcome of those arrangements, with rent abatements and deferrals being offset in many cases by an increased lease term. Investore also had a high proportion of tenants that were able to remain open and trading, such as supermarkets, and this presented its own challenges in ensuring that these tenants were able to continue to operate safely and efficiently. The Investore Board considers that the SIML team dealt with the varying challenges presented by COVID-19 in a capable and efficient manner."

That doesn't sound too bad, although we have to remember this report was written by those 'Hyenas in suits'. People do tend to write their own history in a favourable light.

From AR2021 p9
"The Board is pleased to report that the independent review concluded that, relative to scale, Investore’s current management expense ratio is favourable to its peers, and Investore’s current management fees are fair and consistent with both other New Zealand listed property vehicles and Investore’s Australian large format retail peers."

A hint that the Hyena's are not as voracious as they might be? The 'relative to scale' qualification is notable. I would think that as the scale of a company increases, the relative size of expenses should decrease.

From AR2021 p8
"Finally, SIML has been very pleased to assist Investore to continue to execute its strategy of targeted growth, with agreements to acquire two new properties announced in May 2021. These transactions are the outcome of several months’ work by SIML on behalf of Investore in negotiating terms and completing due diligence, and we are pleased to be able to deliver high quality acquisitions that complement Investore’s portfolio. We look forward to continuing to support Investore in its targeted growth strategy."

That is a very long winded way of saying that contracted management are doing their ordinary job. But on p13 AR2021, we get some numbers:

"(SIML) Completing 65 lease transactions during FY21 (excluding COVID-19 transactions), including 56 rent reviews over 77,500 sqm, resulting in a 2.3% increase to previous rentals."

From AR2021 p13
"SIML assists Investore to meet its sustainability objectives."

There is the ESG box ticked, by installing some Tesla superchargers in the car parks.

Now we know what SIML does for its Investore customer, how does SIML determine their charging regime?

SNOOPY

[Snoopy]

Now we know what SIML does for its Investore customer, how does SIML determine their charging regime?



How does SIML charge?

How are the management fees calculated? There is no one section in the annual report we can go to to answer this question. Yet there are hints on the way through

(from AR2021 p7)
"The higher base management fees are a result of Investore’s higher portfolio value, although with a higher portfolio value Investore benefits from a lower rate for asset management fees of 0.45% of portfolio value over $750 million."

$966.5m is my assessment of the average value of Investore property under management over FY2021 (see post 243 on the Stride thread for this calculation)

0.45% x $966.5m = $4.349m (c.f. actual Asset management fee charged $4.965m(1)).

(from AR2021 p48)
"The performance fee expense (actual over the year added to $2.076m) is calculated and payable on a quarterly basis as 10% of the actual increase in shareholder returns (being share price, adjusted for dividends, and other changes in capital structure), which is above 2.5% (compounding annual rate of 1.025^4 -1 = 10.38%) and under 3.75% (compounding annual rate of 1.0375^4 -1= 15.87%) in a quarter.

/a/ Where shareholder returns exceed 3.75% in a quarter, no payment is due for the actual amount of the increase above 3.75% BUT the amount of the increase above 3.75% is carried forward and added to the calculation of shareholder returns in the next seven quarters. However...,
/b/ if shareholder returns are less than 2.5% in a quarter, the deficit is carried forward and subtracted from the calculation of shareholder returns in the next seven quarters.
/c/ Additionally, the performance fee for any twelve month period is capped at 0.2% of the value of Investore’s portfolio value (0.002x $966.5m=$1.933m, c.f. actual payment of $2.076m (2)) , and any excess performance fee is carried forward into the following quarter."

On first read that sounds fair, as deficits below the target return are carried forward and subtracted from the targeted returns over the subsequent 7 quarters. IOW bonuses are paid on an 'overall net gain basis'. And that base does not reset every year. However, in the fine thinking print, it does mean that any 'value falls' that do not recover after two years are forgiven (in that special case the baseline is reset). Such a reset could come into play over the next year or so, because of the precipitous fall in share price from a peak of around $2.25 a year ago to near $1.75 today. For the rest of the two year window that started in early 2021, and in the current rising interest rate environment, it is difficult to see 'Investore' recovering that ground over the next year.

My 'interest rate' comments heightens the reality that most of these share price changes are interest rate driven, and that is one factor that property managers can do little about. I would regard these bonus payments as rewarding a low correlation between the share price and landlord management effort expressing itself through business performance. Some future rent price rises will no doubt come under the category of 'inflation plus' rent contracts, or turnover increases from their hard working lessees. Should management be given a bonus for what I see as working within the normal confines of their normal job description?

From a Stride management perspective, the bonus payments are fantastic. From a lessee perspective, they are a rort that adds higher costs for no value. Therefore from an 'Investore' (lessee) perspective, I believe that 'performance fees' should simply be regarded as a normal extension of, and part of, 'regular management fees'.

Result of my musings

Management fee (excluding operations) for FY2021 = $4.965m + $2.076m = $7.041m

Management fee as a %ge of assets under management = $7.041m / $966.5m = 0.729%

Notes

(1)/ The wording of the Annual Report suggests there is a higher management fee rate for total assets less than $750m. The higher rate is not listed. But it must be greater than the indicative incremental lower rate of 0.45%. Hence it is no surprise that when we calculate the management fee based on 0.45%, the result is less than the true value.
(2)/ Actual bonus payment showing is greater than the maximum, because my maximum calculation is based on a linear average of 'between the two different years' figures. This method has -obviously- underestimated the true value of the portfolio.

SNOOPY

[Snoopy]

Result of my musings

Management fee (excluding operations) for FY2021 = $4.965m + $2.076m = $7.041m

Management fee as a %ge of assets = $7.041m / $1,901,5m = 0.370%


Following the revelation (to me) that Investore has no employees, I thought it might be useful to restate expenses in a way that compares with other companies that do employ people. Effectively I am looking at what would happen if the 'contract work' was brought in house. Furthermore I am looking to compare those returns with similar property companies.



Property Expenses FY2021
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


Management expenses
$0m
$1.102m
$0m
$4.612m
$0m


Management Services Contracted
$1.102m
$0m
$0m
$0m
$0m



Other administration expenses
$0.831m
$0.831m
$11.888m
$2.652m
$2.700m



Direct property operating expenses
$8.701m
$8.701m
$25.762m
$16.753m
$29.0m


Accounting expenses
$0.250m
$0.250m
$0.194m
$0.201m
$0.300m


Performance fee expense
$2.076m
$0m
$0m
$0m
$13.7m



Asset Management fee expense
$4.965m
$7.041m
$0m
$0m
$12.8m



Expense Recoveries
$0m
$0m
$0m
($0.712m)
$0m




Total Operating Expenses {A}
$17.925m
$17.925m
$37.844m
$23.506m
$58.5m











Gross Income from rentals
$64.514m
$64.514m
$111.522m
$107.941m
$182.0m



Total Operating Expense to Rental Income ratio {A}/{B}
27.4%
27.4%
33.9%
21.8%
32.1%



Building Portfolio Valuation (avg) {C}
$966.5m$966.5m
$1,938m$1,841.9m$3,431.7m


Total Operating Expense to Operating Asset Ratio {A}/{C}
1.85%1.85%1.95%1.28%1.70%



Notes

i/ 'Building portfolio average value' for ARG is from Argosy thread post 368. 'Building portfolio average value' for 'Property for Industry' on post 5 of the PFI thread. 'Building Portfolio average value' for Investore is from post 243 on the Stride thread.2021

What constitutes a 'similar' property company is open for debate.

I have selected Argosy for four reasons:

1a/ At the end of Calendar Year date, and considering the big 8 property companies, Argosy was the closest in yield to 'Investore'. That is equivalent to saying it has an equivalent 'market risk' from an investor perspective.
1b/ Argosy does own some big box retail stores - like Investore - albeit making up only 12.5% of the total portfolio (Refer Argosy thread post 368).
1c/ Argosy no longer has external managers, having bought them out in 2011 (in contrast to Investore).
1d/ Argosy has a very high occupation rate of their properties of 99% (c.f. Investore 0.9% vacancy rate)

Furthermore I have selected 'Property for Industry' as a second comparator because:

2a/ They have long term stable tenants.
2b/ They have a very high occupation rate, 100% as of EOFY2021.
2c/ Property for Industry does not have external property managers (the external management contract was bought out in 2017).
2d/ The construction of the buildings in the portfolio is generally 'big box type', even though they are not used for retail purposes.
2e/ Building property valuation is on post 5 of the PFI thread.

Finally I have selected the 'Goodman Property Trust', as a third comparator because:

3a/ they operate 'big box buildings' (albeit not in retail) AND
3b/ they do have an external property manager (the same situation Investore is in).
3c/ Building property valuation for GMT averaged over the year is (from GMT AR2021):

0.5 ($3,074.0m + $3,789.3m) = $3,431.7m

3d/ they have a high portfolio occupancy rate of 98%


SNOOPY

[Snoopy]

Property Expenses FY2021
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


<snip>


Performance fee expense
$2.076m
$0m
$0m
$0m
$13.7m


Asset Management fee expense
$4.965m
$7.041m
$0m
$0m
$12.8m


Total expenses {A}
$17.925m$17.925m$37.844m
$23.506m$58.5m











Gross Income from rentals
$64.514m$64.514m$111.522m
$107.841m
$182.0m


Building Portfolio Valuation (avg) {B}
$966.5m$966.5m
$1,938m$1,841.9m$3,431.7m


Total Operating Expense to Operating Asset Ratio {A}/{B}
1.85%1.85%1.95%1.28%1.70%




We now come to the nub of this series of posts. Are the 'asset managing' hyenas ripping so much flesh off these fat property company carcasses, that the remaining feed left for we dogs (the shareholders), is not worth bloodying our snouts for?

I was surprised, from the four under comparison, to see that ARG had the highest Operating Expense to Operating Asset ratio (OEOAR) at 1.95%. And being 'management contract free', there were no hyenas in sight! The other hyena free listing, PFI, had the lowest OEOAR, with the two hyena harbouring asset managers IPL and GMT occupying the middle ground. Based on the OEOAR figures alone, and my admittedly small sample of four, one might conclude that having no external management contracts as a matter of principle is not a cost issue, - despite those companies overthrowing their management contracts claiming they were doing the best thing for shareholders at the time. However, digging a bit deeper, there is a little more to it than that.

ARG is an outlier in the portfolio in a composition comparative sense. It has by far the smallest amount of tenanted 'big boxes' (it is in fact 40.4% office buildings). My feeling is that office buildings are more likely to be shared. That means there are more tenants to deal with on a per square metre basis. This in turn translates to more management time and cost. Furthermore over FY2021, ARG was also dealing with the after effects of earthquake claims in Wellington, in particular a claim on their 'former New Zealand Post House' on Waterloo Quay. Tough negotiations with the insurance companies were completed. These are a couple of very real reasons that might explain why the Argosy OEOAR was the highest of the four companies looked at.

Of the two 'hyena guarded' companies, IPL and GMT, it was GMT which had the lower OEOAR ( 1.7% vs 1.85% ). However, you can see by the respective annual revenue figures that GMT is by far the larger entity, by a factor of 3.5 in fact (in revenue terms). Shouldn't one expect some economies of scale? Given the differential in revenue streams, I think the 'only slightly lower' OEOAR at GMT is disappointing. So is all this pointing to the expected high value (before I did my calculations) of OEOAR for IPL being not as bad as I thought?

IPL has some "in built economies of scale' itself. 64% of their anchor tenants are Countdown supermarkets. I would think that those on each side of these supermarket letting transactions would know each other very well. Furthermore, the leasing contracts I would expect to be very similar across all Countdown sites. In terms of shortages of customers, you would have to conclude that the supermarket industry was least affected by the pandemic. If anything, any "revenue connected rent contracts" would have been supercharged. It may be a reflection of this that has come through in the significant 'performance fee' earned over the FY2021 period for operating IPL.

GMT is in a similar market demographic 'sweet spot', being a major landlord to another fast growing sector - the freighting business. Tenants NZ Post 6.8%, DHL 3.8%, Freightways 2.6%, Fliway 2.4%, Toll 2.3%, Mainfreight 2.2%, and Linfox 2.1%, add up to more than 22% of the GMT portfolio. Furthermore, the third largest tenant overall, 'Officemax' (2.9% of the portfolio, and strictly not a freighting business) is transitioning from physical stores to a nationwide warehouse distribution network. The 'performance fee' for GMT over FY2021 made up a very high 52% of all 'management fees' over FY2021. Yet even despite that, the overall OEOAR at GMT was still less than the same rate at IPL.

Taking account of all of these factors, my overall opinion is that the hyenas are ruling the carcass at IPL. Yet so fat is the IPL beast, in relative terms, there is sufficient fat on the bone left for the dogs to dive in after the hyenas have had their share. But as always, the "dive in price" has to be right.

A further argument, in shareholder value terms, is that Mr Market will sort all of the hyenas out. Because if those hyenas are really denying the dogs their rightful dividend stream, the respective company share prices will be marked down accordingly. And that will bring the dividend yield back to 'fair value'. But does that argument hang together in this context?

SNOOPY

[Snoopy]

Taking account of all of these factors, my overall opinion is that the hyenas are ruling the carcass at IPL. Yet so fat is the IPL beast, in relative terms, there is sufficient fat on the bone left for the dogs to dive in after the hyenas have had their share. But as always, the "dive in price" has to be right.

A further argument, in shareholder value terms, is that Mr Market will sort all of the hyenas out. Because if those hyenas are really denying the dogs their rightful dividend stream, the respective company share prices will be marked down accordingly. And that will bring the dividend yield back to 'fair value'. But does that argument hang together in this context?


I have added some snapshot valuation metrics, to be part of the ensuing discussion.



Dividend and Capital Movements FY2021
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


Dividend Payments over FY2021
($27.980m)($27.980m)
($53.464m)
($37.961m)
($78.3m)


Normalised Profit (After Tax) {A}
$24.121m
$24.121m
$48.324m
$47.602m
$72.864m


New Capital Raised over FY2021
$102.652m
$102.652m
$16.404m
$6.585m
$172.0m


Shareholder Equity (EOFY) {B}
$765.674m
$765.674m
$1,280.635m
$1,562.662m
$2,962.9m


Total Operating Expense to Operating Asset Ratio (OEOAR)
1.85%
1.85%
1.95%
1.28%
1.70%


Return on Equity (ROE) {A}/{B}
3.18%
3.18%
3.77%
3.05%
2.46%




Gross Earnings Yield (Based on SP @ EOCY2021)
4.71%
4.71%
5.00%
4.34%
2.82%



Notes

1/ Earnings related calculations are based on Operating Earnings.

2/ Normalised NPAT Calculations:
2a/ Investore: 0.72($29.679m+$3.553m+$0.294m-$0.024m) = $24.121m
2b/ Argosy: 0.72($95.625m-$32.691m+$4.183m) = $48.324m
2c/ Property for Industry: 0.72($517.151m-$392.518m-$2.636m-$12.271m-($44.324m-$0.702m)) = $47.602m
2d/ Goodman Property Trust: 0.72($114.9m-$13.7m) = $72.864m

3/ New capital raised includes dividends reinvested under the respective 'Dividend Reinvestment Plans' (Argosy, Property for Industry) and separate 'New Capital Raisings' (Investore, Goodman Property Trust).

4/ Gross earnings yield calculations:
4a/ Investore: ($24.121/0.72)/($1.95x365.135m) = 4.71%
4b/ Argosy: ($48.324/0.72)/($1.60x839.528m) = 5.00%
4c/ Property for Industry: ($47.089/0.72)/($2.98x505.494m) = 4.34%
4d/ Goodman Property Trust: ($72.864m/0.72)/($2.58x1,391.228m) = 2.82%

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

Students of property may observe that in all cases (bar PFI), the dividend paid exceeded the normalised profit. This has implications for future company growth. Because if you wish to grow your company and your cash outgoings exceed your income, then this means you will have to attract new capital if your company is to expand. Some companies have a subtle way of doing this, by implementing a dividend investment plan. The example to note here is Argosy. Argosy have persuaded enough people that reinvesting their dividend is a good idea, so that paying out a dividend greater than the earnings received becomes a sustainable policy.

Other companies that:
(i) have just made an acquisition OR
(ii) are raising more capital with the idea of making an acquisition OR
(iii) are doing an own build
have gone the more conventional capital raising way (Investore, Goodman). BUT (and here is the key point of this post):

If your company is cursed with an inefficient cost structure, then all of the new capital raised will also be deployed under that inefficient cost structure. Mr Market cannot account for this difference in execution efficiency, because he doesn't know when in advance significant new capital will be raised, or even if it will be raised. Yet because of the high payout ratio of these property companies (often over 100% in my examples), it is almost certain that when a significant new asset is to be acquired, then a capital raising will be necessary.

How then, do we use all this information, when evaluating what property company to buy?



OEOAR lowest to highest (*)PFIGMTIPLARG


ROE highest to lowestARGIPLPFIGMT



(*)Note: OEOAR= Operating Expense to Operating Asset ratio


If OEOAR was a contra-indicator of return, then the names in the columns in the above table should line up. The fact they don't, and the highest management cost provider also uses its shareholder funds most efficiently (the exact opposite of what a casual observer might expect) suggests that other factors are important. This is further discussed in post 111.

PFI has the lowest OEOAR, but also the second lowest ROE (which is disappointing). But PFI is the only one of the protagonists to cover its dividend from rent returns.

GMT has the second lowest OEOAR, but the lowest ROE. This is a terrible result and points to inefficiencies elsewhere in the GMT company structure

ARG has the highest ROE (a surprise, given the high OEOAR). This means it is good enough to finish first in overall capital efficiency terms.

IPL is mediocre in this comparative set with a higher than average OEOAR, but still an above average ROE.

In 'capital efficiency' terms, I rate these shares from best to worst: ARG, IPL, PFI and GMT. Nevertheless this is not the end of the story from an investment perspective. If you can't buy your capital efficient shares at the right price, or one of more these four is excessively leveraged, then your actual investment returns can become undone.

SNOOPY

[Beagle]

WOW...you really got your snout into that with dogged determination. The $64,000 question is are they worth buying at $1.75 or should we buy DDOG or BARK on the US markets instead ;)

[Recaster]

My take on the recent bond issue:

https://recastinvestor.substack.com/p/bond-offering-investore-property

[mcdongle]

My take on the recent bond issue:

https://recastinvestor.substack.com/p/bond-offering-investore-property

Thank you for that...

[Waltzing]

DDOG

dropped

agri stocks and tractor supplies ...

Farming ...

[Snoopy]

I have added some snapshot valuation metrics, to be part of the ensuing discussion.



FY2021
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


Total Operating Expense to Operating Asset Ratio (OEOAR)
1.85%
1.85%
1.95%
1.28%
1.70%


Return on Equity (ROE) {A}/{B}
3.18%
3.18%
3.77%
3.05%
2.46%


Gross earnings Yield (Based on SP @ EOCY2021)
4.71%
4.71%
5.00%
4.34%
2.82%



PFI has the lowest OEOAR, but also the second lowest ROE (which is disappointing). But PFI is the only one of the protagonists to cover its dividend from rent returns.

GMT has the second lowest OEOAR, but the lowest ROE. This is a terrible result and points to inefficiencies elsewhere in the GMT company structure.

ARG has the highest ROE (a surprise, given the high OEOAR). This means it is good enough to finish first in overall capital efficiency terms.

IPL is mediocre in this comparative set with a higher than average OEOAR, but still an above average ROE.

In 'capital efficiency' terms, I rate these shares from best to worst: ARG, IPL, PFI and GMT. Nevertheless this is not the end of the story from an investment perspective. If you can't buy your capital efficient shares at the right price, or one of more these four is excessively leveraged, then your actual investment returns can become undone.


There is a problem with investing in the 'best' business you can find in a sector of business opportunities. Mr Market is always one step ahead of you. He has already driven up the price of your favoured investment to make the 'marginal price risk' on purchase, similar to all of those other alternative sector investments. In theory Mr Market is very efficient at doing this. In practice, not always so.

For this exercise, to equalise the return on alternative capital investments, Mr Market should rightfully pay a higher price for a company with a higher ROE. Thus we can calculate a relative 'price premium guidance formula' that will provide a guidance to 'relative return'. But a 'relatively' good return may still be poor if the base rate we are comparing that with is too low. So attention shifts back to the IPL 'base earnings rate', and we are ASSUMING:

a/ That the seemingly low reference ROE figure for IPL, is...
b/ Modified by a market discount factor so that our investor can buy the associated implied revenue stream at an appropriate discounted rate, and....
c/ So harvest an acceptable return for the said investor,

appropriate for this class of investment, .....that our investor may be seeking.



Equalised Return and Market Premiums 2021
Investore Property LimitedArgosy PropertyProperty for IndustryGoodman Property Trust


Return on (Net) Equity (ROE) (based on normalised profit)
3.18%3.77%3.05%2.46%


Investment Property Premium/Discount Factor
1.0001.1860.95910.774


Equity per Share
$2.20$1.64$3.09$2.496


Equalised Equity per Share (ROE equalised against IPL)=align:right
$2.20$1.95$2.96$1.93


Share Price 31-12-2021
$1.95$1.60$2.98$2.58


Shares on Issue 31-12-2021
368.135m844.658m505.494m1,397.303m


Market capitalisation 31-12-2021
$589.016m$1,351.5m$1,506.4m$3,605.0m


SP Premium/Discount @31-12-2021 to Equalised IPL Net Equity 31-12-2021
-11.4%-17.9%+1.0%+33.7%





Share Price 08-03-2022
$1.71$1.40$2.645$2.34


SP Premium/Discount @08-03-2022 to Equalised IPL Net Equity 31-12-2021
-22.3%-28.2%-10.6%+21.2%



OK, what does the above table mean? In the centre of the table are two emboldened figures reading $2.20. The first figure is the net asset backing of IPL shares (see Listed Property Trust Thread post 1182). The second figure is the adjusted net asset backing of IPL shares which is still $2.20 - exactly the same number. This gives you a clue about what this table is showing. This table is a comparative set of numbers outlining the virtue of investing in a different property share, relative to IPL. The relative virtue of investing in IPL compared to itself is 'no difference'. This is why the table is showing no difference in the 'asset backing' of IPL and the 'adjusted net asset backing' of IPL (the 'adjustment factor' in this instance is 1).

If you had bought IPL shares on 31st December 2021, then you would have bought an asset giving a return of 3.18% on the value of the net assets invested. However, those shares were offered on the market at a discount to face value on that date, at $1.95. Because you were able to buy these shares at a discount, this means the return on the money you outlaid will be higher than the calculated ROE (retrospective coupon rate). Your underlying rate of return on equity will be at a figure of:

(220/195) x 3.18% = 3.59%, in fact.

The real implied retrospective 'dividend rate' is even higher than this. That is because Investore have a history of paying out more than their earnings as dividends (See post on this thread 'Dogs vs Hyenas part 8'). I make no judgement -at this point- as to whether that underlying implied return rate is 'good' or 'bad'. That decision is entirely up to the investor. But what the table above is trying to tell us is whether other 'alternative investments in the same sector' are 'better' or 'worse' than Investore, and by how much. Next - a working example of what I am talking about.

Suppose, on 31-12-2021, you bought some shares in Investore at $1.95 each. That price is an 11.4% discount to the asset backing of the share (see above table for all these referenced numbers). Buying something for less than it is worth is a good thing for an investor to do. In fact, doing that is the basis for all successful investing. However the asset backing of a property share can go up and down for different reasons. So just because you bought a share below asset backing on a particular date, does not rule out the possibility of that asset backing falling back towards the price you paid at a later date (a very real possibility with rising interest rates). Interest rates are not the only factor in determining the 'worth' of a property share though. The rental income stream you can achieve from the net tangible assets is another. A higher rental income stream from the same dollar value of net assets manifests itself as a higher 'return on equity'. It is this effect I have tried to capture in my 'equalisation of equity' calculations.

Nominally on that same date you could have bought some Argosy shares at $1.60, which would still have been at a discount to the NTA of $1.64. But the percentage discount on that deal would have been 2.4%, verses 11.4% on the hypothetical IPL purchase on the same date. So the IPL deal was the better deal, right? Actually no, because it is ARG that are 'working their net assets harder' (this is where my adjustment factors in that table come in). So once you make the ROE equalizing adjustment, you can see that the Argosy deal is the better deal with 22.3% -28.2% = a 5.9 percentage point further discount than was available on the IPL deal. At this point I need to jump in and say that a 5.9 percentage point margin on the relative value of the purchase price of an asset is not that great a difference. Such a variation is within the realm of 'normal sharemarket trading' over a month. So if you were building a property portfolio of listed property assets, it would not be unreasonable to take up both deals. The whole point of this table is that basing a value criterion strictly on net asset backing, particularly when the book value of assets are vulnerable, is perhaps not the best option when taking an investment return perspective.

Yet basing an investment decision purely on a return calculation, such as I am suggesting, is still a 'one dimensional' calculation. There are other factors to consider.

SNOOPY

[Snoopy]

Yet basing an investment decision purely on a return calculation, such as I am suggesting, is still a 'one dimensional' calculation. There are other factors to consider.


Here follows a little lesson on ranking potential investments only on returns.




Valuation Metrics FY2021
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


Dividend Payments over FY2021
($27.980m)
($27.980m)
($53.464m)
($37.961m)
($78.3m)


Normalised Profit (After Tax) for FY2021 {A}
$24.316m
$24.316m
$48.324m
$47.602m
$72.864m


Market capitalisation 31-12-2021 {G}
$589.016m
$589.016m
$1,351.5m
$1,506.4m
$3,605.0m


Normalised PER 31-12-2021 {G}/{A}
24.2
24.2
28.0
31.6
49.5


New Capital Raised over FY2021
$102.652m
$102.652m
$16.404m
$6.585m
$172.0m


Shareholder Equity (EOFY) {B}
$765.674m
$765.674m
$1,280.635m
$1,562.662m
$2,962.9m


Return on Equity (ROE) {A}/{B}
3.18%
3.18%
3.77%
3.05%
2.46%


Gross PIE equivalent Dividend Yield (EOCY2021)
5.52%
5.52%
5.65%
3.59%
2.91%


Gross Income from rentals {C}
$64.514m
$64.514m
$111.522m
$107.941m
$182.0m


Net Operating Profit Margin {A}/{C}
37.7%
37.7%
43.3%
44.1%
40.0%


Bank and Bond Debt (EOFY) {D}
$277.363m
$277.363m
$754.421m
$598.653m
$730.1m


MDRT {D}/{A}
11.4 years
11.4 years
15.6 years
12.6 years
10.0 years




]








[/TR]




Total expenses {E}
($17.925m)
($17.925m)
{$37.844m}
($24.218m)
($58.5m)


Building Portfolio Valuation (avg) {F}]
$966.5m
$966.5m
$1,938m
$1,841.9m
$3,431.7m


Total Operating Expense to Operating Asset Ratio {E}/{F}
1.85%
1.85%
1.95%
1.31%
1.70%




Notes

1/ Earnings related calculations are based on Operating Earnings.

2/ Normalised NPAT Calculations:
2a/ Investore: 0.72($29.949m+$3.553m+$0.294m-$0.024m) = $24.316m
2b/ Argosy: 0.72($95.625m-$32.691m+$4.183m) = $48.324m
2c/ Property for Industry: 0.72($517.151m-$392.518m-$2.636m-$12.271m-($44.324m-$0.712m)) = $47.602m
2d/ Goodman Property Trust: 0.72($114.9m-$13.7m) = $72.864m

3/ New capital raised includes dividends reinvested under the respective 'Dividend Reinvestment Plans' (Argosy, Property for Industry) and separate 'New Capital Raisings' (Investore, Goodman Property Trust).

4/ Gross PIE equivalent dividend yield is from the 'Listed Property Trusts' thread, post 1178.

5/ Market Capitalisation from this thread, post 106

6/ PFI revenue excludes $0.712m of 'management fee income', that has been treated instead as an offsetting expense (see note 2c).

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

.
The previous post in this series talked about Argosy offering a better deal to investors than Investore, based on how well each company utilises their assets and based on current market prices. One way of getting more out of your unit holder equity is to leverage that equity up via borrowing. Companies call this 'making efficient use of their capital'. But such a game does not come without associated risk. There are different metrics with which to measure leveraged risk. But my preference is something called 'Minimum Debt Repayment Time' (MDRT). Put simply, this is the answer to the question:

"How many years would it take to pay off all of a company's underlying debt, if all of the current year after tax profits were put towards paying off that company debt?"

The answer to that question, in years, is the current MDRT figure

If we look at Argosy vs Investore, we can see that MDRT is a whopping 4 years longer. And at 15.6 years, it is nearly three years longer than any of the three protagonists. Given the marginal difference in purchase price value, as outlined in part 7, and the outlier MDRT value of 15.6, this would be enough to drop Argosy from my preferred purchase list in favour of Investore.

My rule of thumb to evaluate the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

Looked at in this light, the debt levels of all of our protagonists are a 'cause for concern'. Is my 'worry scale' too sensitive on debt, because I am not used to looking at property companies? It could be, as the more steady and predictable a company's cashflows are (and rent payments are that), the more debt can be safely serviced. And big company tenants tend to be reliable at paying their rent. There are two ways to quickly reduce debt for a property company:

1/ Sell some properties.
2/ Raise more equity to replace some debt via a cash issue of new shares.
3/ Revalue some of your existing properties upwards (improves debt:equity ratio).

There has been a lot of '3' going on in recent times from all of the protagonists. But in a new climate of falling property values, it may be that option '2' is the best solution for squaring up balance sheets in the near future. Solution '2' is not usually great for existing shareholders when future earnings streams are diluted as a result.

Taking all of the table's information into account, I like to balance yield against the security of of the ability to pay back company debt, and then balance that against the discount it can be bought at on market. I would tend to look on property as a steadying conservative base to build other more risky shares around. Argosy offers the best yield but at the highest debt repayment risk.



My verdict:



1/ I am calling IPL the winner of this contest, but only if that market discount to underlying earnings potential exists (see post 106. on March 8th the discount was 22.3%). IPL offers a slightly lower gross PIE equivalent dividend yield to ARG, with a significantly lower debt risk. I am not recommending ARG in this 'big box' race because of the outlier MDRT position. Nevertheless ARG makes a better show of itself in the 'Toffs into Offs' series as written up in the Argosy thread.

2/ PFI has the greatest dividend cover from earnings, and the lowest operating expense to operating income ratio, Purely on reported market measures, PFI offers the second lowest dividend yield. But if it paid out all its earnings it would offer a much more competitive dividend yield of: 47.602/37.961 x 3.59% = 4.50%. Looking at operational statistics I think PFI would be my pick. Unfortunately for new investors Mr Market knows this and has driven the PFI price up accordingly.

Note that both of our two winners are able to be bought on market at a discount to 'equalised net equity' (see post 106) which is an essential ingredient of earning a top two position.

Also rans (no third place awarded)/ GMT looks very sound but at a market yield I can only describe as miserable (again post 106 shows market investors are paying an 'equalised net asset' premium). ARG loses out on a recommendation in this tussle because of its significantly higher MDRT figure for a not that much greater return.

Yet being the winner of a contest like this only points to the underlying question, does the investment stack up inside a much broader pot of alternative investment opportunities in other investment classes?

SNOOPY

[Grimy]

Many thanks for all your time and effort Snoopy.

[LaserEyeKiwi]

Interesting reads Snoopy! hope you don’t mind if I copy them to the Listed Property Trusts thread.

[Snoopy]

I have looked at various comparative investments. But the question I have not answered is that with all the share price movements since the start of the calendar year, is investing in Investore today 'the go'? The alternative way to put money into Investore is via the listed bonds. These currently are trading on the debt market at:

a/ 3.85% (offer of IPL010 4.4% coupon 18-04-2024 bonds, no buy bidders)
b/ 4.45% (offer of IPL020 2.4% coupon 31-08-2027 bonds, no buy bidders)
c/ 3.75% (offer of IPL030 4.0% coupon 25-02-2027 bonds, 3.95% buy bidders)

for a best return of 4.45% (option B)

Gross earnings yield (which is different from dividend yield, as Investore's dividends are higher than their earnings) for the head share at 31-12-2021 based on a share price of $1.95 was:

4.71% x (24.316/27.980) = 4.09%

But with the decline in share price in the interim, this yield has improved to:

4.09% x (195/169) = 4.72%

There are no earnings retained to fund further growth of the portfolio in this modelling. So this yield is the best sustainable yield an investing shareholder can ever expect to get from IPL going forwards, (unless the IPL share price declines further of course).

Where there is an option of either buying a share or a bond as alternative ways of getting into the same company, I generally look for the bond option to have a higher yield to compensate for missing out on the growth prospects over time of the alternative option of owning the share. The history of the IPL share since listing in 2016 at around $1.65 has been a generally rising share price as interest rates fell followed by a falling share price as interest rates rose. At a closing price of $1.69 today, we are almost back to where we started five years ago.

Were there any other perks small shareholders accumulated along the way? The 20th May 2020 capital raise offered new shares at a discounted $1.65 early in the FY2021 year. That discount doesn't look so generous at today's IPL share price. Institutional shareholders ended up with the same deal a month earlier. It looks like a well managed capital raising by the company, where shareholder stakeholders long term broke even on their new shares.

It comes down to this: A 4.72% gross return for the shareholder verses a 4.45% gross return for the bondholder. Despite the security of the cashflow, I can't help feeling both are overpriced. A yield of 5% sounds better, That means a share price of:

$1.69 x (4.72/5) = $1.60

The share price has been there prior to the second half of 2019, and that is a price level where I can start to see shareholder value.

Verdict: A 'Nah' at today's prices.

SNOOPY

discl: do not hold

[Snoopy]

Dividend and Capital Movements FY2021
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


Total Operating Expense to Operating Asset Ratio (OEOAR)
1.85%
1.85%
1.95%
1.28%
1.70%


Return on Equity (ROE) {A}/{B}
3.18%
3.18%
3.77%
3.05%
2.46%


Gross Dividend Yield (Based on SP @ EOCY2021)
4.71%
4.71%
5.00%
4.34%
2.82%



Notes

1/ Earnings related calculations are based on Operating Earnings.


If a lot of your company analysis is based on 'data mining', it is useful to know what data is best to mine. Looking for 'bloated management' is a soft but measurable target.

It is tempting to dismiss out of hand, a company with a high 'Operating Expense to Operating Asset Ratio' (OEOAR). But OEOAR is only one element of the cost structure. Perhaps a better indicator of the cost structure is to look at 'Return on Shareholder Equity' (ROE). All else being equal, a higher OEOAR should be indicative of a lower ROE. So what do we see in the four actual examples (PFI, GMT, IPL, and AGR) that I have been looking at?



OEOAR lowest to highestPFIGMTIPLARG


ROE highest to lowestARGIPLPFIGMT



What I expected to see was the lowest costs (indicated by OEOAR) lining up with the highest returns (indicated by ROE). However the table above does not show that.

One explanation might be that I calculate the ROE figure using the equity on the books at the end of financial year, while any income/expense comparison is earned/spent, not on a snapshot day, but over the whole year. If there are large property revaluations over the year, then the average equity over the year can be very different to the equity denominator that I use.

For this comparative purpose only, I will recalculate the equity as the average between the end of the two most recent years. Calculations follow, using some data from post 101:

ARG: ($1,075.804m + $1,280.635m)/2= $1,178.220m => ROE= 4.09%
IPL: ($526.601m +$765.674m)/2 = $646.138m => ROE= 3.76%
PFI: ($1,136.613m + $1,562.662m)/2 = $1,349.638m => ROE= 3.53%
GMT: ($2,402.1m + $2969.2m)/2 = $2,685.7m => ROE= 2.71%

If you go through those numbers you will find that changing my analysis to this makes absolutely no difference to the ordered tabulated result. So my more sophisticated analysis did not end up adding to the pot of knowledge. So let's change tack and look at the IntOAR or 'net interest cost to asset ratio' (Note: Building Property Valuations from post 99 on this thread):

ARG: $28.508m/$1,938m = 1.47%
IPL: $13.087m/$966.5m = 1.35%
PFI: $20.104m//$1,841.9m = 1.09%
GMT: $22.3m/$3,431.7m = 0.65%

and we get



IntOAR lowest to highestGMTPFIIPLARG


ROE highest to lowestARGIPLPFIGMT


IntOAR highest to lowestARGIPLPFIGMT



It is clear which way the correlation works and I can explain why. The higher the relative interest charge, the more the company is funded by borrowing. The more borrowing is used to fund the company, the less equity is required. So therefore the equity that is within the company is working more efficiently, producing a higher ROE figure. The moral is, if you want to run a successful property company, just borrow as much as you can :-P.

SNOOPY

[Snoopy]

Notes

1/ Earnings related calculations are based on Operating Earnings.
2/ Normalised NPAT Calculations:
2a/ Investore: 0.72($29.679m+$3.553m+$0.294m-$0.024m) = $24.121m


I have some concern about most of our property companies having a policy of paying out 'more than they earn' to shareholders, in dividend payments. This has been justified by using AFFO (Adjusted Funds from Operations), a non GAAP measure, as a replacement for 'Net Profit after Tax'. So how do the two measures differ? As an example of what is happening, I am taking a closer look at 'Investore' over FY2021.



Snoopy Profit NormalisationAdjusted Funds From Operations


Profit Before Tax$29.949m$29.949m


add Finance Swap Termination Expense$3.553m$3.553m


add Loss on Rental Guarantee$0.294m$0.294m


less Net Change in fair value of financial instruments$(0.024m)$(0.024m)


less Capitalised lease incentives - Covid-19 abatements (1)$0m$(0.857m)
I

add Borrowing establishment costs amortisation (2)$0m$0.683m

29,679
less Spreading of fixed rental increases$0m$(0.179m)


add Lease incentives amortisation - Covid-19 abatements$0m$0.126m


less Reversal of Lease Liabilities movement in Investment Properties$0m$(0.065m)


less Capitalised lease incentives, rent free$0m$(0.054m)


less Capitalised lease incentives, cash incentives$0m$(0.032m)


less Lease incentives amortisation, cash incentives$0m$0.011m


add Lease incentives amortisation, rent free$0m$0.009m


equals Normalised Profit before tax$33.772m


equals AFFOBT$33.413m


less Tax($9.456m)$(4.044m)



equals Total Distributional Profit after tax$24.316m$29.369m


less Maintenance Capital Expenditure (3)$(1,299m)


equals AFFO$28.070m






Notes (AFFO adjustments from AR2021 p47)

Those AFFO adjustments look to be largely identifiable through the cashflow statement (AR2021 p33). That is no surprise in that what we have here is really a 'cashflow issue'. By that I mean that if the cash is flowing in, then it is available to pay as a dividend. I don't mind adjusting 'normalised income' for cashflow, as long as the extra cash coming in is truly 'long term', i.e. is not a delay to a bill that needs to repaid in adjacent subsequent years.

(1) Capitalised incentives to lessees = 'Cash Out'. I understand that. But I like to envision these incentives and their subsequent amortisation as ripples around the normalised operating environment. That is why I don't adjust for those.

(2) 'Borrowing establishment costs', I see as part of the normal process of getting a loan. I don't see the point in adjusting for the cash timing on what are 'ordinary business expenses'.

(3) Why the 'Maintenance Capital Expenditure', which is money that:
(i) has been spent AND
(ii) was needed to have been be spent
has not been deducted before the 'maximum distributable profit' was calculated under AFFO, I do not understand.


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

I agree with some of the AFFO adjustments but not others, as the table above demonstrates. Despite this, the overall effect of adjusting under each approach on NPBT is not dissimilar (a 1% difference).

This means that effectively, the entire difference between the two disparate comparative expense steams comes down to the 'current tax expense': $9.456m (Snoopy, based on the 28% NZ corporate tax rate) vs $4.044m (AFFO).

The actual income tax for the year in the income statement is listed $7.706m. FY2021 (ending 31-03-2021) was the first year that depreciation for commercial buildings was reinstated. On p60 of AR2021 there was a note that said:

"As part of its COVID-19 support package the New Zealand Government has reintroduced a 2% diminishing value depreciation deduction for commercial properties, starting in April 2020 for Investore. This provided a financial benefit to Investore of approximately $2.2 million for the year ended 31 March 2021."

If you go to section 7.3 in AR2021, it is apparent that from the underlying tax liability for FY2021 of: ($47.310m) + $39.000m = ($8.310m), depreciation does provide the largest part of the offset that brings the tax bill for the year back to just ($3.652m) [with the current tax addition of ($0.392m) income tax movement in cashflow hedges still to be added.] However if my reading of that tax note is correct, it is saying that $4.054m of this years tax is deferred, not forgiven. Consequently it doesn't seem right that 'tax deferred' should be thrown into the current account, declared cash surplus, and paid out as a dividend. I am not a tax accountant, so my interpretation of what has happened here could be wrong. But until someone comes along with a more learned explanation of what has gone on regarding 'cash available to pay the dividend' (aka AFFO), I will stick to my explanation.



Actual dividend paid over FY2021: 4x $6.995m = $27.980m


AFFO for FY2021 = $27.801m


Normalised profit for the year FY2021: $24.316m



I will leave readers to decide if they think that the current dividend payout policy is sustainable.

SNOOP

[Sideshow Bob]

FY22 Results - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/392231)

[Recaster]

Have written an analysis of this company going back five years.

The link if interested is:

https://recastinvestor.substack.com/p/update-investore-property-iplnzx

[Grimy]

Thanks for that Recaster.

[winner69]

Guidance full year cash dividend 7.9 cents

NO pay rise this year for shareholders


Don't they know there's a cost of living crisis

[Snoopy]

Guidance full year cash dividend 7.9 cents

NO pay rise this year for shareholders

Don't they know there's a cost of living crisis


No problem Winner. Just wait for the share price to go down. That means the yield will go up. There is your 'pay rise' ;-P

SNOOPY

[winner69]

No problem Winner. Just wait for the share price to go down. That means the yield will go up. There is your 'pay rise' ;-P

SNOOPY

So it's true - “If you don’t understand where the yield is coming from, you are the yield.”

[LaserEyeKiwi]

With a 6% Yield - better than a bank account, but not good enough to pop the share price at all considering the seismic risk for this property portfolio.

They are actually adding assets in Wellington & Canterbury, while more prudent portfolio managers are trying to leave those areas.

[winner69]

Valuations taking a $143m hit or 12% as portfolio revalued

I’m no expert in such matters but an average cap rate of 5.6% still seems a little low.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/IPL/408855/391288.pdf

[Aaron]

Valuations taking a $143m hit or 12% as portfolio revalued

I’m no expert in such matters but an average cap rate of 5.6% still seems a little low.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/IPL/408855/391288.pdf

I am no expert either, but what do you reckon is a reasonable cap rate? 8%. I would have thought buying property at 5% hardly keeps up with eventual replacement or refurbishment but then I suffer from long term thinking.

Pretty solid tenant and solid leases in good locations?

Maybe taking into account interest rates falling in 2023/24.

NTA is pretty bogus for these property companies.

Of more interest do you know what banks require when lending on commercial property. What would be the LVR and debt service requirements. What other requirements should we be aware of?

What about non-property companies. Bank requirements might become important if inflation stays strong.

I remember Bruce Sheppard doing this years ago and identified Provenco/Cadmus as an absolute dog based on bank lending requirements. It went bust not long after.

[Snoopy]

Guidance full year cash dividend 7.9 cents

NO pay rise this year for shareholders

Don't they know there's a cost of living crisis




No problem Winner. Just wait for the share price to go down. That means the yield will go up. There is your 'pay rise' ;-P




Valuations taking a $143m hit or 12% as portfolio revalued

I’m no expert in such matters but an average cap rate of 5.6% still seems a little low.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/IPL/408855/391288.pdf


NPBT (and before property re(de?)valuations) $35.247m

AGM today and share price down to $1.35. No. of shares on issue at EOFY 367.503m => Current market Value $1.35 x 367.503m = $496m

Gross Capitalisation Rate = Net Operating Income / Current Market Value = $35.247m/$496m = 7.1%

Winner got his pay rise. All good?

SNOOPY

[Snoopy]

Do you know what banks require when lending on commercial property. What would be the LVR and debt service requirements. What other requirements should we be aware of?


Aaron's question, answered at the AGM2023. When talking about slide 8:
"During FY2023, $75m of bank facilities were refinanced.and extended for a further two years to November 2025. As part of this refinancing, Investore also renegotiated its banking covenants with its banking syndicate, removing the covenant relating to its weighted average lease term of Investores portfolio, and reducing the LVR (Loan to Value Ratio) covenant from a maximum of 65% to a maximum of 52.5%."

Further down the page, under the discussion on Slide 9, we learn:
"Investores FY23 acquisitions and developments were funded from its available debt facilities. This coupled with portfolio devaluation has resulted in Investores LVR increasing to 36.5% as at 31st March 2023."

It reads like the banks are tightening up on these property companies with their decreasing property valuations altering the debt/equity picture. But with an average weighted lease term of 8.1 years (AR2023 p16), I can see why the banks were not worried about letting go of this part of the financial covenant with IPL.

SNOOPY

[Snoopy]

It reads like the banks are tightening up on these property companies with their decreasing property valuations altering the debt/equity picture.


A bit more from the AGM address
"As shareholders will be aware, during FY2023, Investore undertook a share buyback program of up to 5% of the shares on issue. acquiring and cancelling 632,398 shares (actually only 0.172% of shares were bought back) for a total cost of $1.1m (that equates to a average buyback price of $1.58). As previously announced the board has decided to cancel this share buyback program."

Fair enough. But later on in the talk we also learn that:
"Investore is pleased to announce the adoption of a dividend reinvestment plan, which will allow eligible shareholders to reinvest dividends into additional Investore shares."

I guess if you were an 'eligible shareholder' that would sound good. Yet with the share price currently sitting at $1.35, and extra shares liable to be issued at less than that price, the overall strategy of the last few months looks to have been to 'cancel existing shareholder capital at a high price', while 'planning to bring in new shareholder capital at a low price'. (more shares now need to be created at a lower price to reverse the lesser number of earlier higher priced shares cancelled). That sounds like a 'net eps dilution' exercise to me. 'Sound capital management' by the board?

SNOOPY

[Aaron]

Aaron's question, answered at the AGM2023.
It reads like the banks are tightening up on these property companies with their decreasing property valuations altering the debt/equity picture. But with an average weighted lease term of 8.1 years (AR2023 p16), I can see why the banks were not worried about letting go of this part of the financial covenant with IPL.

SNOOPY

Thanks Snoopy glad someone takes the time to read the annual report. Dropping the LVR from 65% to 52.5% and removing a covenant relating to lease terms does not sound like tightening up by the banks to me. More like bending over backwards.

I was banned for a time but remember seeing this article and wonder if Investore discussed why they are selling these two properties.

https://www.oneroof.co.nz/news/two-south-island-countdown-supermarkets-for-sale-43632

Probably real estate agent hype but if it is to be believed why would they be selling. Property company overtrading again? Does this disguise poor performance. Beagle pointed out a while ago how the KPG earnings did nothing for 20yrs(I think) and the share price of property companies has come up again on a thread somewhere. Without a decent yield for your purchase price the bonds provide a better yield for less risk, although high inflation may change this dynamic. Although raising rents as tenants are struggling might be difficult.

NZX-listed Investore Property is selling two of its regional South Island Countdown supermarket properties, both with long leases to General Distributors Ltd, owned by a subsidiary of Australia’s ASX-listed Woolworths Group.

The supermarkets for sale are in Stoke, Nelson and the prosperous regional centre of Blenheim, an area that has outstripped New Zealand’s GDP growth over the past two decades.

Thompson says single-tenanted, large-format retail properties like these, and especially those categorised as being an essential service provider, are held in high regard among investors because they’re seen as providing a defensive income with minimal management.

“Retail assets of this calibre seldom become available for that reason. They’re very tightly held,” he adds.

[Aaron]

"As shareholders will be aware, during FY2023, Investore undertook a share buyback program of up to 5% of the shares on issue. acquiring and cancelling 632,398 shares (actually only 0.172% of shares were bought back) for a total cost of $1.1m (that equates to a average buyback price of $1.58). As previously announced the board has decided to cancel this share buyback program."SNOOPY

It makes you wonder why companies do not just pay higher dividends rather than buying back shares. Tax free capital gains from higher value shares perhaps or stock price manipulation. I think share buybacks were made illegal a long time ago and brought back with the Companies Act 1993 (possibly fake news have not DMOResearch) suspect they may be again banned again before too long. I do not see the benefit of buybacks other than pumping up stock prices and management performance fees. Perhaps someone could enlighten me as to the benefits of share buybacks.

[Snoopy]

Dropping the LVR from 65% to 52.5% and removing a covenant relating to lease terms does not sound like tightening up by the banks to me. More like bending over backwards.


Maybe I am reading this wrongly. But my interpretation of what is being said here is that:

a/ 'BEFORE' the banking syndicate was comfortable with advancing to the company a maximum loan totalling equal to 65% of the value of the properties held by the company.
b/ 'AFTER' they are only prepared to loan up to 52.5% of the value of properties held by the company.

When I say 'value of these properties', I believe the banks talking about 'market value'. Not 'cost of acquisition'.

As at the end of year balance date 31-03-2023, the Investore LVR 'actual value' was 36.5%. So no action is required by Investore managers right now. The banks are just saying 'watch what you do from here on'.

That sounds like an effective downgrade in the recognised creditworthiness of Investore to me. The removal of the requirement on the weighted average length tenancy agreements (WALT), whatever it was, is, I think, a bit if a sop to show that Investore are not being punished too badly. I would regard the current WALT of 8.1 years as pretty good.

SNOOPY

[Snoopy]

I wonder if Investore discussed why they are selling these two properties.

https://www.oneroof.co.nz/news/two-south-island-countdown-supermarkets-for-sale-43632

Probably real estate agent hype but if it is to be believed why would they be selling. Property company overtrading again? Does this disguise poor performance. Beagle pointed out a while ago how the KPG earnings did nothing for 20yrs(I think) and the share price of property companies has come up again on a thread somewhere. Without a decent yield for your purchase price the bonds provide a better yield for less risk, although high inflation may change this dynamic. Although raising rents as tenants are struggling might be difficult.

NZX-listed Investore Property is selling two of its regional South Island Countdown supermarket properties, both with long leases to General Distributors Ltd, owned by a subsidiary of Australia’s ASX-listed Woolworths Group.

The supermarkets for sale are in Stoke, Nelson and the prosperous regional centre of Blenheim, an area that has outstripped New Zealand’s GDP growth over the past two decades.

Thompson says single-tenanted, large-format retail properties like these, and especially those categorised as being an essential service provider, are held in high regard among investors because they’re seen as providing a defensive income with minimal management.

“Retail assets of this calibre seldom become available for that reason. They’re very tightly held,” he adds.

This is what Investore said on property sales after slide 17 of the AGM address:
"While Investores balance sheet and portfolio are well positioned, the ongoing higher interest rate environment means the board will continue to focus on how to prudently manage capital. Accordingly, the board announced capital management initiatives with the release of Investores FY23 annual results, designed to manage gearing over the near term. These included the intent to sell selected non-core assets of approximately $25m-$50m, provided appropriate value can be realised for the assets. The net proceeds received from these investments, if they proceed, will be used to repay existing bank debt."

"Investore is also pleased to announce the adoption of a dividend reinvestment plan."

"The purpose of these initiatives is to ensure that Investore is well placed, to withstand further potential valuation headwinds, in case they eventuate, as well as preserve balance sheet headroom to pursue further strategic initiatives across its portfolio."

I see Countdown supplies 64% of Investores rental income (AGMPR2023 slide 14). So to call these two Countdown supermarkets on the block as 'non-core assets' sounds like corporate communication officer drivel to me.

Investore need the money to shore up their balance sheet before any more market related shocks tank the IPL share price further, and a 'capital call' on shareholders is required. I imagine both the Nelson and Blenheim Countdown supermarkets are currently among IPLs lower yielding assets (because of the high quality of the assets, which also means they should be easy to sell). That is how I read the situation.

SNOOPY

[Aaron]

a/ 'BEFORE' the banking syndicate was comfortable with advancing to the company a maximum loan totalling equal to 65% of the value of the properties held by the company.
b/ 'AFTER' they are only prepared to loan up to 52.5% of the value of properties held by the company. SNOOPY

Sorry, your right my misunderstanding.

I probably should read the annual report but wonder if Countdown is 64% Anchor Tenant Classification by Contract Rental as at 31 March 2023. Does this give a lot of power to one tenant when renegotiating lease terms? I guess they need the buildings and locations as much as IPL need the tenant.

Wow having to sell shops due to rising interest rates. Does that mean they paid too much for the purchase and/or development of some of their properties? Maybe Winner could get a pay cut and we can buy more IPL shares at a much lower price. Or maybe they sell valuable tightly held, in demand property and hang on until interest rates are suppressed by central govt again. If the real esate agents blurb is slightly factual then the properties they are selling sound like they are the good ones for which there is a demand not the ****ty ones. Tightly held means they are unlikely to ever get them back.

I wonder what makes these two shops "non-core" for a property company. Low yielding but sellable will hardly instill investors with confidence in Management.

I wonder if mgmt should have "cooled their jets" while interest rates were at historical lows. Did they buy high and now are selling low. Not a good strategy for wealth accumulation.

[Snoopy]

The overall strategy of the last few months looks to have been to 'cancel existing shareholder capital at a high price', while 'planning to bring in new shareholder capital at a low price'. (more shares now need to be created at a lower price to reverse the lesser number of earlier higher priced shares cancelled). That sounds like a 'net eps dilution' exercise to me. 'Sound capital management' by the board?


Perhaps my comment above was a little cynical. I doubt if the board (or anyone) could have reasonably foreseen that interest rates in NZ would rise so far so fast.



It makes you wonder why companies do not just pay higher dividends rather than buying back shares. Tax free capital gains from higher value shares perhaps or stock price manipulation. I think share buybacks were made illegal a long time ago and brought back with the Companies Act 1993 (possibly fake news have not DMOResearch) suspect they may be again banned again before too long. I do not see the benefit of buybacks other than pumping up stock prices and management performance fees. Perhaps someone could enlighten me as to the benefits of share buybacks.


The fundamental theory behind share buybacks, the process where shares are bought back and cancelled, is that, -with less shares on issue-, earnings per share will increase - even if overall earnings for the company remain flat. The negative part of a 'share buyback plan' is that, in order to do a buyback, you have to spend 'spare' cash. Spare cash could come from profits not paid out as dividends. Or it could come from 'borrowed money', if debt levels are judged to be sub-optimally low.

So why would having any debt at all be better? If you have a company which earns a 'high return on assets', then it can make sense to minimise (to a point) the share equity of owners and maxmise the bank debt to finance those company assets. As long as the company are earning above 'bank borrowing rates', that means any returns you earn by using the bank's capital, above bank borrowing rates, are able to be distributed to shareholders. And the less 'shareholder capital' that shareholders have invested in the business, that means all of that excess earnings that come from using bank borrowings can be distributed over that smaller pool of shareholder capital. The smaller the pool of share capital, the greater the amount of excess earnings derived from the borrowed bank capital that can be distributed 'per share' to the equity holders.

This is how a company optimises 'capital efficiency' to favour the shareholder. However, to make this work, a company must have a 'good business model' to start with. The key factor in a 'good business model' is to make sure the 'return on shareholder assets' is well above the borrowing rate that you have negotiated with your banking syndicate. OK so there is the reasoning why you might want to do a share buyback. If you have read and understood the above, you have probably already figured out why a share buyback strategy might be upset by rising bank interest rates. So how does all this affect IPL? For that you will have to read 'Part 2'.

SNOOPY

[Snoopy]

Moving onto the IPL annual report for 2023, there are many years where IPL has 'earned' more from the appreciation of the value of their property portfolio, rather than the underlying rent being paid by tenants on those properties. Property revaluations and (gulp) devaluations are connected to movements in various financial indicators, but are not readily predictable in the short term. That is why it is prudent for IPL management to maintain an 'equity buffer'. This is a way to ensure that a sudden 'property market downturn', will not trigger a 'banking covenant breach' and a concomitant sudden rush to refinance the company on the banking syndicate's terms.

My way of looking at IPL is to see how well the operational earnings (i.e. largely rent) expressed as 'return on assets' covers the bank (and IPL bondholders in this instance) financing costs. From the FY2023 financial statements:



Operational Profit before tax$35.207m

:
less Current Tax Expense($4.972m)


equals Underlying NPAT$30.235m



When looking at the value of investment properties on the books, most reporting companies use an 'average value of assets' managed throughout the year. I prefer to use just the value of properties at the end of the financial year, because that is the value that will be carried forward into next years accounts and all prior adjustments are historical. The value of Investment properties on the IPL balance sheet as at EOFY2023 is: $1,070.451m. So the underlying return on assets may be calculated as follows:

ROA = $30.235m/$1,070.45m = 2.82%

We are told that the average weighted cost of debt per annum at at 31st March 2023 is 4.0% (AGMPR2023 Slide 8). I am not sure exactly how IPL calculates this. How does this compare with my own 'calculated interest paid' rate from the published accounts? To work out this, I first take the three published loan balances we know about over FY2023 (SOFY2023, HY2023 and EOFY2023) and average them:

($351.530m+$387.576m+$387.037m)/3 = $375.381m
Net finance expense = $16.195m
=> indicative interest rate paid = $16.195m/$375.381m= 4.31%

( I call the above calculation indicative, because we do not know the variations in the loan balance on the other 365-3=362 days of the year where loan data is not published. Nevertheless, there isn't too much difference between 4% and 4.31%)

So straight away we can see that even with a write-down in property values in some years (e.g FY2023), over the medium term we are relying on capital gain to make this funding model work.

In analytical terms, there is something to be said for considering a 'cost of equity capital'. This will help determine if for a particular investment your capital is wisely allocated. However in 'cash terms' there is no cost of equity capital. I say that, because you don't have to pay for the privilege of investing your own money. That means sometimes it is useful to look at a different figure, such as 'Return on Borrowings', or ROB, where your own equity capital is removed from the underlying asset:

ROB = $30.235m/($1,070.45m-$675.02m) = 7.65%

From the above we can see that the underlying IPL 'return on borrowed money' is significantly more than the interest rate being paid on company borrowings. This means there is no imminent 'operational cashflow threat' that might see Investore fold. If ROB > ROA this would also suggest to me that increasing company borrowings as the consequence of a share buyback is, within certain limits, a 'sensible strategy' for IPL to follow, as a rule.

SNOOPY

[Snoopy]

This would suggest to me that increasing company borrowings as the consequence of a share buyback is, within certain limits, a 'sensible strategy' for IPL to follow, as a rule.


The most current released LVR for Investore as at EOFY2023 was 36.5%. How was this calculated?

Value of Investment Properties (from FY2023 balance sheet): $1,070.451m
Borrowings (from FY2023 balance sheet): $385.037m

=> LVR = $385.037m / $1,070.451 = 36.0%

It looks like 0.5% has gone missing (reward offered for anyone who can find it - no not really). But if $385.037m of loans represents a 36.5% LVR, by how much would the property values have to decrease before that new LVR banking covenant of 52.5% would be breached?

$385.037m / 'Covenant Breaking Depreciated Value' = 52.5% = 0.525
=> 'Covenant Breaking Depreciated Value' = $385.037m / 0.525 = $733.404m

This means the 'cumulative critical write down' amount going forwards that will cause the LVR banking covenant to be breached is:

$1,071.451m - $733,404m = $338.047m

A further property valuation reduction of: $338.047m / $1,071.451m = 30% (round figures) from the 31st March 2023 balance date is the critical figure . This would likely require the one year government bond rate to rise from 4.11% (as it was on 31-03-2021) to 4.11% x 1.3 = 5.34%. (1) As at 28-06-2023 the government bond rate is 4.54%. I think it is unlikely that the one year government bind rate will rise further to 5.34% at this stage in the interest rate cycle. But we can't be 100% sure. This could explain why management are taking some pro-active action selling off those Nelson and Blenheim Countdown properties. Looking at the way interest rates have kept rising since the 31st March 2023 balance date, I do predict more property write downs at the September 2023 half year reporting date for IPL. Whether that will 'spook the market again', I guess we will find out,

Note (1) I am not suggesting that calculating any potential future property write down is as simple as just comparing one year government bond rates at comparative period end points. I am suggesting that as a quick approximation this simple calculation is a reasonable indicator as to what the actual property value adjustment might be.

SNOOPY

discl: do not hold, but is on my acquisition radar

[Aaron]

Thanks Snoopy

I will have to go over your numbers to clarify in my head how the return on investment is higher than the bank interest rate, if they borrowed to buy back the shares. a 2.82% ROA c.f. 4% interest rates. Not sure what ROB indicates as ROE is more commonly used. As always you are making me think which goes against my natural inclinations.

Another theory for buybacks is that companies have excess cash that can't find better investments than their own shares so they do buybacks but this is odd as just paying out the excess as dividends would bring the price of their shares back up.

One theory I had is if you did not have enough debt, private equity would make a takeover offer load the company up with debt take the cash and a few years later relist and fob it off onto willing investors.

Also when looking at the debt covenants you look at one year govt bond rates. I guess there is a secondary market for these as I cannot find a quote on the nzdx.

Interest.co.nz says the 1yr is at 5.42%.

https://www.interest.co.nz/charts/interest-rates/government-bond-rates

property company bonds might do better over the medium term if inflation stays high, but then as we rely on central bank policy to make our investing decisions the inflation/deflation question remains the most important one for these markets.

Some people say the retiring baby boomers spending less, large amounts of debt and technology will keep inflation down, although Jeremy Grantham suggested that the lack of investment into mining and drilling almost guarantees inflation over the longer term as supply reduces. Who to believe it is hard to know and nobody does at the end of the day.

[Snoopy]

I will have to go over your numbers to clarify in my head how the return on investment is higher than the bank interest rate, if they borrowed to buy back the shares. a 2.82% ROA c.f. 4% interest rates. Not sure what ROB indicates as ROE is more commonly used. As always you are making me think which goes against my natural inclinations.


Assets (A) are funded by both shareholder equity (E) and borrowings (B).

I think the likes of Winner favours ROA, because that shows the underlying earning power of the assets, irrespective of how those assets are funded.

Generally I prefer ROE, because that shows the earning power of the shareholder equity after it has been leveraged up optimally by bank borrowings (it is the job of the company directors to ensure that the company is leveraged to the Goldilocks point (not too little, not too much, just right) ).

Nevertheless shareholders are still responsible for any borrowings the company makes, which are in the form of debt due to third parties. This is where the concept of ROB comes in. ROB represents the return on those borrowings, assuming that the internal equity cost part of the asset funding is ignored. This makes sense if you consider the company as a 'black box', with only external transactions to and from that 'black box' being considered.

SNOOPY

[winner69]

Snoops ….I prefer ROIC where the Invested Capital is Equity plus Debt

That way can see if an outfit is returning in excess of its cost of capital ….ie adding economic value

[Snoopy]

Another theory for buybacks is that companies have excess cash that can't find better investments than their own shares so they do buybacks but this is odd as just paying out the excess as dividends would bring the price of their shares back up.


You are quite correct. Increasing the dividend would boost the share price. But only until the share went ex-dividend, at which point the share price would fall back by the amount of the dividend.

OTOH, decreasing the number of shares on issue, via a share buyback, increases the earnings per share for all time going forwards. So any resultant increase in share price as a result of a share buyback should stick.



One theory I had is if you did not have enough debt, private equity would make a takeover offer load the company up with debt take the cash and a few years later relist and fob it off onto willing investors.


That is no hypothetical you have dreamed up. That is exactly what would happen, with private equity using the excess cash held within the company to fund their takeover. It is exactly this modus operandi that was used by Ron Brierley all those years ago when he used to pick off companies with lazy balance sheets on the NZX as he grew his Brierley Investments Limited empire.

SNOOPY

[Snoopy]

Thanks Snoopy
Also when looking at the debt covenants you look at one year govt bond rates. I guess there is a secondary market for these as I cannot find a quote on the nzdx.

Interest.co.nz says the 1yr is at 5.42%.

https://www.interest.co.nz/charts/interest-rates/government-bond-rates


This is very strange. I go to your link, click on the one year chart, and I get 4.20% as the government one year rate on 31-03-2023 and 4.54% on 28-06-2023.

However, if I go to this alternative link
http://www.worldgovernmentbonds.com/bond-historical-data/new-zealand/1-year/

I get a yield of 5.468% on 28-06-2023 (close to your figure Aaron) and 4.970% on 31-03-2023.

What is not in dispute is that one year NZ bond interest rates have risen over the period 31-03-2023 to 28-06-2023. If I use the figures from the worldgovernmentbonds website, the conclusion to my post 132 changes to the following:

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

The 'cumulative critical write down' amount going forwards that will cause the LVR banking covenant to be breached is:

$1,071.451m - $733,404m = $338.047m

A further property valuation reduction of: $338.047m / $1,071.451m = 30% (round figures) from the 31st March 2023 balance date is the critical figure . This would likely require the one year government bond rate to rise from 4.970% (as it was on 31-03-2021) to 4.970% x 1.3 = 6.461%. (1) As at 28-06-2023 the government bond rate is 5.468%. I think it is unlikely that the one year government bond rate will rise further to 6.461% at this stage in the interest rate cycle. But we can't be 100% sure. This could explain why management are taking some pro-active action selling off those Nelson and Blenheim Countdown properties. Looking at the way interest rates have kept rising since the 31st March 2023 balance date, I do predict more property write downs at the September 2023 half year reporting date for IPL. Whether that will 'spook the market again', I guess we will find out,

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

SNOOPY

[Aaron]

This is very strange. I go to your link, click on the one year chart, and I get 4.20% as the government one year rate on 31-03-2023 and 4.54% on 28-06-2023.

The link starts with the 10 year yield there is a chart tab box just above the graph and you need to select 1yr instead of the 10yr.

This is the treasury site. They are the ones that issue the bonds aren't they.

https://debtmanagement.treasury.govt.nz/individual-investors/kiwi-bonds/kiwi-bond-interest-rates

1yr 5%

[Aaron]

Snoops ….I prefer ROIC where the Invested Capital is Equity plus Debt

That way can see if an outfit is returning in excess of its cost of capital ….ie adding economic value

Using our 2023 Investore Example I guess ROIC would be.

$51,402/(675,020+385,037) = 4.8% for 2023 or 48,310/(855,042+351,530) = 4.0% for 2022

The equity portion of the denominator gets moved around a lot by the change in property valuations.

So at 4.8% ROIC (if I have this right) NZDX says Investore bonds are trading at 6.91% although this might jump around depending on who needs to cash up. And how would you measure the cost of equity. I am guessing $29,050dividends/ $675,020 equity = 4.3% Weighting 64% equity + 34% debt (4.3%*.64) + (6.91% * .36) = 5.23% WACC so currently subtracting economic value ON THE DEBT PORTION???

Just trying it as a quick exercise in my lunch break sorry have not given it sufficient thought but would be interested to know if i am on the right track.

I need to redo my calcs the NZDX site also shows me that IPL is only paying 2.4% to 4% on their bonds they mature in 2027 so interest rates might be negative by then.

Currently adding value while interest rates are suppressed.

[Snoopy]

This is very strange. I go to your link, click on the one year chart, and I get 4.20% as the government one year rate on 31-03-2023 and 4.54% on 28-06-2023.




The link starts with the 10 year yield there is a chart tab box just above the graph and you need to select 1yr instead of the 10yr.


Yes I saw the one year Tab, clicked that,, and the numbers I got were as reported:
4.20% as the government one year rate on 31-03-2023 and 4.54% on 28-06-2023.

There is a comment at the bottom of the page by 'DollarsandSense' which says:
"I think someone has entered some data incorrectly"

Not sure what data they are talking about, or even if they know what they are talking about.

SNOOPY

[Snoopy]

Using our 2023 Investore Example I guess ROIC would be.

$51,402/(675,020+385,037) = 4.8% for 2023 or 48,310/(855,042+351,530) = 4.0% for 2022


You have divided the profit before finance expense and tax by the sum of the shareholder equity and borrowings. Assets are funded by a combination of shareholder equity and borrowings. So I would argue you have calculated ROA rather than ROIC. Also by using earnings before interest and tax (EBIT) as your measure of profit you have taken out the variable connected to how the assets are funded, and also not considered the government tax rake off. Please note I am not saying you are wrong to do this. I am just pointing out explicitly what you have done to put it in context.



The equity portion of the denominator gets moved around a lot by the change in property valuations.


Yes absolutely right. And this may be what Winner was getting at when he says he uses 'Return on Invested Capital' is his preferred measure. If you buy a property and it appreciates in value, that does not change the amount of money you bought the property for. In that sense any capital gain you make on a property is not adding to your 'invested capital'. You should only use the capital you originally put up to buy the property to represent your invested equity. Thus you might define 'invested capital' as

shareholder equity + shareholder borrowings - the property revaluation reserve

If you worked out ROIC that way, missing out the property valuation reserve from the denominator, that would mean ROIC (as defined by me in this post) is higher than ROA, reflecting the fact that any capital gain you got is a 'free lunch', which it is - a 'desirable free extra' as your reward for playing in the property market game. However, I am not sure if this was the point Winner was making re ROA and ROIC. Perhaps he will clarify?

SNOOPY

[winner69]

Aaron and Snoops …..your points just show that ROIC isn’t the best way to look at property companies and banks. I forgot to mention that when I said (in response to a request) that ROIC was my ‘preferred’ metric over ROE or ROA

[Snoopy]

Using our 2023 Investore Example I guess ROIC would be.

$51,402/(675,020+385,037) = 4.8% for 2023

So at 4.8% ROIC (if I have this right)
NZDX says Investore bonds are trading at 6.91% although this might jump around depending on who needs to cash up.

And how would you measure the cost of equity. I am guessing $29,050dividends/ $675,020 equity = 4.3% Weighting 64% equity + 34% debt (4.3%*.64) + (6.91% * .36) = 5.23% WACC so currently subtracting economic value ON THE DEBT PORTION???


'Cost of Equity' in investment circles is generally worked out for a particular listed entity according to the formula:

'Risk Free rate of Return' + 'Beta' x ('Overall market rate of Return' - ''Risk Free Rate of Return')

where 'Beta' is an historical measure of how the volatility of the share you are looking at compares to the volatility of the overall market. Nothing whatever to do with any of the calculations you have provided above.

However if we put aside the above commonly understood definition of 'Cost of Equity', and return to the logic of your post, I guess you could consider that if a company has capital, the cost of the company renting that capital off shareholders could be considered the dividend, as that is the money the company has to pay out each year as a price for shareholders lending them that equity capital. However the logic of this thought does get strange if, for instance, a company decides not to pay a dividend. Does the cost of capital then drop to zero? I guess using this logic, when no dividend is paid, it does!

Next you are telling us that the 'cost of borrowing' depends on what some market player is prepared to buy IPL listed bonds for on the day. That figure does not necessarily reflect what the company is paying on those bonds. The company does not 'see' the fluctuations in any associated company bond prices affecting their everyday business. By my way of thinking you are going off the track here.

Finally you are 'weighting' the combination of cost of debt and the cost of equity as a weighted sum total? Yes that is how a more conventional 'cost of capital' model works. Technically I think the 'conventionalists' like to take into account how the debt equity ratio changes over the year as well. However, I prefer to use just the end of year figures. I calculate an equity ratio at EOFY2023 of:

675,020 / 1,080,288 = 62.5%

This is not the 64% you have used.

I feel you may have gone down a rabbit hole in this post. Maybe flick those ears back, have a bit of a sleep, eat a carrot, get your thoughts squared up and come back to us?

SNOOPY

[kiora]

Down the bottom all worked out for an investor?
Under "Balance Sheet Analysis"
"ROE (net income / shareholders' equity)"
https://www.marketscreener.com/quote/stock/INVESTORE-PROPERTY-LIMITE-30568742/finances/

PS not invested

[Snoopy]

Down the bottom all worked out for an investor?
Under "Balance Sheet Analysis"
"ROE (net income / shareholders' equity)"
https://www.marketscreener.com/quote/stock/INVESTORE-PROPERTY-LIMITE-30568742/finances/

PS not invested

Thanks for that reference, nice presentation. I guess it is all auto-generated by a spreadsheet. The projections for FY2024 look suspect. ROE predicted to be 4.85%, greater than ROA of 5.29%. I don't think it is possible to have ROA greater than ROE, so something funny is happening with the computer modelling here.

Personally when I calculate ROE I take the accumulated asset revaluations, adjusted for present day debt to equity ratio, off the equity total. If you include them, by just blindly using the equity listed in the annual report, you are effectively punishing a property company like this for having the foresight for investing in property assets that increase in value. Not what you want, when you are evaluating the success or otherwise of a property company.

SNOOPY

[Aaron]

'Cost of Equity' in investment circles is generally worked out for a particular listed entity according to the formula:

'Risk Free rate of Return' + 'Beta' x ('Overall market rate of Return' - ''Risk Free Rate of Return')

where 'Beta' is an historical measure of how the volatility of the share you are looking at compares to the volatility of the overall market. Nothing whatever to do with any of the calculations you have provided above.

However if we put aside the above commonly understood definition of 'Cost of Equity', and return to the logic of your post, I guess you could consider that if a company has capital, the cost of the company renting that capital off shareholders could be considered the dividend, as that is the money the company has to pay out each year as a price for shareholders lending them that equity capital. However the logic of this thought does get strange if, for instance, a company decides not to pay a dividend. Does the cost of capital then drop to zero? I guess using this logic, when no dividend is paid, it does!

I feel you may have gone down a rabbit hole in this post. Maybe flick those ears back, have a bit of a sleep, eat a carrot, get your thoughts squared up and come back to us?

SNOOPY

Cheers Snoop, way off track by the sounds of it. Realised IPLs cost of debt will be very low for quite some time after posting, although the NZDX might indicate what debt investors will require when IPL goes back to the market in a few years time all things being equal.

Seems reasonable to me that if a company is not paying a dividend the cost of equity is 0% although a shareholder shares in any gains from the capital reinvested. That is another reason why debt is less risky. You have a contractually enforceable interest payment and you rank higher than equity in the event of a bankruptcy.

[Aaron]

Aaron and Snoops …..your points just show that ROIC isn’t the best way to look at property companies and banks. I forgot to mention that when I said (in response to a request) that ROIC was my ‘preferred’ metric over ROE or ROA

Hey Winner what is IPLs ROIC based on the 2023 annual report??? Long form calculations would be handy.

[Snoopy]

Seems reasonable to me that if a company is not paying a dividend the cost of equity is 0% although a shareholder shares in any gains from the capital reinvested.


Such a comment would be sacrilege to any professional accountant reading what you have written. Nevertheless, I cannot help but to agree with you!

SNOOPY

[Snoopy]

This is what Investore said on property sales after slide 17 of the AGM address:
"While Investores balance sheet and portfolio are well positioned, the ongoing higher interest rate environment means the board will continue to focus on how to prudently manage capital. Accordingly, the board announced capital management initiatives with the release of Investores FY23 annual results, designed to manage gearing over the near term. These included the intent to sell selected non-core assets of approximately $25m-$50m, provided appropriate value can be realised for the assets. The net proceeds received from these investments, if they proceed, will be used to repay existing bank debt."

"Investore is also pleased to announce the adoption of a dividend reinvestment plan."

"The purpose of these initiatives is to ensure that Investore is well placed, to withstand further potential valuation headwinds, in case they eventuate, as well as preserve balance sheet headroom to pursue further strategic initiatives across its portfolio."

I see Countdown supplies 64% of Investores rental income (AGMPR2023 slide 14). So to call these two Countdown supermarkets on the block as 'non-core assets' sounds like corporate communication officer drivel to me.

Investore need the money to shore up their balance sheet before any more market related shocks tank the IPL share price further, and a 'capital call' on shareholders is required. I imagine both the Nelson and Blenheim Countdown supermarkets are currently among IPLs lower yielding assets (because of the high quality of the assets, which also means they should be easy to sell). That is how I read the situation.


Following Investores call, to look to sell two of their blue chip anchor Countdown stores (Nelson and Blenheim), I thought the announced change in discount rates over the year was worth a further look.

From AR2023 p42:
The 'big box retaill' portfolio has been valued at a discount rate of 5.38-11.0% (Avg 8.19%), up from 3.00-8.50% (Avg 5.75%) the previous year. This represents an increase of 8.19%-5.75%= 2.44 percentage points. Likewise the Terminal Yield is now 4.75-10.25% (Avg 5.5%), up from the 4.00-11.0% (Avg 7.00%). This is an decrease of 5.50%-7.00%= -1.50 percentage points.

IF the terminal yield (representing the discount of cumulative rental yield value on the property portfolio, following on from the short to medium term detailed future forecasting period) discount rate is reduced,
THEN that means value of that pool of collective far future earnings is worth more.
AND YET the overall Investore result for the year showed a large decrease in the discounted value of the property portfolio.

Logic suggests to me that the only way this is possible is for the value of the short to medium term earnings capitalised back to today to have taken a massive hit, more than wiping out the forecast longer term gains. I wonder if Countdown have now got Investore 'over a barrel' in the contract negotiation pit? (in figurative terms).

A very strange 'negotiation' with Countdown was reported on AR2023 p6:
"Investore has agreed with Countdown to expand the customer amenity at Countdown Rangiora, including the addition of an online fulfillment area and five new covered pickup bays. These improvements will deliver Investore a 7.5% per annum rent return on cost of up to $1 million over the remaining term of the lease. As part of this arrangement, Investore has also secured a four year lease extension at Countdown Morrinsville."

Morrinsville is in rural Waikato. So what has this to do with building new grocery pick up bays at Countdown Rangioira in greater Christchurch? The above wording makes it sound like the Morrinsville deal was a 'concession', in return for Investore spending $1m that they would rather not spend. Why Investore would not want to spend $1m (small change in the big picture) at a 7.5% investment yield return is not explained. Is a 7.5% investment not a good return, when set off against current bank borrowing costs?

From AR2023 p23
"During FY23 Investore refinanced two bank facilities totalling $75 million, extending their tenor by a further two years."
No doubt this refinancing was at the higher market rates prevailing today.

From AR2023 p4
"(Investore) Completed the acquisition of land at Hakarau Road, Kaiapoi, for $10.1m, and commenced construction of a new Countdown supermarket on this site targeting a 5 Green Star rating and delivering an expected yield on cost of 5.5%."

If the 7.5% yield referred top above is marginal, 5.5% must be below cost. Why have Investore signed a deal with Countdown, renting out their new supermarket at below cost?

Further on in AR2023 p21 we also get some information on 'turnover' rent top ups at Countdown supermarkets.

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

Countdown Turnover Rental

Countdown leases (which comprise 64% of portfolio Contract Rental) contain turnover-linked rental mechanisms under which additional turnover rent is paid when moving annual turnover (MAT) at a store exceeds a specified threshold. There has been a continued increase in stores that are paying turnover rent since 2018, with 30YET% of stores now paying turnover rent, up from 9% in FY18. Turnover rent has also
continued to increase across the portfolio on a like-for-like basis, to $1.4m as at 31 March 2023, up from $0.3m as at 31 March 2018.

A higher inflationary environment can help drive growth in nominal MAT, which is positive for Investore’s turnover rental income. In addition, historical data suggests that once stores exceed their MAT thresholds, they typically continue to generate turnover rental and do not dip below the threshold again.

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

AR2023 p21 goes on to display a 'turnover rent' graph, showing a $0.4m rise in the rent received over FY2023, with the text above suggesting that once a turnover rent threshold is reached, such rent payments are likely to continue. This seems very positive for Investore. So why has the short and medium term outlook for the company turned so negative? Perhaps if a Countdown supermarket does well enough to demand a rebuild, then the old supermarket is closed and all of the old onerous rent contracts (from a Countdown perspective) are torn up?

On p12 of AR2023, we are told what a good job SIML are doing at renegotiating rents on Investore's behalf:
"On behalf of Investore, SIML also negotiated 82 rent reviews during the year, over more than half of Investore’s portfolio by net Contract Rental1 which resulted in 3.3% rental growth on previous rentals. Of these rent reviews, 33 were CPI-linked rent reviews, delivering a 7.0% increase on previous rentals."

If 33 of the rent reviews delivered a 7% annual increase, and the average of all rent reviews resulted in 3.3% rental growth, what was the average rent review increase 'R' negotiated on the remaining 82-33= 49 agreements? Solving the equation below should tell us.

33x7+52xR=82x3.3 => R= 0.762%

That doesn't seem like a very good result! I wonder if more of Investore's tenants are playing 'hard ball' in rent negotiations then Investore are letting on?

SNOOPY

[Aaron]

Snoops I can't give you more good reps without spreading it around more. You would assume Investore(Stride) mgmt and Woolworths executives would have similar power in negotiations as it is mutually beneficial relationship.

But Investore would not be able to dictate to the tenant like say a big mall with a Mum and Pop retail shop. I would worry if Countdown/Woolworths start building or owning their own shops. I assume they don't already.

The whole discussion on cap rates is annoying as I imagine without central govt control of interest rates and money supply the debate would be on cash generation and return on investment rather than speculating on where interest rates will be in 2024.

You can buy IPL shares for a 6.47% gross yield according to the NZX site or 7.13% on their bonds maturing in Feb 2027. If interest rates stay high will dividends get cut? Or do we have a govt guarantee of low interest rates and easy money despite inflation? Based on today's prices investors have obviously chosen the latter.

[winner69]

Do stride/IpL still own Johnsonville Mall

There’s 15 vacant stores in it at the moment

[Snoopy]

Do stride/IpL still own Johnsonville Mall

There’s 15 vacant stores in it at the moment

I have just checked on the mall map.
https://www.johnsonvilleshoppingcentre.co.nz/store/store-map/

I see what you mean! Lots of shop number xx descriptions, rather than the name of a business that should be renting. On a positive note, still 82% tenanted. I see Zampelles is still there though. That is one of my 'go to' lunch stops when going in and out of Wellington. Good range of cabinet and hot food. Have you tried it?

Yes the Johnsonville Mall is still owned by Stride. The list of what 'town centre' precincts they own is on AR2023 p59. But a WALT of only 2.3 years! Is that when the bulldozer goes in?

There is an historical piece on when Stride acquired the mall back in 2015
https://www.stuff.co.nz/business/72384967/johnsonville-mall-owner-dnz-buys-string-of-countdowns

"The sale represented a yield of 6.5 per cent, which was quite low and was therefore a huge vote of confidence in the Wellington market."
"We are extremely pleased with the result. (seller)"

Blimey, now Investore is trumpeting how smart they are by developing a new supermarket in Kaiapoi, just out of Christchurch on a 5.5% yield. I can write the press release for that development off the cuff.

"The development represents a yield of 5.5 per cent, which is extremely low and is therefore a humongous over the top blue sky vote of confidence in the Kaiapoi market"
"We are insatiably pleased with the result. (seller)"

I wonder how pleased Investore shareholders should be?

SNOOPY

[Snoopy]

Snoops I can't give you more good reps without spreading it around more. You would assume Investore(Stride) mgmt and Woolworths executives would have similar power in negotiations as it is mutually beneficial relationship.


Allow me to explain how 'mutually beneficial' at Woolworths works. Woolworths orders food from suppliers on 60 day payment terms. Goods arrive at the store on a 'freight included' basis. Goods are put on shelf and sell within a few days. Woolworths banks the money for the goods they haven't bought yet. Eventually Woolworths pays their suppliers for the goods they sold a few weeks ago. So Woolworths clips the ticket without having to put any cash up front for the goods. It is called the 'capital light' food retail model. And Woolworths are the masters at it.

Woolworths would be no less ruthless when negotiating with their landlords. How many times have you seen a 'big box' successfully rebadged for alternative use? I expect Woolworths use their 'threatening to relocate' tactic with full force come rent renegotiation time.



But Investore would not be able to dictate to the tenant like say a big mall with a Mum and Pop retail shop. I would worry if Countdown/Woolworths start building or owning their own shops. I assume they don't already.


No need to lay out for bricks and mortar yourself if you can bully a landlord into doing it for you.

SNOOPY

[Snoopy]

The whole discussion on cap rates is annoying as I imagine without central govt control of interest rates and money supply the debate would be on cash generation and return on investment rather than speculating on where interest rates will be in 2024.

You can buy IPL shares for a 6.47% gross yield according to the NZX site or 7.13% on their bonds maturing in Feb 2027. If interest rates stay high will dividends get cut? Or do we have a govt guarantee of low interest rates and easy money despite inflation? Based on today's prices investors have obviously chosen the latter.


Investore have been quite canny with their funding in the past. The amounts and terms of Investore company bonds issued to date are as follows:

IPL010 April 2018 to April 2024: $100m bond at a bond coupon rate of 4.40%
IPL020 February 2022 to February 2027: $100m at a bond coupon rate of 4.00%
IPL030 August 2022 to August 2027: $125m at a bond coupon rate of 2.40%

It doesn't look like Investore will be going to the public soon to replace those April 2024 expiring bonds:
"$100 million of Investore’s senior secured fixed rate bonds (IPL010 bonds) will mature in April 2024, and consistent with Investore’s prudent and proactive approach to capital management, Investore is pleased to confirm that, post balance date, it has secured commitment from its lenders for a new three year bank facility to refinance these bonds."

I suspect borrowing at market rates from the banks will see Investore paying more than 4.4% on that $100m of expiring borrowings from April 2024. Yet the expected yield on their new Kaiapoi Countdown Supermarket is just 5.5% (AR2023 p4). That doesn't leave much of a yield margin does it? And this is assuming Investore has a tight rein on construction costs.

Aaron those 6.47% and 7.13% interest rates are on the secondary market. Investore does not pay those. Investore are locked into 4.40%, 4.00% and 2.40% as I have described above. Come April 2024, Investore will be exposed to market interest rates on the capital in that expiring IPL010 bond. If bank borrowing rates are 6%, that will mean an incremental interest bill of: $100m x ( 6.00% - 4.40% ) = $1.6m, kicking in for the FY2025 year. On the un-matured bonds, those lower coupon interest rates continue.

You ask if dividends are liable to be cut? If there is not enough take up on the recently announced dividend reinvestment plan, then I would say 'possibly'. One way of looking at a DRP is to consider it a 'dividend cut'.

On the subject of inflation and regulating lower interest rates, I feel the loss of tourism, post Covid-19 arriving, will continue to be a drag on NZ's external balance of payments for some time. That is likely to lead to a lower NZ dollar, which will, in turn, increase the overseas funded component of interest costs for domestic banks on lending within New Zealand. Consequently I do not see borrowers interest rates following inflation down, until the country's external balance of payments improves. And that may take some years. No guarantee of easy money, nor low interest rates is my view. If 'investors' are thinking the opposite, I would say those 'investors' are wrong. Hopefully those 'investors' do not include the board. But if the board are prepared to sign off a long term rental deal on a new Countdown supermarket in Kaiapoi at a loss, you do wonder.

SNOOPY

[FTG]

Investore have been quite canny with their funding in the past. The amounts and terms of Investore company bonds issued to date are as follows:

But if the board are prepared to sign off a long term rental deal on a new Countdown supermarket in Kaiapoi at a loss, you do wonder.

SNOOPY

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

Is it a triple Net Lease? What are the Rent Review terms E.g. Fixed annual increases or CPI + perhaps? Capped and collared ? etc etc.

The essence being that it may appear, from a cursory glance, to be an unprofitable exercise for IPL the first year or two. But basically they have front-ended inducement/incentives & then the proposition gets a very nice roll-on after a while and looks very good over the long term.

[Aaron]

Aaron those 6.47% and 7.13% interest rates are on the secondary market. Investore does not pay those. Investore are locked into 4.40%, 4.00% and 2.40% as I have described above SNOOPY

I appreciate that thanks Snoopy I was just pointing out in the "free" market investors are getting more yield for less risky bonds than they are for the shares. But then there is the cash is trash argument which in todays world is valid so I guess they are reasonably relying on inflation and capital gain.

[Snoopy]

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

What are the Rent Review terms E.g. Fixed annual increases or CPI + perhaps?

The essence being that it may appear, from a cursory glance, to be an unprofitable exercise for IPL the first year or two. But basically they have front-ended inducement/incentives & then the proposition gets a very nice roll-on after a while and looks very good over the long term.


I wouldn't expect Investore to be too specific on individual rent contracts (commercial sensitivity and all of that). But we do get 'snippets' of collective information such as below:

"Completed 82 rent reviews during FY23 across 130,000 sqm, comprising over half of the portfolio Contract Rental (p4 AR2023)."
"On behalf of Investore, SIML also negotiated 82 rent reviews during the year, over more than half of Investore’s portfolio by net Contract Rental(*) which resulted in 3.3% rental growth on previous rentals. Of these rent reviews, 33 were CPI (Consumer Price Index) -linked rent reviews, delivering a 7.0% increase on previous rentals." (AR2023 p12)

(*) Note: "Contract Rental is the amount of rent payable by each tenant, plus other amounts payable to Investore by that tenant under the terms of the relevant lease as at the relevant date, annualised for the 12-month period on the basis of the occupancy level for the relevant property as at the relevant date, and assuming no default by the tenant."

When I broke this down the quoted information further, in post 149:



If 33 of the rent reviews delivered a 7% annual increase, and the average of all rent reviews resulted in 3.3% rental growth, what was the average rent review increase 'R' negotiated on the remaining 82-33= 49 agreements? Solving the equation below should tell us.

33x7+52xR=82x3.3 => R= 0.762%

That doesn't seem like a very good result! I wonder if more of Investore's tenants are playing 'hard ball' in rent negotiations then Investore are letting on?


it did not sound favourable for the 'other' 49 rent agreements renegotiated! Investore admits above that more than half of the agreements (49) did not have a CPI related factor in their rent review.

SNOOPY

[Snoopy]

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

Is it a triple Net Lease?

Thanks for your response FTG. I am not as familiar with some of these 'building lease terms as you are so resorted to Google to interpret your reply.

A triple net lease (triple-net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance.

Call me naive. But I though all NZ commercial property leases were like that!.

SNOOPY

[Snoopy]

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

Is it a triple Net Lease? What are the Rent Review terms E.g. Capped and collared ?.

The essence being that it may appear, from a cursory glance, to be an unprofitable exercise for IPL the first year or two. But basically they have front-ended inducement/incentives & then the proposition gets a very nice roll-on after a while and looks very good over the long term.

Quoting from google again

Collar restrictions prevent the rental from falling below a predetermined level (sounds like good for landlords) , while the Cap restriction prevents the rental from rising above a predetermined amount (sounds like good for tenants). Essentially it reflects the best and worst case scenarios for both Landlords and Tenants.

p21 of AR2023 contains some information about this, in relation to Countdown.
"Countdown leases (which comprise 64% of portfolio Contract Rental) contain turnover-linked rental mechanisms under which additional turnover rent is paid when moving annual turnover (MAT) (*) at a store exceeds a specified threshold."
"A higher inflationary environment can help drive growth in nominal MAT, which is positive for Investore’s turnover rental income. In addition, historical data suggests that once stores exceed their MAT thresholds, they typically continue to generate turnover rental and do not dip below the threshold again."

(*)Note: Moving Annual Turnover (MAT) is determined by calculating the net sales over a 12 month period from April to March, with the calculation being done on a rolling basis.


IOW inflation will generally stop turnover dropping back below a certain turnover level, that has previously generated some 'extra turnover rent'. That 'turnover rent' does sound like a 'collar arrangement'?

Nevertheless that bar graph on AR2023 p21 is telling. It goes back six years. But for the last 3 years 'base rent' at Countdown has been stuck at $35.2m. This indicates no annual CPI adjustment in the Countdown rent contracts. The only increase has been the 'turnover rent adjustment'.

The increase in 'Countdown rent' increment for FY2022 was: $36.2m/$36.1m= 0.28%, and for FY2023: $36.6m/$36.2m= 1.10%

So it looks like rent from Countdown is increasing at well under the rate of inflation! (a defacto cap restriction?)

SNOOPY

[FTG]

I wouldn't expect Investore to be too specific on individual rent contracts (commercial sensitivity and all of that). But we do get 'snippets' of collective information such as below:

"Completed 82 rent reviews during FY23 across 130,000 sqm, comprising over half of the portfolio Contract Rental (p4 AR2023)."
"On behalf of Investore, SIML also negotiated 82 rent reviews during the year, over more than half of Investore’s portfolio by net Contract Rental(*) which resulted in 3.3% rental growth on previous rentals. Of these rent reviews, 33 were CPI (Consumer Price Index) -linked rent reviews, delivering a 7.0% increase on previous rentals." (AR2023 p12)

(*) Note: "Contract Rental is the amount of rent payable by each tenant, plus other amounts payable to Investore by that tenant under the terms of the relevant lease as at the relevant date, annualised for the 12-month period on the basis of the occupancy level for the relevant property as at the relevant date, and assuming no default by the tenant."

When I broke this down the quoted information further, in post 149:



it did not sound favourable for the 'other' 49 rent agreements renegotiated! Investore admits above that more than half of the agreements (49) did not have a CPI related factor in their rent review.

SNOOPY

Well done on the investigative work Snoopy. Makes interesting reading.

I reckon your findings re the IPL's portfolio 'rent (incl review process) profile' is likely reflective of what's been happening in the broader Commercial Property sector.

That being, whilst inflation was rather benign for a few years, less leases had CPI related clauses in them. Instead the market shifted more to model of fixed rent increases (if it be annually, 2 yrly etc), with perhaps a market review periodically thrown in for good order.

So maybe IPL has a few legacy leases in play here and hence they hang on tight until those market reviews kick in for the 49 lease cohort.

It would be interesting to know how they have structured the Kaiapoi lease, but understand that's not likely for now, with 'commercial sensitivities' in play. Maybe IPL have changed their approach in this 'new era'?

In saying that, albeit being a new building, I wouldn't be surprised if the lease was struck back prior to inflation getting off the benign mat.

[Snoopy]

Following the revelation (to me) that Investore has no employees, I thought it might be useful to restate expenses in a way that compares with other companies that do employ people. Effectively I am looking at what would happen if the 'contract work' was brought in house. Furthermore I am looking to compare those returns with similar property companies.



Property Expenses FY2021
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


Management expenses
$0m
$1.102m
$0m
$4.612m
$0m


Management Services Contracted
$1.102m
$0m
$0m
$0m
$0m



Other administration expenses
$0.831m
$0.831m
$11.888m
$2.652m
$2.700m



Direct property operating expenses
$8.701m
$8.701m
$25.762m
$16.753m
$29.0m


Accounting expenses
$0.250m
$0.250m
$0.194m
$0.201m
$0.300m


Performance fee expense
$2.076m
$0m
$0m
$0m
$13.7m



Asset Management fee expense
$4.965m
$7.041m
$0m
$0m
$12.8m



Expense Recoveries
$0m
$0m
$0m
($0.712m)
$0m




Total Operating Expenses {A}
$17.925m
$17.925m
$37.844m
$23.506m
$58.5m











Gross Income from rentals
$64.514m
$64.514m
$111.522m
$107.941m
$182.0m



Total Operating Expense to Rental Income ratio {A}/{B}
27.4%
27.4%
33.9%
21.8%
32.1%



Building Portfolio Valuation (avg) {C}
$966.5m$966.5m
$1,938m$1,841.9m$3,431.7m


Total Operating Expense to Operating Asset Ratio {A}/{C}
1.85%1.85%1.95%1.28%1.70%



Notes

i/ 'Building portfolio average value' for ARG is from Argosy thread post 368. 'Building portfolio average value' for 'Property for Industry' on post 5 of the PFI thread. 'Building Portfolio average value' for Investore is from post 243 on the Stride thread.2021

What constitutes a 'similar' property company is open for debate.

I have selected Argosy for four reasons:

1a/ At the end of Calendar Year date, and considering the big 8 property companies, Argosy was the closest in yield to 'Investore'. That is equivalent to saying it has an equivalent 'market risk' from an investor perspective.
1b/ Argosy does own some big box retail stores - like Investore - albeit making up only 12.5% of the total portfolio (Refer Argosy thread post 368).
1c/ Argosy no longer has external managers, having bought them out in 2011 (in contrast to Investore).
1d/ Argosy has a very high occupation rate of their properties of 99% (c.f. Investore 0.9% vacancy rate)

Furthermore I have selected 'Property for Industry' as a second comparator because:

2a/ They have long term stable tenants.
2b/ They have a very high occupation rate, 100% as of EOFY2021.
2c/ Property for Industry does not have external property managers (the external management contract was bought out in 2017).
2d/ The construction of the buildings in the portfolio is generally 'big box type', even though they are not used for retail purposes.
2e/ Building property valuation is on post 5 of the PFI thread.

Finally I have selected the 'Goodman Property Trust', as a third comparator because:

3a/ they operate 'big box buildings' (albeit not in retail) AND
3b/ they do have an external property manager (the same situation Investore is in).
3c/ Building property valuation for GMT averaged over the year is (from GMT AR2021):

0.5 ($3,074.0m + $3,789.3m) = $3,431.7m

3d/ they have a high portfolio occupancy rate of 98%



This post is a follow up to one of my 'Dogs verses Hyenas' series of posts in 2022. examining the relative merits of potentially internalising the management contract at IPL. The reference post that I have quoted above is from one of the glory years of property management: FY2021. FY2023 was a lot tougher for property managers. So how did those operating costs pan out under quite different market conditions? (those bonus payments have disappeared)! I am looking at IPL both as it exists now, compared with what it might look like if the 'contracted work' was brought in house. Furthermore I am looking to compare those 'running costs' with similar property companies.



Property Expenses FY2023
Investore As Presented
Investore with In House Staff
Argosy As Presented
Property For Industry As Presented
Goodman Property Trust As Presented


Management expenses
$0m
$1.013m
$0m
$5.170m
$0m


Management Services Contracted
$1.013m
$0m
$0m
$0m
$0m



Other administration expenses253
$1,434m
$1,434m
$10.575m
$2.806m
$3.000m
253


Direct property operating expenses
$10.730m
$10.730m
$31.760m
$17.598m
$36.8m


Accounting expenses
$0.250m
$0.250m
$0.217m
$0.264m
$0.400m


Performance fee expense
$0m
$0m
$0m
$0m
$0m



Asset Management fee expense
$6.158m
$6.158m
$0m
$0m
$17.6m



Expense Recoveries
$0m
$0m
$0m
($0.742m)
$0m




Total Operating Expenses {A}
$19.585m
$19.585m
$42.552m
$25.364m
$57.8m











Gross Income from rentals {B}
$70.987m
$70.987m
$124.323m
$110.167m
$213.8m



Total Operating Expense to Rental Income ratio {A}/{B}
27.6%
27.6%
34.2%
23.0%
27.0%



Building Portfolio Valuation (avg) {C}
$1,117m
$1,117m
$2,177m
$2,127.6m
$4,782.2m


Total Operating Expense to Operating Asset Ratio {A}/{C}
1.75%
1.75%
1.75%
1.19%
1.21%



Notes

i/ 'Building portfolio average value' for ARG is from Argosy thread post 677. 'Building portfolio average value' for 'Property for Industry' on post 10 of the PFI thread (note the results I am using for PFI are from the December 2022 year, the closest comparative period for the FY2023 year of the other protagonists). 'Building Portfolio average value' for Investore is: ($1033.2m+$1201.3m)/2=$1,117m (Stride AR2023 p33)

What constitutes a 'similar' property company is open for debate.

I have selected Argosy for four reasons:

1a/ At the end of Calendar Year date, and considering the big 8 property companies, Argosy was similar in yield to 'Investore'. That is equivalent to saying it has an equivalent 'market risk' from an investor perspective.
1b/ Argosy does own some big box retail stores - like Investore - albeit making up only 9.9% of the total portfolio (Refer Argosy thread post 677).
1c/ Argosy no longer has external managers, having bought them out in 2011 (in contrast to Investore).
1d/ Argosy has a very high occupation rate of their properties of 99.3% (c.f. Investore 99.5% occupancy rate by area)

Furthermore I have selected 'Property for Industry' as a second comparator because:

2a/ They have long term stable tenants.
2b/ They have a very high occupation rate, 100% as of EOFY2022.
2c/ Property for Industry does not have external property managers (the external management contract was bought out in 2017).
2d/ The construction of the buildings in the portfolio is generally 'big box type', even though they are not used for retail purposes.
2e/ Building property valuation is on post 10 of the PFI thread.

Finally I have selected the 'Goodman Property Trust', as a third comparator because:

3a/ They operate 'big box buildings' (albeit not in retail) AND
3b/ They do have an external property manager (the same situation Investore is in).
3c/ Building property valuation for GMT averaged over the year is (from GMT AR2022 balance sheet):

0.5 ($4,791.2m + $4,773.2m) = $4,782.2m

3d/ They have a high portfolio occupancy rate of 99.5%

SNOOPY

[Snoopy]

Do property managers 'do their bit' for looking after unit holders in bad times? This is the discussion topic relating to post 161.

The dogs vs hyena allegory on this subject is that the hyenas (property managers) rip into the carcass (manged properties) first 'eating their fill' while what remains is what is on the plate for the dogs (the shareholders, i.e. us).

In the area of management expense to asset ratio, there was a 'big push' a few years back from certain leading market property players to stop using wild hyenas -with a seemingly uncontrollable appetite-, and instead use domestically trained in house hyenas, that would feed from the menu as determined by the property company that trained them. Of the four protagonists looked at here, two still use wild hyenas (Investore and Goodman) while Property for Industry and Argosy use their own company trained in house hyenas. But just because a hyena is 'house trained', that doesn't stop it being greedy.

The example making that point here is the Argosy 'house trained hyena', which turns out to be the greediest of the lot! Perhaps that is a slightly unfair observation, given that Argosy is the only one of our four protagonists here that manages a proportion of their portfolio that are office buildings - more tenants in the same space take more managing. But it does call a lie to the myth that 'house trained hyenas' are always better for the dogs.

Of the four protagonists, it is Property for Industry (PFI) -with their company trained hyena- that is the most economical to feed, both in good times and in bad. In fact all the protagonists have reduced their fee-to-asset ratio by at least 10 basis points as good times (FY2021) turned to bad (FY2023). Argosy did better with their fee to asset expense ratio down by 20 basis points (albeit still ending up as the equal most expensive), while Goodman (GMT) really surprised by trimming their 'fee to asset' ratio by a massive fifty basis points, to be (almost) on par with PFI on a cost basis. Impressive as unlike PFI, GMT still uses wild hyenas.

How did GMT look after their unit holders so well (in relative terms anyway) as the property market turned tough? Their somewhat egregious 'bonus fee', which made up 23.4% of operating expenses in good times (FY2021) dropped to nothing. Perhaps the real lesson here is that when a big property player is behaving badly (in a management expense to asset ratio sense), - but then comes good- it is more 'noticeable' than if a good manager in good times only gets 'just a little bit more efficient' as the property market turns for the worse.

Management expense to income ratio did get worse as the property market headed south (the sole exception being GMT for the reason I have explained above.) This is not surprising. Company wages still have to be paid to those looking after the operational aspects of their company property portfolios, no matter what the rent return from those properties is doing. Ironically the worst performer in the good to bad transition in this regard was PFI. But again this stands to reason. PFI -being the leanest operator in good times- meant there was less opportunity to cut in house costs in bad.

To summarise, yes all the property managers (be they contracted or in house) did 'do their bit' to 'contain costs', as property market conditions went south. What has made Investore look bad in this comparison is that underlying property values at Investore have fallen more in value, in relative terms, than the other protagonists. So reducing operating expenses (the numerator) while property values (the denominator) are shrinking just as fast makes it look like little progress was made in terms of the 'operating expenses' to 'asst value' ratio. By contrast, the property company where the values of the properties held reduced the least (PFI and GMT) , got an immediate benefit. Even a small reduction in expenses reduced the 'operating expenses' to 'asset value' ratio. Little work making a bigger impact looks good on paper.

SNOOPY

[Snoopy]

Actual dividend paid over FY2021: 4x $6.995m = $27.980m


AFFO for FY2021 = $27.801m


Normalised profit for the year FY2021: $24.316m Calculation: 0.72($29.949m+$3.553m+$0.294m-$0.024m) = $24.316m



I will leave readers to decide if they think that the current dividend payout policy is sustainable.


We are two years down the track in result terms. Time to front up with an answer.
Did the dividend payment turn out to be sustainable or not? (For those who came in late. the acronym AFFO stands for 'Adjusted Funds From Operations'). According to some, AFFO is the best measure of the dividend paying capability of a company, such as Investore.




FY2021FY2022FY2023


Actual Dividend Paid
$27.980m$28.808m$29.050m


AFFO
$27.801m$26.187m$28.618m


Normalised Profit
$24.316m$24.180m$25.373m



Notes: Normalised Profit Calculations

FY2021/ nNPAT= 0.72($29.949m+$3.553m+$0.294m-$0.024m) = $24.316m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for a one off 'swap termination finance expense' loss, a loss booked on a rental guarantee and a gain made on the fair value of financial instruments.

FY2022/ nNPAT= 0.72($34.265m-$0.157m-$0.576m+$0.052m) = $24.180m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for income from a swap termination, the gain on the disposal of an investment property and a loss made on the fair value of financial instruments.

FY2023/ nNPAT= 0.72($35.207m+$0.033m) = $25.373m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for a loss made on the fair value of financial instruments.

Whichever way you measure it, the dividend payment rate still looks unsustainable. So what happened to the company borrowings over that time?

SNOOPY

[Snoopy]

Whichever way you measure it, the dividend payment rate still looks unsustainable. So what happened to the company borrowings over that time?





Borrowings
Incremental Annual Borrowings
Incremental Properties Purchased
Annual fair value Adjustment


EOFY 2020
$(236.946m)


EOFY 2021
$(277.363m)
$(40.417m)
$133.647m
$139.287m


EOFY 2022
$(351.530m)
$(74.167m)
$73.784m
$91.017m


EOFY 2023
$(385.037m)
$(33.507m)
$34.060m
$(185.246m)


Total

$(148.091m)
$241.491m
$45.058m



We are looking at a big increase in borrowings over three years, although this is more than offset by the inclusion of new property assets (and older property revaluations) on the other side of the ledger. However the banks have revised their loan covenant to demand that overall loans make up no more than 52.5% of property assets. If we consider what has happened over the last two years on an incremental basis, that would mean new loans should be no higher than:
0.525x ($241.491m + $45.058m)= $150.438m

That new incremental debt ceiling leaves very little 'wriggle room' above the actual net new incremental loans taken out ($148.091m). Are the banks in defacto control of Investore now? These kinds of numbers would suggest they might be, which would explain why two core IPL Countdown supermarket properties, one in Blenheim and the other in Nelson, are now for sale. And why a Dividend Reinvestment Plan has been quickly brought into play! Let's hope enough people sign up for that to allow 'top up borrowing' to 'pay the dividend' to cease.

SNOOPY

[Snoopy]

This is what Investore said on property sales after slide 17 of the AGM address:
"While Investores balance sheet and portfolio are well positioned, the ongoing higher interest rate environment means the board will continue to focus on how to prudently manage capital. Accordingly, the board announced capital management initiatives with the release of Investores FY23 annual results, designed to manage gearing over the near term. These included the intent to sell selected non-core assets of approximately $25m-$50m, provided appropriate value can be realised for the assets. The net proceeds received from these investments, if they proceed, will be used to repay existing bank debt."


Investments make a positive contribution to a company when the return from the investment exceeds the cost of holding them. Investore has multiple sources of funding which include fixed rate bonds and some bank financing. We can get some idea of the cost of funding by dividing the interest paid during the year, by an estimate of the average funds drawn down over that year. To estimate that average draw-down balance, I take a 'triangulated average' of the the borrowed funds balances declared at reporting dates. These are the borrowings owed at the start of the financial year, the borrowings owed at the end of the financial year, and the borrowing balance at the interim reporting date in the middle.

Borrowed Funds Average Estimate = ($351.530m+$387.576m+$385.037m)/3= $374.704m

The finance expense for the year was $16.287m

This gives an indicative average interest rate of: $16.287m/$374.704m = 4.35%. If 4.35% seems low, remember IPL030 bonds carry a coupon rate of 4%, the IPL020 bonds are on a coupon rate of 2.4% (both with 2027 maturing dates) and even the IPL010 bonds that mature in April 2024 are only at a coupon rate of 4.4%. Nevertheless with refunding these $100m worth IPL010 bonds, rolling over at a higher rate in April 2024, borrowing costs should tick higher. Given this, I find it somewhat galling to learn that the new Countdown development in Kaiapoi is due to be rented out on a projected 5.5% yield. That doesn't leave much of a profit margin. I shudder to think that when the remaining two sets of IPL bonds roll over in 2027, that lease deal for Kaiapoi Countdown could even end up being loss making for Investore.

Nevertheless there was some further information on the 'turnover rent' clauses in Countdown contracts (including this one) declared on slide 8 in the HY2023 presentation.

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

Turnover rent

Turnover income and percentage of stores above turnover threshold

(Turnover income and turnover thresholds are as at and for the 12 months to 30 September 2022 and are based on unaudited sales figures.)

The proportion of Countdown stores with sales over turnover thresholds has doubled since March 2018, with 26% of the Countdown portfolio now paying 'turnover rent'.

• Countdown leases (which comprise 63% of portfolio Contract Rental) generally contain a five yearly review of base rent and MAT (Moving Annual Turnover) relative to thresholds. When MAT is higher than the turnover threshold at the review date, the base rent is increased by the three-year average turnover rental paid.
• All the Countdown-anchored portfolio is subject to a ‘review event’ over the next three financial years:
• 78% of stores have a turnover rent review event, which will result in an uplift in base rental if store turnover is above the MAT threshold.
• 11% of stores (which are currently below the turnover threshold) have a fixed uplift of between 3–5% over the next 18 months.
• 11% of stores have an expiry event

.• For example, in FY25, 48% of the Countdown portfolio has a rent review event: 17% of the Countdown portfolio is over turnover threshold and generating turnover income; 20% of the Countdown portfolio is between 80 – 100% of turnover threshold; and 11% is less than 80% of turnover threshold.

• Investore’s portfolio comprises 61.1 hectares of commercial property with an average site coverage of 41%, providing future development opportunities.

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


It does sound like there will be some 'rent raising relief' before, those likely sharply higher funding costs kick in over 2027.

SNOOPY

[Snoopy]

Notes: Normalised Profit Calculations

FY2023/ nNPAT= (1-0.28)($35.207m+$0.033m) = $25.373m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for a loss made on the fair value of financial instruments.


I have been assuming that over the long term tax at Investore was being paid at a rate of 28%. My table below suggests this was a wrong assumption. Why does this matter? If the tax bill was not as high as I had assumed, this means the shortfall of after tax earnings to dividends may not be as I had assumed.



FY2019FY2020FY2021FY2022FY2023



Profit before other expense/income and income tax {A}$26.993m$26.749m$29.949m$34.265m$35.207m



Current tax expense (AR Note 7.3 'Tax') {B}$5.341m$5.559m$3.652m$4.925m$4.972m



Tax paid - cashflow statement {C}$5.308m$5.387m$4.395m$4.711m$5.298m




Implied Current tax rate {B}/{A}19.8%20.8%12.2%14.4%14.1%




From AR2021 p7
"income tax expense (was) $2.2 million lower than it would otherwise haven been due to the reintroduction of building depreciation deduction claims for commercial properties from April 2020."
But even if we add that $2.2m back, the tax rate for FY2021 works out to be just: $5.842m/$29.949m= 19.5%

An explanation of how the nominal tax rate of 28% was reduced to something significantly less may be found in section 7.3 of the annual report, sub-titled 'income tax'. So let's have a deep dive into that to see if we can figure out what is going on with the tax rates.

SNOOPY

[Snoopy]

An explanation of how the nominal tax rate of 28% was reduced to something significantly less may be found in section 7.3 of the annual report, sub-titled 'income tax'. So let's have a deep dive into that to see if we can figure out what is going on with the tax rates.


While others settle down to tackle the weekend crossword, I have decided to launch in to the great section 7.3 puzzle. To make things easier I will look at what happened in FY2022 (as referred to in AR2023), For that was a more typical year without huge property write downs of FY2023. The following is my 'expanded with explanation' version of the table found in section 7.3.



Calculation Detail



Profit before Income tax for FY2022$125.806m



=> Prima facie Income tax @28%${35.226m)($125.806m x 0.28 = $35.226m)



add back Notional tax on property valuation gains (not chargeable)$25.485m($91.017m x 0.28 = $25.485m, AR2023 p29)



equals Base Current Tax Expense (excluding revaluations)$(9.741m)



add back Notional tax on property sold: Maclaggan St,, Dunedin (not chargeable)$0.161m($0.576m x 0.28 =$0.161m, AR2023 p29)



add back tax effect of Lease liability on property sold (1)$0.018m



Subtract Tax on financial derivative movement$(0.015m)($(0.052m) x 0.28= $0.015m, AR2023 p29)



add back Refund of tax on non-taxable income$0.083m( Cannot find more details )

100m

add back Refund of tax on other permanent differences$0.101m( Cannot find more details )



add back tax effect of Depreciation (2)$4.461m



subtract Non-deductable expenses tax (3)$(0.053m)( $0.190m x0.28= $0.053m, AR2023 p53)



less Temporary differences (4)$(0.040m)(unable to find source)



add back Losses Utilised (5)$0.100m(unable to find source)



equals Current Tax Total$(4.925m)




Notes

(1) I am not sure how this entry relates to the MacLaggan St Dunedin St property sale as outlined in the line above, the only documented property sale during the year. Generally a lease liability relates to the tenant, not the landlord. Could it be that the anchor tenant took on a site that had one or more smaller sub tenancies that they were not interested in? Some big box developments have a cafe on site run by a third party as an example. To get around this, maybe Investore leased those sub tenancies back from the anchor tenant? This is all pure speculation on my part, as I struggle to explain why a landlord (Investore) has lease liabilities, outside of the context of 'leasehold land'.

(2) This is the key entry in the table. I believe this tax entry is related to depreciation claimed each year. That depreciation is not listed separately anywhere else in the annual report. So it looks like it is included as part of direct property related expenses' in the income statement.

When a building is recognised as increasing in value over the year, the depreciation charge on those assets goes up as well. But only for reporting to shareholders purposes. As far as the IRD is concerned, the buildings value remains on the Investore books at 'construction cost' or 'acquisition cost' on a second set of Investore accounts that only the IRD reads.

From an IRD perspective, IF the depreciation costs are recorded in the annual report at a level that is too high (as a result of property revaluations), THEN this means the 'operating profit', -as recorded in the annual report-, (which is set off against those too high depreciation expenses) will be too low. Thus the IRD will be looking for 'more tax' than Investore superficially claims it owes, given Investore's declared operating profit. However, the $4.461m depreciation tax adjustment shown in the above table will result in the company paying 'less tax'. The conclusion must be that I have no idea what I am talking about on this issue :(

(3) This figure fits with audit fees not being deductible for tax. Why would audit fees not be deductible? One counter-argument is that actually they are. And the fact that the $53m of tax reduction from non-deducible expenses just happens to align with the audit fees is a co-incidence. IOW the $53m comes from an unrelated expense area that was not further disclosed. Another possibility that I have considered is that the audit fees have been previously claimed as an expense by the parent property manager Stride. So when the overall Stride auditing fees were apportioned amongst their managed property owning units, of which Investore is one, it would be 'double claiming' to claim that tax back again. All of this is my own speculation, so make of it what you will.

(4) Deferred tax is provided, using the liability method, on all temporary differences between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. This kind of tax adjustment is termed a 'temporary difference'. I thought this is what I was talking about under note (1), albeit in this context $0.040m seems a very small adjustment. However AR2023 p55 spells out other kinds of temporary difference:

i/ tax asset arising from loss allowance;
ii/ tax liability arising from certain prepayments and other assets; and
iii/ tax asset/liability arising from the unrealised gains/losses on the revaluation of interest rate swaps

I suspect this $40k adjustment relates to one or a combination of all of the above.

(5) If existing losses are utilised in the current financial year it means that less income tax is payable.

SNOOPY

[Snoopy]

While others settle down to tackle the weekend crossword, I have decided to launch in to the great section 7.3 puzzle. To make things easier I will look at what happened in FY2022 (as referred to in AR2023), For that was a more typical year without huge property write downs of FY2023.


As you can see from my post 167, I did finish the 'crossword' over the weekend. But rather than get 'bogged down' in all that detail, I am going to edit down my table concentrating just on the 'nitty gritty'.




Calculation Detail


Profit before Income tax for FY2022$125.806m


=> Prima facie Income tax @28%${35.226m)($125.806m x 0.28 = $35.226m)


add back Notional tax on property valuation gains (not chargeable)$25.485m($91.017m x 0.28 = $25.485m, AR2023 p29)


equals Base Current Tax Expense (excluding revaluations)$(9.741m)


add back Summed 'rats and mice' tax adjustments$0.355m


add back tax effect of Depreciation (2)$4.461m


equals Current Tax Total$(4.925m)




Notes

(2) This is the key entry in the table. I believe this tax entry is related to depreciation claimed each year. That depreciation is not listed separately anywhere else in the annual report. So it looks like it is included as part of direct property related expenses' in the income statement.

When a building is recognised as increasing in value over the year, the depreciation charge on those assets goes up as well. But only for reporting to shareholders purposes. As far as the IRD is concerned, the buildings value remains on the Investore books at 'construction cost' or 'acquisition cost' on a second set of Investore accounts that only the IRD reads.

From an IRD perspective, IF the depreciation costs are recorded in the annual report at a level that is too high (as a result of property revaluations), THEN this means the 'operating profit', -as recorded in the annual report-, (which is set off against those too high depreciation expenses) will be too low. Thus the IRD will be looking for 'more tax' than Investore superficially claims it owes, given Investore's declared operating profit. However, the $4.461m depreciation tax adjustment shown in the above table will result in the company paying 'less tax'. The conclusion must be that I have no idea what I am talking about on this issue :(

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

If we go back to Part 1 of this series, the declared operational profit over FY2022 (i.e. excluding property valuations) was $34.265m.

Using the 'base current tax expense' calculated above I get a tax rate of:
$9.741m/$34.265m= 28.4% (pretty close to the standard 28% company tax rate)

But if I use the 'current tax total', the tax rate drops to:
$4.925m/$34.265m= 14.4% (pretty close to HALF the standard 28% company tax rate)

The above simplified table shows that it was the 'depreciation tax adjustment' that allowed this massive reduction in the tax bill to happen. And remember we are talking about FY2022 when the tax deduction for depreciation on commercial buildings had been reinstated. How is Investore getting out of paying tax like this? It doesn't seem like it can be real.

SNOOPY

[Snoopy]

When a building is recognised as increasing in value over the year, the depreciation charge on those assets goes up as well. But only for reporting to shareholders purposes. As far as the IRD is concerned, the buildings value remains on the Investore books at 'construction cost' or 'acquisition cost' on a second set of Investore accounts that only the IRD reads.


I am doing a bit more sleuthing, trying to get a handle on these depreciation numbers. The most recently fully documented acquisition by Investore that I can see is the Briscoes/Rebel Sport big box complex at 4 Carr Road in Mt Roskill, Auckland.

From AR2022 p17 "4 Carr Road, Mt Roskill, Auckland, acquired in August 2021 for $36.0 million, with a WALT of 10 years at the time of acquisition."

The 6th August 2021 press release gives further details:
"The property is a 1.1 hectare, high profile, fully occupied site anchored by Rebel Sport and Briscoes with two other retail tenancies. It is located immediately adjacent to Investore’s existing property on Carr Road which is occupied by Bunnings Warehouse, and takes Investore’s aggregate land holding at Carr Road to 3.85 hectares. The property was extensively redeveloped in 2019 and comprises 5,332 sqm of net lettable area with a weighted average lease term of 10 years as at the date of settlement. The initial passing yield on acquisition is 4.0% and settlement is expected to occur in August 2021."

1.1 hectares is 11,000 square metres. So we can see the big boxes occupy around half of the acquired land, the rest presumably being utilised as car parks.

In AR2022 p50, the 4 Carr Road property was valued at $36.250m, value that had shrunk to $30m a year later (AR 2023 p40)

The breakdown in a valuation from June 2021 (FY2022) may be found here:
https://www.oneroof.co.nz/estimate/4-carr-road-three-kings-auckland-city-auckland-2089587

$29.3m (improvements) + $9.1m (land) = $33m (total)

The improvement value had gone up by 159% since the buildings were last rated in 2017. I am guessing that whatever was there in 2017 was demolished to make way for the new Bunnings and Rebel Sports big box stores. So that $29.3m would be close to the acquisition price of the buildings, with the land likely shouldering the subsequent FY2023 year depreciation.

The straight line depreciation rate for buildings is 1.5% of the original cost price.
https://www.ird.govt.nz/-/media/project/ir/home/documents/forms-and-guides/ir200---ir299/ir260/ir260-2020.pdf

So I am estimating the annual depreciation charge on this acquisition to be:
0.015 x $29.3m = $0.440m

There are 44 big box properties in the Investore portfolio. Some are larger some are smaller than 4 Carr Road. But a quick and dirty depreciation assessment on this portfolio, I think would show an annual whole of portfolio depreciation charge of:

$0.440m x 44 = $19.36m

That figure is likely to be too high because it is based on FY2020 construction costs and earlier builds would have been done at historical construction prices. If the average age of a big box in the Investore portfolio is 10 years, and construction costs have doubled over that time period, this would suggest an annual depreciation charge at Investore of: $19.36m/2= $9.68m.

SNOOPY

[Snoopy]

add back tax effect of Depreciation (2)$4.461m



Notes

(2) This is the key entry in the table. I believe this tax entry is related to depreciation claimed each year. That depreciation is not listed separately anywhere else in the annual report. So it looks like it is included as part of direct property related expenses' in the income statement.


Either the plot is thickening or I am thickening. As yet, I am not quite sure which!

I had another look at the AR2023 'Statement of Comprehensive Income' (AR2023 p29). That $9.649m entry for 'direct property expenses over FY2022? It is broken down under Note 2.1 (AR2023 p37). And guess what? There is nothing in that breakdown that suggests any depreciation is included! IOW my suggestion on where the depreciation charge was hidden looks to be wrong.

After studying the statement of Comprehensive Income again, I can't see where the annual depreciation charge might be hiding.

So how is it that a property owning company can produce a statement of comprehensive income with no allowance for any depreciation, and yet seemingly claim back tax a result of depreciation ($4.631m). (AR2023 p54)? Baffling, or am I just getting thicker?

SNOOPY

[Snoopy]

https://www.oneroof.co.nz/news/two-south-island-countdown-supermarkets-for-sale-43632

Probably real estate agent hype but if it is to be believed why would they be selling. Property company overtrading again? Does this disguise poor performance. Beagle pointed out a while ago how the KPG earnings did nothing for 20yrs(I think) and the share price of property companies has come up again on a thread somewhere. Without a decent yield for your purchase price the bonds provide a better yield for less risk, although high inflation may change this dynamic. Although raising rents as tenants are struggling might be difficult.

NZX-listed Investore Property is selling two of its regional South Island Countdown supermarket properties, both with long leases to General Distributors Ltd, owned by a subsidiary of Australia’s ASX-listed Woolworths Group.

The supermarkets for sale are in Stoke, Nelson and the prosperous regional centre of Blenheim, an area that has outstripped New Zealand’s GDP growth over the past two decades.

Thompson says single-tenanted, large-format retail properties like these, and especially those categorised as being an essential service provider, are held in high regard among investors because they’re seen as providing a defensive income with minimal management.

“Retail assets of this calibre seldom become available for that reason. They’re very tightly held,” he adds.

Well you can't accuse Investore of over-trading recently. Neither of those two 'blue chip' supermarkets put up for sale at either 12 Putaitai Street, Stoke, Nelson., or 51 Arthur Street Blenheim have sold. The Blenheim site was reported in August 2022 as a 'tender sale', with tenders closing 7th September 2022.
https://www.oneroof.co.nz/news/blenheim-countdown-for-sale-with-long-lease-42007

Rent was listed as $778,160 per year. Assuming that figure has been increased by 7.1%, as per the CPI rent adjustment in the Interim Presentation for HY2024, slide 7, that rent is now: $778,160x1.071=$833,409. Over the three years to July 2023, the rating valuation of the property increased by 76% to $12.050m
https://www.oneroof.co.nz/property/marlborough/blenheim-central/51-arthur-street/aQ9AZ

Thus the estimated gross rental yield on the property today, based on the rating valuation, is: $0.833409 / $12.050m = 6.9%

Interestingly when I click the tab 'oneroof property estimate', it comes up with the message that there are insufficient market sales to determine 'fair value'. However if Investore are bragging about opening a new Woolworths supermarket at Kaiapoi in December with a yield on cost of 5.5%, it would make no sense to sell another top line supermarket at a yield of 6.9% to fund it. So it is clear that Investore would want a lot more money than even the drastically increased rating value of $12.050m.

Meanwhile, the other property on the 'to sell' list, the supermarket at Putaitai Street, Stoke, Nelson has a September 2021 rating valuation of $12.3m.
https://www.oneroof.co.nz/property/nelson-bays/stoke/12-putaitai-street/JnODR

If the rent is similar to Blenheim, then Investore will surely want a similar premium that applied to that store at sale time.

It is interesting that more than a year after both of these properties have been put up for tender, no sale has resulted for either.

Speaking at the launch of the tender process in August 2022, the selling agent from Whillans Realty Group, Bryce Clark says:
"They’re expecting a lot of interest in the property. Its long lease to Countdown and investment size will appeal to family trusts, local syndicates and high net worth investors."

Does 'a lot of interest' include 'zero interest?' Well zero is a whole number, so I guess the answer to that question is 'yes'. As a real estate agent once relayed to me, 'zero interest' is a signal that your asking price is too high. It is interesting that Investore do not know the value of the stores they are marketing for sale, yet are very keen to sign up a new store at a yield on cost of just 5.5%.

I get the feeling that I may have had a lucky escape by not investing in Investore.

SNOOPY

[Aaron]

Thanks for the update Snoopy.

Lucky escape alright 42% capital loss over the last two years.

A 5.5% yield for a new store? I guess actual depreciation on a large warehouse type building is pretty minimal and correct me if I am wrong most of their debt is bonds in three lots IPL 010 020 030. $100,000,000 matures in April next year current paying 4.4% on this. The debt maturing on August 2027 $125,000,000 was at only 2.4%, that must surely qualify as return free risk, what idiot would have purchased these.

I wonder what rate their new bonds in April 2024 will sell at? currently on the secondary market they are 7.01% so 7.01 - 4.4 = 2.61% on $100,000,000 equals an additional 2,610,000 in interest each year. That is only 8% of last years operating cashflow, but on $350,000,000 (ipl 010+020+030) that is $9,135,000 or 29% of 2023 operating cashflow.(more if the difference between 2.4% and 7% is considered although the long maturities reduce the risk of dwindling dividends and debt is only 36% of assets. The value of the properties are based on an average 5.7% capitalisation rate.

What if this capitalisation rate goes up instead of down as expected?

I guess they are looking at capital gain and maybe potential buyers of the Blenheim and Nelson stores are basing the properties value on yield rather than some distance hope central banks will go crazy and print money and drop interest rates. A valid investing strategy based on the last 30 years.

I guess the high finance guys see interest rates back down to 2-3% before they need to roll over the bonds. I wonder if Alokhdir is on their board.

Sorry Snoops 5seconds thinking about your post and the issues for IPL leads to many ignorant questions and very few answers. At least the yield on the shares is currently higher than the interest on the bonds now, so you are getting a return for equity risk now.

Full disclosure, I purchased some IPL010 a while back at 7%, currently glad I bought the bonds rather than the shares. Even if interest rates drop and push up share prices my yield remains attractive in a low interest rate environment.

Although I still need to come up with some sort of coherent investing plan.

Hopefully some investing professional on here can tell me. If the yield on an investment is less than the borrowing costs then aren't you burning capital?

If so then isn't the property sector at ridiculously low yields only relying on low interest rates and high inflation to make a profit?

As Snoop points out why would you sell a 6.9% yield for a 5.5% one. I guess in property it is always location, location, location and the chance for tax free capital gain.

[Snoopy]

I get the feeling that I may have had a lucky escape by not investing in Investore.


Notwithstanding the property sale fiasco, I talked about in post 171 above, that half year announcement was a bit of a shocker.

On 3rd October 2023 Investore gave warning that it expected a gross reduction in fair value of their property portfolio of $70m for the half year ended 30th September 2023. However 6 weeks later, on 16th November 2023, we learn that the actual reduction in fair value was $82.7m. That is a pretty big disconnect between expectation and reality over just a 41 day time frame.

There seems to be a jargon disconnect with the term 'distributable profit' and the profit they expect to distribute. Cash guidance for FY2024 is now 7.2cps compared to a distributable profit of 7.9cps. Why aren't Investore distributing that extra 0.7cps? Because considering future cashflows and the debt to asset banking covenants the board want to satisfy, it would be imprudent to make such an extra distribution. So the 'distributable profit' is not really distributable after all! On 30th August 2023 (a week after the National party had joined Labour in signalling the removal of depreciation deductions for commercial buildings) we heard the board was 'targetting an annual cash dividend of 7.9cps for FY2024'. Yet ten weeks later and only six weeks into the new financial year the 7.9cps 'dividend target' had been abandoned!

What set off the alarm bell for me was that this announced dividend reduction came hot on the heels of the dividend reinvestment plan announced on 28th June 2023, which was in place for the most recent quarterly dividend payment. Blow by blow, the dividend issue is as follows:

a/ On 25th September 2023 we learned that 2,060,544 shares at a price of $1.223701 had been issued to shareholders from the first quarterly dividend that was eligible to participate in the dividend reinvestment plan. That represented a payment of: 2.060544 x $1.23701 = $2.549m.
b/ The number of IPL shares on issue that were eligible for the dividend was 367,502,635.
c/ If all shareholders eligible for the cash payment of 1.975cps had taken it in cash, then the cash payment would have been: 367.502635m x $0.01975 = $7.258m.
d/ So it looks like $2.549m/$7.258m= 35.1% of all shares held chose to participate in the DRP.
e/ If only (100%-35.1%=) 64.9% of shareholders took the cash, that means the real cash payout per share was: 0.649x 1.975c = 1.281cps.
f/ 1.281cps is an annual dividend rate of just 4x1.281c= 5.124cps, well below the 7.9cps annual target figure being touted at the time.

So despite the headline quarterly dividend rate being cut to 1.625c (1.625c x 4= 6.5cps, an 18% annualised forecast cut as outlined in the November half year announcement), the board is implying that, in reality, this is still too high. As under the old policy with a DRP in place, the forecast annual payment rate was already only 5.124cps. With the DRP continuing, it looks like the cash payments to Investore unit holders are set to fall not by 18%, but closer to 40%. Ouch!

The picture on rental income is not adding up for me either. On p2 of the half year 2024 result announcement, unit holders learn that:
"Resilience in Investores portfolio helped deliver stable net rental income of $30.4m (HY2023 $30.2m)."

That represents a comparative past period rental income rise of a meagre 0.66%. However if you go back to the HY2023 result announcement on page 4 we learned:
"Investore completed 41 rent reviews in HY2023 resulting in +4.4% increase on previous rentals."

So a 4.4% rent rise on those rental contacts up for review resulted in a mere 0.66% rise in net profit! Where did all that extra income go? From HYR2024, the income statement.



Period HY2024Period HY2023Difference


Total Corporate Expenses$4.148m$4.612m($0.464m)


Net Finance Expense$8.618m$7.909m0.709m



I had expected that egregious management charges and interest rate rises had swallowed up all that increased rental revenue. But as you can see from the table above, this did not happen. In fact management charges were down and cushioned the interest rate rise for a net cost blowout of just $0.245m across the whole portfolio. So how do I explain the announced rent rise verses actual profit rise disconnect?

I have to resort to what was not said in the profit announcements to explain the situation. We are told 41 leases had rent increases embedded in them. But we are not told how many rental agreements IPL has in total. Nor are we told the the proportion of the portfolio the that those newly inflated leases represent. Some large leases (not all leases are equal in size) may have not been up for renegotiation, thus ensuring the overall property portfolio rent increases were well short of 4.4%. Certain one off bonus rental payments based on store turnover, as an example, may not have carried through from the previous year. A tenant moving to new premises may have resulted in end of lease write downs as a condition of moving into a bright new building on longer lease terms. Everything in this paragraph is my own speculation of course and may or may not be true to varying degrees. But what I am highlighting is that there are lots of loopholes under a 'bright headline of rent increases', that could lead to actual net rental payments being much less than the widely trumpeted inked contract rent increases highlighted in all their glory.

All in all I get a picture of inept and lazy management, probably sheltering under a desk while negotiators from Woolworths, their principal tenant, strong arm them into submission by beating them with a figurative stick at rent renegotiation time. If I was a unit holder I would probably petition for the entire Investore management team to be removed from office, so we could start again. But the reality is unit holders can't do that because there is no management team at Investore. They have zero employees! All the management is done under contract by parent company Stride.

SNOOPY

[Snoopy]

Neither of those two 'blue chip' supermarkets put up for sale at either 12 Putaitai Street, Stoke, Nelson., or 51 Arthur Street Blenheim have sold. The Blenheim site was reported in August 2022 as a 'tender sale', with tenders closing 7th September 2022.
https://www.oneroof.co.nz/news/blenheim-countdown-for-sale-with-long-lease-42007

Rent was listed as $778,160 per year. Assuming that figure has been increased by 7.1%, as per the CPI rent adjustment in the Interim Presentation for HY2024, slide 7, that rent is now: $778,160x1.071=$833,409. Over the three years to July 2023, the rating valuation of the property increased by 76% to $12.050m
https://www.oneroof.co.nz/property/marlborough/blenheim-central/51-arthur-street/aQ9AZ

Thus the estimated gross rental yield on the property today, based on the rating valuation, is: $0.833409 / $12.050m = 6.9%

Interestingly when I click the tab 'oneroof property estimate', it comes up with the message that there are insufficient market sales to determine 'fair value'. However if Investore are bragging about opening a new Woolworths supermarket at Kaiapoi in December with a yield on cost of 5.5%, it would make no sense to sell another top line supermarket at a yield of 6.9% to fund it. So it is clear that Investore would want a lot more money than even the drastically increased rating value of $12.050m.

Meanwhile, the other property on the 'to sell' list, the supermarket at Putaitai Street, Stoke, Nelson has a September 2021 rating valuation of $12.3m.
https://www.oneroof.co.nz/property/nelson-bays/stoke/12-putaitai-street/JnODR

If the rent is similar to Blenheim, then Investore will surely want a similar premium that applied to that store at sale time.

It is interesting that more than a year after both of these properties have been put up for tender, no sale has resulted for either.


I have just seen this comment in HYR2024 on p13

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

4 Investment properties classified as held for sale

During the current period, the Board approved disposing the three properties located at 51 Arthur Street, Blenheim; Corner Putaitai Street & Main Road, Nelson; and 66-76 Studholme Street, Morrinsville. Upon the change in intention from holding the investment properties to disposing of them, Investore reclassified the properties from investment properties to investment properties classified as held for sale at a value of $26.5 million. An associated right-of-use asset of $0.6 million for the ground leases at 66-76 Studholme Street, Morrinsville ($0.1 million), and 51 Arthur Street, Blenheim ($0.5 million), were also reclassified from investment properties to investment properties classified as held for sale.

Management has assessed the value of 66-76 Studholme Street, Morrinsville, to be $6.5 million as at 30 September 2023 after considering recent comparable market evidence. The investment properties at 51 Arthur Street, Blenheim, and Corner Putaitai Street & Main Road, Nelson, were independently valued as at 30 September 2023 using the same respective valuer used for the 31 March 2023 valuations.

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

So three properties classified for sale on the books at $26.5m. Take away the Morrinsville property part of that at $.6.5m. That means the Blenheim and Stoke supermarkets are on the Investore books at $20m combined, say $10m each at their 30-09-2023 very recent valuation date. If I am anywhere near right about that, then that Blenheim supermarket is currently yielding 6.9% x (12.05/10)= 8.3% on its book value. That sounds like a great investment to me. I would be wanting a very good price for that if I was Investore. Maybe they should give the Kaiapoi property the 'quick flick', so they can keep the one in Blenheim?

But I guess booking a real profit on a Blenheim sale will signal what great investors Investore (or Stride) really are?

SNOOPY

[Snoopy]

Correct me if I am wrong most of their debt is bonds in three lots IPL 010 020 030. $100,000,000 matures in April next year current paying 4.4% on this. The debt maturing on August 2027 $125,000,000 was at only 2.4%, that must surely qualify as return free risk, what idiot would have purchased these.


Yes, you are mostly right Aaron:
i/ $100m of IPL010 bonds at a coupon rate of 4.40% maturing on 18-04-2024.
ii/ $125m of IPL020 bonds at a coupon rate of 2.40% maturing on 31-08-2027
iii/ $125m of IPL030 bonds at a coupon rate of 4.00% maturing on 25-02-2027

In HYR2024, under section 5.1 mention is made of a fully drawn $40m bank facility (floating rates) maturing on 31-05-2026, and a $70m bank facility (floating rates), but only drawn to $10.3m. The idiot who purchased those 2.40% bonds was probably a Swiss banker who didn't like the negative interest rates on offer in his homeland at the time.



I wonder what rate their new bonds in April 2024 will sell at?


Looks like they are going the bank loan route for now. No new bonds. From HYR2024 p16.
"During the current period, Investore's banks have provided an additional $100.0 million of bank facilities to provide liquidity for the IPL010 fixed rate bonds which are due to mature in April 2024."



Currently on the secondary market they are 7.01% so 7.01 - 4.4 = 2.61% on $100,000,000 equals an additional 2,610,000 in interest each year. That is only 8% of last years operating cashflow, but on $350,000,000 (ipl 010+020+030) that is $9,135,000 or 29% of 2023 operating cashflow.(more if the difference between 2.4% and 7% is considered although the long maturities reduce the risk of dwindling dividends


What you have done is taken the cost of refinancing the IPL010 loan from 4.4% to 'market rates' (which you use the secondary market trading rate of 7.01% as 'market rate indicative'). Then you have multiplied that interest number by 3.5, suggesting that present day interest rates will still be representative of the maturing interest rate to current interest rate gap in 2027. Your implied suggestion that in 2027, interest rates will be the same 2.61 percentage points above the maturing bond coupon rates is speculative. I think it is too early to suggest that by 2027, the maturing of all three bonds will see the annual interest bill rise by $9.135m.



and debt is only 36% of assets. The value of the properties are based on an average 5.7% capitalisation rate.


Slide 5 of PRHY2024 says debt is now 40.3% of assets, but lease liabilities are not included. If I look in the half year balance sheet myself:

Liabilities = $418.020m - ($7.644m+$0.052m) = $410.324m
Total Assets = $1,014.731

=> Liabilities / Total Assets = $410.324m / $1,014.731 = 40.4% (that calculation looks close enough)



What if this capitalisation rate goes up instead of down as expected?


Such thoughts are economic heresy. You are not allowed to think such things.



I guess they are looking at capital gain and maybe potential buyers of the Blenheim and Nelson stores are basing the properties value on yield rather than some distance hope central banks will go crazy and print money and drop interest rates. A valid investing strategy based on the last 30 years.


It does look like there is a market for some of those big box assets, at a good price above today's book value. Worst case scenario is that the company has to sell more assets than they are planning to do right now.



I guess the high finance guys see interest rates back down to 2-3% before they need to roll over the bonds.


Your arrest by the thought police has been postponed. Glad to see you are 'back in the fold' (for now).

SNOOPY

[Snoopy]

Sorry Snoops 5seconds thinking about your post and the issues for IPL leads to many ignorant questions and very few answers. At least the yield on the shares is currently higher than the interest on the bonds now, so you are getting a return for equity risk now.

Full disclosure, I purchased some IPL010 a while back at 7%, currently glad I bought the bonds rather than the shares. Even if interest rates drop and push up share prices my yield remains attractive in a low interest rate environment.


IPL closed at $1.12 today. The projected annual income stream going forwards is 6.5cps. So that is a 'net interest rate' of 6.5c/$1.12= 5.80%. IPL is a PIE with income taxed at a maximum rate of 28%. So the gross equivalent earnings yield for IPL is currently 5.80%/0.72 = 8.06%



Hopefully some investing professional on here can tell me. If the yield on an investment is less than the borrowing costs then aren't you burning capital?

If so then isn't the property sector at ridiculously low yields only relying on low interest rates and high inflation to make a profit?

As Snoop points out why would you sell a 6.9% yield for a 5.5% one. I guess in property it is always location, location, location and the chance for tax free capital gain.

I think you are needed on the board of IPL Aaron, with thoughts like that.

SNOOPY

[Snoopy]

Aaron's question, answered at the AGM2023. When talking about slide 8:
"During FY2023, $75m of bank facilities were refinanced.and extended for a further two years to November 2025. As part of this refinancing, Investore also renegotiated its banking covenants with its banking syndicate, removing the covenant relating to its weighted average lease term of Investores portfolio, and reducing the LVR (Loan to Value Ratio) covenant from a maximum of 65% to a maximum of 52.5%."




Slide 5 of PRHY2024 says debt is now 40.3% of assets, but lease liabilities are not included. If I look in the half year balance sheet myself:

Liabilities = $418.020m - ($7.644m+$0.052m) = $410.324m
Total Assets = $1,014.731

=> Liabilities / Total Assets = $410.324m / $1,014.731 = 40.4% (that calculation looks close enough)


I find it hard considering that something that I have considered investing in is a train wreck. I don't think IPL falls onto this category. But it does have the look of an under-boilered loco with a heavier and heavier load to pull. Let's see how the cash crunch has evolved over the last few reporting periods:



Investore LVR CovenantFY2021FY2022FY2023
HY2024Sum


LVR Covenant {A} 65%65%52.5%52.5%



Net cash created from operations, (Annualised)$26.932m$27.539m$31.469m
$24.014m (1)$109.954m


NPAT (excluding property revaluations, Annualised)$21.993m$27.150m$35.046m$32.360m (2)$116.549m



Net Dividend Payment (Annualised)$29.980m$28.808m$29.050m$20.788m (3)$108.626m



Debt (less lease liabilities)$336.112m$365.260m$396.951m$410.324m




Undrawn banking facilities$196.193m$120.000m$87.400m$174.700m



Assets$1,070.850m$1,238.736m$1,080.288m$1,014.731m


Debt/Assets {B}31.4%33.8%36.7%40.4%


Covenant Headroom {A}-{B}33.6pp31.2pp15.8pp12.1pp



Notes

1/ Annualising: 2x$12.007m= $24.014m
2/ Annualized NPAT for FY2024: 2( -$66.523m- -$82.712m) = $32.360m
3/ Estimate of sum of annual dividend payments over FY2024 is as follows (Note that the dividend stream paid in FY2024 starts out with the final dividend for FY2023):
$7.258m + 2($7.258m-$2.465m) + [($7.258m-$2.465m)](1.625/1.975)] = $20.788m

The $2.465m in the above equation represents the dividend contribution reinvested via the dividend reinvestment plan from the Q1 2024 dividend - the second dividend paid during the financial year. I have assumed that this 'rate of reinvestment' will continue into the Q2 2024 ans Q3 2024 dividends that will complete the dividend payments indicated for FY2024. I have proportionately reduced the size of the Q3 2024 dividend in line with the company forecast in IR2024. This figure is a small underestimate as I haven't allowed for the increasing number of shares on issue throughout the year from the DRP.

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

The above table is of interest just as much for what it does not show than what it does. I had a pre-conception that this was probably yet another case of a company borrowing to pay their dividend as the debt went up. But looking at the numbers, I think that is an unfair interpretation. There is a bit of a mismatch between dividends and profits year by year but it goes both ways. Over the four years in the table, dividends are well covered by profits and even better matched to operating cashflow. So it looks like the build up in debt is instead due to Investore continuing to do what they were designed to do - invest in new big box development projects. The issue with this strategy is that the value of big box investments 'marks to market', which is absolutely great when the value of buildings go up. The problem is that in a market downturn, the debt used to purchase the investments does not mark to market. So the value of the buildings goes down while the debt stays the same. Not good!

The banks have reacted to this situation by lowering their LVR covenant (down from 65% to 52.5%) , and simultaneously, as measured by the reduction in undrawn banking facilities, lowering the amount of finance available to the company to buy new developments in the future. Don't take too much notice of the leap in available facilities as at HY2024. A $100m increase is only there to replace $100m of maturing bond market non-bank debt in April 2024. It just means that 'bank debt' will be replacing 'bond debt', and the real borrowing headroom had reduced again to $74.700m.

There is my take on WHAT is happening. If I start to expand on WHY it is happening, I might make a few bankers reading this unhappy. So I think I will leave the discussion there.

SNOOPY

[Snoopy]

Hopefully some investing professional on here can tell me. If the yield on an investment is less than the borrowing costs then aren't you burning capital?

If so then isn't the property sector at ridiculously low yields only relying on low interest rates and high inflation to make a profit?

As Snoop points out why would you sell a 6.9% yield for a 5.5% one. I guess in property it is always location, location, location and the chance for tax free capital gain.


I have spent some weeks now pondering this question on and off, of how acquiring the new flagship Kaiapoi Woolworths supermarket with that 5.5% return on cost is such a fantastic deal for Investore unit holders.

My conclusion is that probably the management at Stride Property, the guys and gals who do all the work for Investore haven't thought about it. They just come to work each day, look for development opportunities, and 'do what they do'. To go back to where developing any sort of commercial property was a bad idea, you have to go back a long way. Probably 1987 and the fall out from the sharemarket crash. The property down-wash from that took a few years to work through. But the mid 1990s were a new era. There are probably no property development managers who were in the game 'back then', still working in that field now. Apart from the last year or so, we have had either falling interest rates or interest rates hovering at a really low level for thirty years. That is a time-frame that includes the entire careers of many senior people. A pause and step down interest rate environment was sufficient to paper over cracks in what might be seen 'with hindsight' as marginal property developments. So no need to rethink the basics. Just 'follow the mantra' and all will be well.

Now, all of a sudden, we have interest rates high again (although as other have pointed out, 'high' depends on your time-frame). You don't have to go back that many years to a time when the interest rates of today were the norm. I think what has caught people out is that after 30 years of punctuated interest rates falls the macro trend has changed. And although interest rates have risen before, it has never happened this suddenly to this extent. I think property developers today simply do not believe what they see and they still in their minds eye have a picture of borrowing interest rates settling at about 3%. After all, our RB chairman Adrian Orr will bring inflation under control 'next month' - won't he? The pertinent question is, how will such thought processes, locked into the property paradigm of the last 30 years, damage Investore, and their likes, long term, from today?

SNOOPY

[kiwikeith]

Property is normally a good investment during high inflation as the rents and the value of the property generally rise. Investore has quite a high average lease to expiry period so rent rises will be a function of the contracted leases for the next few years. Property values have been falling due to higher interest rates and this has impacted the share price. In the long run I expect Investore will do ok albeit with some pain suffered in the short run. The ongoing yield (excl taxes) is 6.5c / $1.10 or a tad under 6%. Given that is around interest rates for term deposits, I dont expect too much upside for Investore in the short run. It may even head closer to $1 per share.

[Snoopy]

I have been assuming that over the long term tax at Investore was being paid at a rate of 28%. My table below suggests this was a wrong assumption. Why does this matter? If the tax bill was not as high as I had assumed, this means the shortfall of after tax earnings to dividends may not be as I had assumed.



FY2019FY2020FY2021FY2022
FY2023


Profit before other expense/income and income tax {A}$26.993m$26.749m$29.949m$34.265m$35.207m


Current tax expense (AR Note 7.3 'Tax') {B}$5.341m$5.559m$3.652m$4.925m$4.972m


Tax paid - cashflow statement {C}$5.308m$5.387m$4.395m$4.711m$5.298m


Implied Current tax rate {B}/{A}19.8%20.8%12.2%14.4%14.1%



From AR2021 p7
"income tax expense (was) $2.2 million lower than it would otherwise haven been due to the reintroduction of building depreciation deduction claims for commercial properties from April 2020."
But even if we add that $2.2m back, the tax rate for FY2021 works out to be just: $5.842m/$29.949m= 19.5%


I have been mulling over these ultra low tax rates for Investore for a few months without an answer. Today I took it on myself to ring the CFO to get an answer. And the answer left me absolutely STUNNED.

Apparently, the NZ accounting reporting rules state that for an NZX listed property owning business, you do not have to report building depreciation when publishing your financial results! That doesn't mean that (last financial year anyway) the IRD does not recognise depreciation as an expense. It only means that when the company reports their results to the public, they are told not to include depreciation in those reported results. That means the reported profit results of these property owning companies are much higher than the 'profit as assessed by the IRD'.

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 7.3 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: $4.461m/0.28 = $15.932m. If we include these depreciation charges in the profit results, a very different picture of profitability emerges.



FY2019FY2020FY2021FY2022FY2023Total



Reduction of prima facie income tax from depreciation (AR Note 7.3, Tax) (1)$1.854m$1.728m$4.368m$4.461m$4.264m



Profit before other expense/income and income tax (as declared)$26.993m$26.749m$29.949m$34.265m$35.207m


less Depreciation Charge$6.621m$6.171m$15.600m$15.932m$15.229m


equals IRD Profit before other expense/income and income tax {A} (2)$20.372m$20.578m$14.349m$18.333m$19.908m


less Current tax expense (AR Note 7.3 'Tax') {B}$5.341m$5.559m$3.652m$4.925m$4.972m$24.449m


equals IRD Operational Net Profit After Tax$15.031m$15.019m$10.697m$13.408m$14.936m




Tax paid - cashflow statement$5.308m$5.387m$4.395m$4.711m$5.298m$25.09 9m


Implied Current tax rate {B}/{A}26.2%27.0%25.5%26.9%25.0%



Notes

1/ The depreciation adjustment to income tax payable jumped in FY2020, and stayed higher. The reason for this is that depreciation was restored as a tax deductible expense in FY2020 as the result of the government of the day's Covid-19 response package to assist commercial landlords.
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.


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

A reasonable question to ask is, if the company tax rate is 28%, then why is this company not paying that? The net positive numbers in the prima facie income tax adjustments (Note 7.3) is the answer to that question. Things like 'non-taxable income', 'permanent differences in derivative positions', and 'previous losses utilised' can help explain the difference. The key point here is that suddenly the tax rate being paid looks round and about like any other company, which is exactly what I would expect. But before today I can honestly say I was unaware of this special reporting procedure for property owning companies, where depreciation is omitted from the reported profit figures.

Can anyone fill me in on the history of this 'property company favouring' account reporting policy?

SNOOPY

[Snoopy]

When a building is recognised as increasing in value over the year, the depreciation charge on those assets goes up as well. But only for reporting to shareholders purposes. As far as the IRD is concerned, the buildings value remains on the Investore books at 'construction cost' or 'acquisition cost' on a second set of Investore accounts that only the IRD reads.

From an IRD perspective, IF the depreciation costs are recorded in the annual report at a level that is too high (as a result of property revaluations), THEN this means the 'operating profit', -as recorded in the annual report-, (which is set off against those too high depreciation expenses) will be too low. Thus the IRD will be looking for 'more tax' than Investore superficially claims it owes, given Investore's declared operating profit. However, the $4.461m depreciation tax adjustment shown in the above table will result in the company paying 'less tax'. The conclusion must be that I have no idea what I am talking about on this issue :(


I like to correct posts that I have made in the past but got wrong. The above post shows how far you can go wrong if you start out on the wrong path. I speculated that the depreciation charges being recorded were too high, when in fact the opposite situation was happening. There were no depreciation charges being recorded in the reported results at all! Now that I know this, my observations of what was happening make more sense.

First point: Property revaluations (or devaluations) have nothing to do with this topic. They are reported on in the next section of the "Consolidated Statement of Comprehensive Income", (below the line of the profit figure I picked out).

Second Point: By leaving out depreciation from the reported result, it appears that the IRD are taxing profits at a much lower than the legislated company tax rate. However, it is accounting reporting standards that are causing the profit to be publicly overstated. The real IRD reported profit is much less, which explains why the IRD are taking off so much less tax than I expected.

Sorry about my previous warped reasoning. But I got there in the end.

SNOOPY

[Snoopy]

What a good question (see post title). But it is a trick question. That is because, as I found out yesterday, the NZ accounting reporting standards do not require depreciation to be included when a publicly owned property company reports its profitability. So the announced profit of the company does not change, no matter what happens to the depreciation allowed for. How good is that!

What is of more interest to investors is what happens to the distributable profit. So let's line up the 'what actually happened table' against the 'what would have happened table' and see what the differences are.

The 'what actually happened table' includes FY2019 and FY2020, two years where the depreciation allowance on buildings was not allowed. Yet there was still some depreciation allowed for in the accounts. I am unclear what this depreciation represents (there is almost no deprecation information in the respective annual reports). But it could be that various parts of the building fit out, like shelving and refrigerators are tax deductible, even if the structural elements of the building are not. To reflect this element, I am going to assume that even with building depreciation disallowed in our hypothetical FY2021-FY2023 measure up (i.e. where there is no 'building depreciation', the 'What would have happened' scenario), that an annual depreciation charge of $6.200m remains. For the purpose of this exercise I have used the legislated company tax rate of 28%, when I calculate 'income tax paid'. 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.


What actually happened



i/ Building Depreciation Allowed FY2021,FY2022, FY2023FY2019FY2020FY2021FY2022
FY2023Total


Profit before other expense/income and income tax (as declared)$26.993m$26.749m$29.949m$34.265m$35.207m


less Depreciation Charge$6.621m$6.171m$15.600m$15.932m$15.229m


equals IRD Profit before other expense/income and income tax $20.372m$20.578m$14.349m$18.333m$19.908m


less Income Tax expense @ 28%$5.760m$5.762m$4.018m$5.133m$5.574m$26.247m


equals IRD Operational Net Profit After Tax$14.617m$14.816m$10.331m$13.200m$14.334m





add Cashflow from 'Structural Depreciation' not reinvested (1)$0m$0m$9.400m$9.732m$9.029m



equals 'Cash Earnings' available for distribution$14.617m$14.816m$19.731m$22.932m$23.36 3m



(Reference Only) Current tax expense (AR Note 7.3 'Tax')
$5.549m$5.832m
$7.706m$7.639m$0.128m$26.854m



Notes

1a/ Calculation for FY2021: ($15.600 - $6.200)m = $9.400m
1b/ Calculation for FY2022: ($15.932 - $6.200)m = $9.732m
1c/ Calculation for FY2023: ($15.229 - $6.200)m = $9.029m




What would have happened



ii/ If Building Depreciation DisAllowedFY2019FY2020FY2021FY2022
FY2023Total


Profit before other expense/income and income tax (as declared)$26.993m$26.749m$29.949m$34.265m$35.207m


less Depreciation Charge$6.621m$6.171m$6.200m$6.200m$6.200m


equals IRD Profit before other expense/income and income tax $20.372m$20.578m$23.749m$28.065m$29.007m


less Income Tax expense @ 28%$5.760m$5.762m$6.650m$7.858m$8.122m$34.182m


equals IRD Operational Net Profit After Tax$14.617m$14.816m$17.099m$20.207m$20.885m



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 was the whole point of the touted 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.

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 the company 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 of course (one way of raising it)!

Yet all this 're-cladding' 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!!?!!

(Addendum: The point I didn't realise and that confused me was that the PIE fully imputed dividend includes a supplement of depreciation deductions relating to the structure of the building that are added to earnings. These depreciation deductions are not profit, even though the implementation of the PIE tax regime means they can be treated as such for tax and dividend purposes. If tax deductability on building structural elements is taken away, that means the company will pay more tax on their higher profits, and there will be less money left over to supplement the earnings in the dividend pool,)

SNOOPY

[Snoopy]

What is of more interest to investors is what happens to the distributable profit. So let's line up the 'what actually happened table' against the 'what would have happened table' and see what the differences are.


I think I must have got out of the wrong side of bed this morning. How is it that my long sought answers are just leading to more awkward questions? Take a look at the dividends paid out below, and the underlying earnings used to support them.



Building Depreciation Allowed FY2021,FY2022, FY2023FY2019FY2020FY2021FY2022FY20235 year Total



Dividends Paid during Financial Year (1) $19.676m$20.701m$27.980m$28.808m$29.050m$126.705m



Profit before other expense/income and income tax (as declared)$26.993m$26.749m$29.949m$34.265m$35.207m$ 153.163m



less Depreciation Charge$6.621m$6.171m$15.600m$15.932m$15.229m$59.55 3m


equals IRD Profit before other expense/income and income tax $20.372m$20.578m$14.349m$18.333m$19.908m$93.540m


less Income Tax expense @ 28%$5.760m$5.762m$4.018m$5.133m$5.574m



equals IRD Operational Net Profit After Tax$14.617m$14.816m$10.331m$13.200m$14.334m$67.298 m







Capital raised during year (2)($2.638m)$76.032m$102.652m
($1.074m)[/TD]$174.972m



Building revaluations during year$17.206m$7.716m$139.287m$91.593m($185.246m)$70 .556m



EOFY shareholder equity {A}$443.209m$526.691m$765.674m$855.042m$675.020m


EOFY total assets {B}$769.877m$786.625m$1,070.850m$1,238.786m$1.080. 288m


Equity Ratio {A}/{B}57.6%70.0%71.5%69.0%62.5%





Notes

1/ Dividends paid 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.

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


At first glance, the dividend paid over the five year period looks well covered by the profit declared. However this is a spurious comparison. The dividend paid is an 'after tax' figure, including all costs. Whereas the 'declared profit' is before tax and does not allow for any depreciation. The correct comparison for the dividend payout then, both after tax figures, is with the row titled 'IRD Operational Net Profit After Tax'. Using those figures, we can see that, over five years, the dividends paid out have exceeded underlying operational earnings by a total of:
$126.705m -$67.298m = $59.407m

The only way for this to occur in practice is for the difference to be made up by paying out some 'supplementary funds', or shareholder equity in some form. So was the shareholder equity run down over that five year period? No, it was built up:
$675.020m - $443.209m = $231.811m

Yet most of this capital build up relates to a net $177.590m of new capital raised over the five year period under examination. If that capital raising had not occurred, then, on a purely new capital for dividends perspective, the net cumulative property revaluations of $70.556m covered the extra cash demand of paying dividends ahead of earnings.

I am unsure how 'depreciation' fits into this equation. There is certainly depreciation claimed for income tax purposes, and the operational profit that I have calculated above is 'after depreciation'. But as far as the building structure is concerned, whether this depreciation is 'real' over time, in terms of an income adjustment, is open to question.
The accumulated depreciation of $59.553m over the study period has been more than wiped out by property revaluations of $70.556m. So another way of viewing 'what has happened' is that there has been zero depreciation and instead the assets have been revalued by: $70.556m-$59.552m=$11.004m over the time.

Furthermore, if the depreciation is $59.552m less than I have allowed for in may calculations, then the accumulated operational net profit over five years increases to:
$67.298m + 0.72x$59.553m = $110.176m

That figure is much closer to covering the $126.705m in dividends over the period, with only: $126.705m-$110.176m=$16.529m of borrowings (or asset sales?) needed to make up the difference. As long as asset valuations are increasing at a faster rate than debt then this isn't a problem. But the measure of this is 'Equity Ratio', and for 'Investore' the Equity ratio' is pushing up towards those banking covenants. Hmmmm.......

SNOOPY

[Snoopy]

Investore is a property owning entity set up by the Stride Investment Management Limited (SIML), part of the parent Stride Property Group. SIML continue to provide all management functions for Investore, which has no staff of its own. Investore hold, and manage day to day essential service big box retail outlets. The largest tenant by far (64% of all tenancies) is 'Woolworths' of Australia, who run the New Zealand owned 'Countdown' supermarket chain, (which is nevertheless in the process of rebranding to the same name as the Australian parent owner - 'Woolworths'). Other 'essential' retail brands operating out of big boxes, that are owned by Investore are: Bunnings (hardware), Foodstuffs (groceries), Mitre 10 (hardware) and Briscoes (bedroom, dining room and kitchen ancillaries) .

Investore owns a total of 44 properties, containing 143 tenants. Portfolio occupancy by area is 99.5%. The next largest NZX listed big box retail outlet owners are Argosy Properties (with 8 large retail format stores amongst a large selection of diversified type of properties). Other NZX listed big box property owning companies (in particular Goodman Property Trust and Property for Industry) lease their properties out as logistics hubs, factories, and industrial service buildings. Other NZX listed retail property for investment is in the form of multi-tenanted shopping malls (e.g. Kiwi Property Group and parent Stride Properties). That means IF you want to:

i/ Invest in destination big box stores within New Zealand
ii/ Stores that feature tenants with strong 'everyday use brands', and
iii/ Stores come under the investor favourable PIE investment regime envelope,

THEN Investore is your number one investment destination.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

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

I am using the Net Profit After Tax figures derived in my post 180 as the basis for this post.

FY2019: $15.031m / 260.076m = 5.78cps
FY2020: $15.019m / 304.499m = 4.93cps
FY2021: $10.697m / 368.135m = 2.91cps
FY2022: $13.408m / 368.135m = 3.64cps
FY2023: $14.936m / 367.503m = 4.06cps

Two setbacks, before the 'great 'eps' climb back' from FY2021. The financial year ends on 31st March. This means FY2021 was the principal Covid-19 affected year.

Conclusion: FAIL TEST

SNOOPY

[Snoopy]

The 'return on shareholder equity' test.

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

I have removed all annual portfolio revaluations (and devaluations) from the equity base since listing. Over time the value of the real estate tends to increase. These increases are nominally a net benefit to the unit holder. However in the case of a 'return on equity' calculation, the 'return on book equity' will decrease as the equity on the books goes up. Changes in book equity are made both from changes in wider market interest rates and changes in rental contracts. It is only the latter that is under the control of Investore management, and these rent increases are also reflected in the numerator of our calculation. Thus removing property valuation changes from the denominator of our calculation is the better way to measure Investore management's contribution to the change in the return on equity picture over time. Change in property valuations are not an annual cashflow consideration, but changes in rents are very important to cashflow, and operational profit.

FY2019: $15.031m / ($443.209m - $36.054m - $17.206m) = 3.85%
FY2020: $15.019m / ($526.691m - $36.054m -$24.922m) = 3.23%
FY2021: $10.697m / ($765.674m - $36.054m- $164.208m) = 1.89%
FY2022: $13.408m / ($855.042m - $36.054m -$255.802m) = 2.38%
FY2023: $14.936m / ($675.020m - $36.054m - $70.556m)= 2.63%

Notes

1a/ The base Incremental Property valuation to equity representing changes to valuations from the company's inception to the end of FY2018 is:
($0.801m) from 2HY2016, $13.720m (from FY2017), $23.135m (from FY2018), for a total of $36.054m. The company's first full year of operation was FY2017

1b/ Incremental Property valuations to equity for the five years being analyzed are as follows:
FY2019: $17.206m = $17.206m
FY2020: $17.206m + $7.716m = $24.922m
FY2021: $17.206m + $7.716m + $139.287m = $164.209m
FY2022: $17.206m + $7.716m + $139.287m + $91.593m = $255.802m
FY2023: $17.206m + $7.716m + $139.287m + $91.593m +($185.246m) = $70.556m

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

Not even close in any year! But not unexpected. Companies with substantial tangible assets rarely do well in this test.

Conclusion: FAIL TEST

SNOOPY

[kiwikeith]

[QUOTE=Snoopy;1031928]The 'return on shareholder equity' test.

FY2019: $15.031m / $443.209m = 3,38%

FY2020: $15.019m / $526.691m = 2.85%


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?

[Snoopy]

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

FY2019: $15.031m / $50.394m = 29.8%
FY2020: $15.019m / $54.416m = 27.6%
FY2021: $10.697m / $64.514m = 16.6%
FY2022: $13.408m / $67.923m = 19.7%
FY2023: $14.936m / $70.987m = 21.0%

If we use an inflation rate for FY2023 of 7%, inflation adjusted profits for FY2023 would need to be $13.408m x 1.07 = $14.347m. This figure was exceeded in FY2023. We have not got back to pre-Covid-19 net profit margin levels. But the three results since FY2021 have shown that an improvement in net profit margin is possible.

Conclusion: PASS TEST

SNOOPY

[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?


Hi kiwikeith,

I was getting a bit lonely on this thread banging away. So I am glad someone else is not only reading it, but is more awake than I am! Yes you are quite correct. I need to adjust the equity value in the divisor down by the amount of the cumulative asset revaluations over the years. This will require a deep dive into the archives. I am 'out of the office' for a few days from tomorrow. Hence my rushed Friday night posting, trying to get everything out there. I will correct the error in due course. Thanks for pointing it out.

I may later on incorporate changes in capital value of Investore assets, when calculating an Investore unit holders total return over time. But that is outside the scope of this 'Buffett test' exercise.

SNOOPY

[kiwikeith]

Hi kiwikeith,

I was getting a bit lonely on this thread banging away. So I am glad someone else is not only reading it, but is more awake than I am! Yes you are quite correct. I need to adjust the equity value in the divisor down by the amount of the cumulative asset revaluations over the years. This will require a deep dive into the archives. I am 'out of the office' for a few days from tomorrow. Hence my rushed Friday night posting, trying to get everything out there. I will correct the error in due course. Thanks for pointing it out.

I may later on incorporate changes in capital value of Investore assets, when calculating an Investore unit holders total return over time. But that is outside the scope of this 'Buffett test' exercise.

SNOOPY

Hi Snoopy

Yeah my enquiry is more of a top level general enquiry rather than in the fine detail. There are several studies that indicate that on the US market the property reits (property companies in the US) have marginally outperformed the S&P 500 over long periods like 25-30 years. However similarly to NZ property companies, the last 18 months has been pretty brutal for US Reits as rapidly rising interest rates have had an inverse effect on reit share prices. And again like NZ, many US reits now trade at significant discounts to net asset values. In NZ, Bob Jones argues that if you don't appreciate that real estate tends to rise in value over time, you don't understand property investment.

I own shares in IPL, along with other property companies and am hoping the current malaise in share prices will recover as over time rents will rise and interest rates will fall.

[Snoopy]

I am unsure how 'depreciation' fits into this equation. There is certainly depreciation claimed for income tax purposes, and the operational profit that I have calculated above is 'after depreciation'. But as far as the building structure is concerned, whether this depreciation is 'real' over time, in terms of an income adjustment, is open to question.


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



Building Depreciation Allowed FY2021,FY2022, FY2023FY2019FY2020FY2021FY2022FY20235 year Total



Dividends Paid during Financial Year (1) $19.676m$20.701m$27.980m$28.808m$29.050m$126.705m





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


equals Net dividends paid during year$19.676m$20.701m$27.980m$28.808m$29.050m$126.7 05m




IRD Operational Net Profit After Tax (3)$14.617m$14.816m$10.331m$13.200m$14.334m$67.298 m



'Cash Earnings' available for distribution (4)$14.617m$14.816m$19.731m$22.932m
$23.363m$95.459m









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/ There was no dividend reinvestment plan offered over the period being analyzed.
3/ Refer post 183.
4/ Refer Post 182.


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

Earnings will naturally vary from year to year. Companies set up as 'income generating vehicles', a category into which 'Property Owning PIEs' -like Investore- 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. Yet, for the five years in the above table, declared dividends have exceeded operational earnings by: 126.705/67.298= 88%, or $59.407m. From an operational perspective, this would suggest an addition to the 'retained earnings fund' is needed. One such addition is the 'structural building depreciation', which is a source of cash generated by the business that is not immediately needed for reinvestment back into those same buildings. Add this in, to get the so called 'cash earnings' of the company (bottom line of table above).

Further to this, the 'cash earnings' of IPL (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) while substantially exceeded the IRD recognised net profit after tax over the five years, do not cover the dividends either. Thus, even 'cash earnings' need to be supplemented to cover the net 'cash paid out in dividends'. Capital has been raised over the last five years to allow this to happen. But is raising money from shareholders, so that you can pay some of it straight back to them in dividends, a sensible policy? Apparently yes, because the PIE regime allows any dividends paid under this funding method to be declared as 'exempt' - the equivalent of 'tax paid', despite not a skerrick of tax being paid! Nevertheless, the cashflow picture is still not as balanced as I would like, if you have to resort to such tricks to keep that dividend up!

The coming law change regarding 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 between the pre-law change and post law change scenarios. That's how I now see things anyway.

SNOOPY

[Snoopy]

Further to this, the 'cash earnings' of IPL (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) while substantially exceeded the IRD recognised net profit after tax over the five years, do not cover the dividends either. Thus, even 'cash earnings' need to be supplemented to cover the net 'cash paid out in dividends'. Capital has been raised over the last five years to allow this to happen. But is raising money from shareholders, so that you can pay some of it straight back to them in dividends a sensible policy? Apparently yes, because the PIE regime allows any dividends paid under this funding method to be declared as the equivalent of 'tax paid', despite not a skerrick of tax being paid! Nevertheless, the cashflow picture is still not as balanced as I would like, if you have to resort to such tricks to keep that dividend up!


I may be suspicious of the ability of IPL to keep paying dividends at the rate they are paying them. But unlike some other property companies (I am looking at you PFI), they do at least have the decency to tell unit holders how they have conjured up the dividend money. AR2023 p45 section 3.2 on 'Distributable Profit' ostensibly tells the story of where all that dividend money came from. So how does the story stack up? I am going to look at the FY2022 referred figures for my 'worked example' as these are more 'normal', (lacking the large property write downs of FY2023).

FY2022 AFFO calculation



As PresentedSnoopy modelled (includes depreciation): refer post 182


Profit Before Income tax$125.806m


Net Change in value of investment properties (1)($91.017m)


Sub Total$34.789m



Reversal of right of use assets movement in net change of fair value of investment properties($0.066m)



Gain on disposal of Investment Property (2)($0.576m)




Net change in fair value of derivative financial instruments$0.052m


Spreading of fixed rental increases($0.051m)


Capitalised lease incentives net of amortisation($0.073m)


Borrowings establishment cost amortisation (3)$0.865m


Swap termination income($0.157m)


equals Distributable Profit Before Income tax
$34.783m$18.333m



less Current income tax
($4.925m)($5.133m)


Depreciation Expense Reversed
$15.932m



equals Distributable Profit after Income tax
$29.858m$29.132m



less Maintenance capital expenditure adjustment($3.671m)


equals Adjusted Funds from Operations (AFFO)$26.187m



There is no 'set in stone' definition on how to derive AFFO. But in this case, the figure arrived at does cover the total dividend payout of $28.808m (after tax) for the FY2022 financial year. The next question to answer is, do any of these adjustments make sense? Here is my assessment of the larger 'corrections'.

1/ Backing out the increase in value, on paper, of property on the books certainly does make sense. These 'transactions' are paper increases in value only. No cash changes hands, no transaction actually occurs. Yet property value movements are unpredictable and may even reverse in subsequent years (and did so in FY2023).
2/ A gain on the sale of an investment property is also written back. That makes sense as it is a capital transaction with that capital profit ear marked for investment in other buildings. It is certainly not day to day cashflow, and completely unrepresentative of how Investore make their money as a day to day going concern.
3/ Adding back a portion of the borrowing establishment cost from years ago is -to me- more contentious. My take on this is that Investore shelled out several million dollars to establish one or more loan facilities and is spreading out the cost of initiating this borrowing over several years. Note that this is just the cost of initiating the borrowing. Nothing to do with the regular interest bills that must be paid as part of the borrowing arrangement(s) themselves. However borrowing is part of the fabric of this business. Who buys a large commercial building without borrowing? It seems to me as though 'new loan facilities' will sporadically, but continually, need to be established - forever. Furthermore I would imagine the banks will require payment in full for setting up banking facilities on establishment. Not some kind of 'drip feed' payment arrangement. Investore seem to be arguing the 'drip feed' position. Namely that money paid in a lump years ago is causing a negative reporting effect echoing down through the years. So compensation should be added back annually as 'cash we should have had'. I may have interpreted what is going on here incorrectly. But this argument does not wash with me. Still, Investore are 'only' claiming $800k from this. Maybe not enough to affect the whole apple cart in the grand scheme of things?

One glaring omission I can see (or rather can't see) in these numbers is any mention of 'depreciation'. I think this is because there is an exemption in NZ accounting standards to allow property owning companies not to report depreciation, even though the IRD does account for it. Because depreciation, all $15.932m of it, is not recorded as an expense in the accounts, it simply flows 'unpaid' through to the bottom line of the above table un-noticed. 'Building depreciation' is split across 'structural assets'' and 'fit out assets'. In any given year, most likely the 'structural aspects' of a building will not require any day to day spending. But the 'fit out aspects' will. I believe the above table 'kind of acknowledges this' with a 'maintenance and expenditure adjustment' at the bottom. In effect the company is saying this part of the depreciation expense ($3.671m) is actually money we need to spend to keep our buildings in a 'best fit for use state' by our tenants. Another way of expressing this could be to say that $3.671m is a representation of 'fit out' depreciation after tax. That implies that the pre-tax value of fit out depreciation is $3.671m/0.72= $5.099m. And that implies that the 'structural building depreciation for the year' totals: $15.932m - $5.099m = $10.833m.

The column on the right reprises some earlier work I did on the FY2022 profit and loss statement (post 182). My work won't equate exactly to the official figures. That is because although I know the company tax rate, I do not know how much 'current year tax' of the tax payments 'spills over' into adjacent tax years. My main reason for including this column is to show how distorted the 'Distributable Profit Before Income tax' really is, when reported according to the official NZ accounting standards. If you believe the 'official reported figures', you will believe that the company tax rate is something under 15% ($4.925m / $34.783m = 14.2%). However, my using the IRD recognised income figures shows this is not true. It also highlights the process of adding onto profits the full cost of depreciation to make so much more 'distributable profit'. To me this aspect of the PIE tax rules is unfathomable and makes no commercial sense. But apparently, under PIE rules, a company is allowed to call this 'excluded income' and the whole process is box ticked by the IRD. If a private company told me to do this, I would call it a scam (effectively claiming tax paid on 'income' that was not earned). However because it is the IRD which has been set up to administer these PIE rules, I guess it is the duty of Investore unit holders to 'scam the tax man' as directed!

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 FY2019 and FY2020, I have had to make adjustments to the free cashflow of the company, and hence money available for dividends in FY2021, FY2022 and FY2023. Post 182 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
1.880c1.865c1.865c1.935cN/A7.545c



FY2020
1.935c1.9001.900c1.900cN/A7.635c



FY2021
1.900c1.9001.900c1.900c(0.715c)6.885c



FY2022
1.900c1.975c1.975c1.975c(0.740c)7.085c



FY2023
1.975c1.975c1.975c1.975c(0.693c)7.207c


Five Year Total
36.375c



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 FY2021, FY2022 and FY2023 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 182. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.

FY2021: $6.650m - $4.018m = $2.632m. $2.632m/368.135m = 0.715cps
FY2022: $7.858m - $5.133m = $2.725m. $2.725m/368.135m = 0.740cps
FY2023: $8.122m - $5.574m = $2.548m. $2.548m/367.503m = 0.693cps

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.

SNOOPY

[Snoopy]

Total modelled average net dividends over five years: 36.375c / 5 = 7.271c

As I write this the IPL010 and IPL020 bonds are trading around on the secondary market at the 7.0% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2023 capitalised valuation for IPL to get my required rate of return works out as:

(7.271c/0.72)/0.075 = $1.35

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:

(7.271c/0.72)/0.065 = $1.55

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 $1.55 x 1.075 = $1.67

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 IPL shares to $1.55 x 1.18 = $1.83

All of these valuations are well above current market prices of $1.20. Possibly contributing to this is a five year pattern of dividend decline, continuing into FY2024. Can Investore 'strong arm' any more money out of head tenant Woolworths? Or will the declining dividend trend continue? Hmmmmm......

SNOOPY

[Snoopy]

I have just seen this comment in HYR2024 on p13

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

4 Investment properties classified as held for sale

During the current period, the Board approved disposing the three properties located at 51 Arthur Street, Blenheim; Corner Putaitai Street & Main Road, Nelson; and 66-76 Studholme Street, Morrinsville. Upon the change in intention from holding the investment properties to disposing of them, Investore reclassified the properties from investment properties to investment properties classified as held for sale at a value of $26.5 million. An associated right-of-use asset of $0.6 million for the ground leases at 66-76 Studholme Street, Morrinsville ($0.1 million), and 51 Arthur Street, Blenheim ($0.5 million), were also reclassified from investment properties to investment properties classified as held for sale.

Management has assessed the value of 66-76 Studholme Street, Morrinsville, to be $6.5 million as at 30 September 2023 after considering recent comparable market evidence. The investment properties at 51 Arthur Street, Blenheim, and Corner Putaitai Street & Main Road, Nelson, were independently valued as at 30 September 2023 using the same respective valuer used for the 31 March 2023 valuations.

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

So three properties classified for sale on the books at $26.5m. Take away the Morrinsville property part of that at $.6.5m. That means the Blenheim and Stoke supermarkets are on the Investore books at $20m combined, say $10m each at their 30-09-2023 very recent valuation date. If I am anywhere near right about that, then that Blenheim supermarket is currently yielding 6.9% x (12.05/10)= 8.3% on its book value. That sounds like a great investment to me. I would be wanting a very good price for that if I was Investore. Maybe they should give the Kaiapoi property the 'quick flick', so they can keep the one in Blenheim?

But I guess booking a real profit on a Blenheim sale will signal what great investors Investore (or Stride) really are?


The Countdown supermarkets at 12 Putaitai Street in Stoke Nelson (2021 RV $12.3m) and 51 Arthur Street Blenheim (2023 RV $12.05m) first went out to tender in September 2022. Here we are 18 months down the track and neither property has sold. If they are still on the books at a combined value of $20m, I wonder if the 'Oneroof' recorded market values are realistic? Maybe Investore are secretly hoping these two supermarkets do not sell? An absence of market transactions is a good excuse not to write the 'official' valuation of a property down.

SNOOPY

[Snoopy]

The HY2024 report, published on 16th November 2023 provided updated dividend guidance on dividends that unit holders might expect, going right through to the end of FY2025. It was not spelled out specifically whether these dividend projections take into account the expected loss of the ability to offset 'structural building depreciation' against profits from FY2025 going forwards. But since this has been well signalled as forming part of the new coalition government's tax reform package, my expectation is that this has been taken account of in the new lower projected dividend rates for Investore unit holders going forwards.

The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed in FY2021, FY2022, FY2023 and FY2024. Post 182 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


FY2021
1.900c1.9001.900c1.900c(0.715c)6.885c


FY2022
1.900c1.975c1.975c1.975c(0.740c)7.085c


FY2023
1.975c1.975c1.975c1.975c(0.693c)7.207c


FY2024
1.975c1.975c1.625c1.625c(0.693c)6.500c


FY2025
1.625c1.625c1.625c1.625c6.500c



Five Year Total
34.177c




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 FY2021, FY2022 and FY2023 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 182. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.

FY2021: $6.650m - $4.018m = $2.632m. $2.632m/368.135m = 0.715cps
FY2022: $7.858m - $5.133m = $2.725m. $2.725m/368.135m = 0.740cps
FY2023: $8.122m - $5.574m = $2.548m. $2.548m/367.503m = 0.693cps
FY2024: = 0.693c (estimate, based on FY2023 figure)

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.

SNOOPY

[Snoopy]

Total modelled average net dividends over five years: 34.177c / 5 = 6.835c

As I write this the IPL010 and IPL020 bonds are trading around on the secondary market at the 7.0% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2023 capitalised valuation for IPL to get my required rate of return works out as:

(6.835c/0.72)/0.075 = $1.27

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:

(6.835c/0.72)/0.065 = $1.46

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 $1.46 x 1.075 = $1.57

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 IPL shares to $1.46 x 1.18 = $1.72

All of these valuations are well above current market prices of $1.20. However there still remains the prospect of a capital raising to appease the banking syndicates banking covenants, and the said banks do not appear to be in the mood to extend the debt headroom ceiling for this company. This, the announced dividends cut, and no progress with asset sales are three of reasons why I think the market price for IPL shares remains subdued.

SNOOPY

discl: do not hold

[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.


I think it is worthwhile laying out exactly what changes in property re(de)valuations have occurred since Investore was formed



HY2024($82.712m)


FY2023($185.246m)


FY2022$91.593m


FY2021$139.287m


FY2020$7.716m


FY2019$17.206m


FY2018$23,135m


FY2017$13.720m


2HY2016($0.801m)




Total 'R'=+$23.888m



This total revaluation occurred over a period of eight years.

Over 8 years, that works out at an 8 year annual compounding rate 'r' of:

($596.711m - $23.888m)(1+r)^8 = $596.711m
=> $572.823m (1+r)^8 = $596.711m
=> (1+r)^8 = 1.0417
=> r=1.0051, or 0.5% per annum.

Given it looks like we are headed for a further write down at full year, I come to the fairly disappointing view that over the business cycle (indicative interest rates were in 3.3% September 2016 and 5.9% in September 2024) I am forecasting zero capital gain for the entire existence of Investore. Compare that to what happened to residential house prices over the period and it is a very sobering long term picture at Investore. And all this over a time period of rapidly rising construction costs too! 'No capital gain at all' is not a phrase you want to hear from what ostensibly is one of NZ's leading property investment prospects. Costs rise with inflation to be sure . But whether completed big box values rise with inflation, it seems, is a separate question.

SNOOPY

[Snoopy]

The following quote relates to FY2023



Investments make a positive contribution to a company when the return from the investment exceeds the cost of holding them. Investore has multiple sources of funding which include fixed rate bonds and some bank financing. We can get some idea of the cost of funding by dividing the interest paid during the year, by an estimate of the average funds drawn down over that year. To estimate that average draw-down balance, I take a 'triangulated average' of the the borrowed funds balances declared at reporting dates. These are the borrowings owed at the start of the financial year, the borrowings owed at the end of the financial year, and the borrowing balance at the interim reporting date in the middle.

Borrowed Funds Average Estimate = ($351.530m+$387.576m+$385.037m)/3= $374.704m

The finance expense for the year was $16.287m

This gives an indicative average interest rate of: $16.287m/$374.704m = 4.35%. If 4.35% seems low, remember IPL030 bonds carry a coupon rate of 4%, the IPL020 bonds are on a coupon rate of 2.4% (both with 2027 maturing dates) and even the IPL010 bonds that mature in April 2024 are only at a coupon rate of 4.4%. Nevertheless with refunding these $100m worth IPL010 bonds, rolling over at a higher rate in April 2024, borrowing costs should tick higher.


I did the above overall funding take on Investore mid last year. I think we are all aware that Investore have been fairly canny with their bond market funding, keeping a lid on overall borrowing costs. But what about the bank element of the funding, taken alone? The interest rate level the banking professionals charge Investore, can give shareholders an idea of how well the bankers consider Investore, as a business, is bring managed. In the table below I have taken the bank financing bill for the year and spread it across a 'three point triangulated estimate' of the average annual loan balance. For any given year the 'three points' I refer to are:

i// The end of the financial year.
ii/ The end of the previous financial year.
iii/ The half year mid point between i/ and ii/

Calculated this way, the 'average annual loan balance' will be inaccurate if there is a sudden significant increase or decrease in loan balance close to a reference date. However, these numbers are as accurate as I can get with the publicly released information from the respective Annual and Interim reports.

Annual Bank Interest Charged: Multi Year Picture




Annual bank interest charged {A}
Bank Loan Balance SOFY
Bank Loan Balance MOFY
Bank Loan Balance EOFY
Bank Loan Balance Average {B}
Borrowing Interest Rate {A}/{B}



FY2019
$10.106m
$307.400m
$213.000m
$218.530m
$246.310m
4.10%



FY2020
$8.670m
$218.530m
$204.700m
$138.400m
$187.210m
4.63%



FY2021
$8.150m
$138.400m
$55.000m
$55.000m
$82.800m
9.84%



FY2022
$4.990m
$55.000m
$119.200m
$5.000m
$59.733m
8.35%



FY2023
$3.887m
$5.000m
$40.600m
$37.600m
$27.733m
14.02%





The above table is interesting in that it tracks the company financing from SOFY2019 (EOFY2018) where the company was entirely bank funded, right up to EOFY2023 where the company became almost entirely bond funded, using the IPL010, IPL020 and IPL030 corporate bonds set up over that time. In fact by EOFY2022 the bank funding at balance date was a meagre $5m drawn, albeit banking facilities available were $125m. By EOFY2023 the bank funding draw down had reached $37.600m, under the same $125m debt ceiling. But look at what happened to the bank funded interest rate. It had ballooned out to a staggering 14.02%! Granted that $37.600m amounts to only $37.600m/$385.037m=9.76% of all borrowings. But isn't a banking syndicate charging the company a staggering 14.02% really saying 'we do not want your business!'. This is a huge turnaround from five years previously when the bank lending rate was a nearly ten percentage points lower (just 4.10%, albeit in a lower interest rate climate), and the banks were prepared to fund the whole company. What in the eyes of the bankers has gone so wrong? It has to be related to those banking covenants (refer post 177).

Working from the HY2024 balance sheet figures, on current debt levels, the asset value of the company must not dip below:

$410.324m / 0.525 = $781.569m

$1,014.731m were the assets on the books at balance date. Headroom (maximum write-down available) is:
$1,014.731m - $781.569m = $233.162m

But the banks won't let it get 'down to the wire' like that. More writedowns to come by the full year date of 31-03-2024? A couple of months left to sell some assets? But don't sell them for too low a price, or you might trigger a revaluation downwards for the remaining property portfolio. Crikey this could be tight! And the share price is down 3.4% yesterday to $1.12 in a market that rose 1%. On 18th April 2024 the first of those bonds reverts back to bank funding. Maybe those bankers demanding a 14% risk premium interest rate are pricing their debt fairly? Would a cash issue at $1 per share placate them?

SNOOPY

discl: not a holder of the shares nor the bonds

[Snoopy]

In the table below I have taken the bank financing bill for the year and spread it across a 'three point triangulated estimate' of the average annual loan balance. For any given year the 'three points' I refer to are:

i// The end of the financial year.
ii/ The end of the previous financial year.
iii/ The half year mid point between i/ and ii/

Calculated this way, the 'average annual loan balance' will be inaccurate if there is a sudden significant increase or decrease in loan balance close to a reference date. However, these numbers are as accurate as I can get with the publicly released information from the respective Annual and Interim reports.

Annual Bank Interest Charged: Multi Year Picture




Annual bank interest charged {A}
Bank Loan Balance SOFY
Bank Loan Balance MOFY
Bank Loan Balance EOFY
Bank Loan Balance Average {B}
Borrowing Interest Rate {A}/{B}


FY2023
$3.887m
$5.000m
$40.600m
$37.600m
$27.733m
14.02%





I am really shocked at the interest demands the banks have placed on IPL. So much so that I am wondering if that 14.02% is some kind of calculation aberration. So as a double check, I am looking at the interest rate charged in the half year after that (HY2024).





Semi-Annual bank interest charged {A}
Bank Loan Balance SOFY
Bank Loan Balance MOFY
Bank Loan Balance EOFY
Bank Loan Balance Average {B}
Borrowing Interest Rate 2{A}/{B}


HY2024
$2.570m
$37.600m
$50.300
N/A
$43.950m
5.85%



One thing that has changed in those six months is bank facility F being bumped up from an undrawn $5m to a fully drawn $40m. There is also a brand new bank facility G undrawn to $65m. Could it be the cost of setting up these new facilities were incurred in the previous six months, hence pushing up the 'interest ' charge in the prior period? Another factor in the prior period was that the average bank balance over the year was very low in historical terms. Add even a modest additional fixed charge to a low interest rate bill and all of a sudden, the percentage 'interest' charge blows out. This is my explanation of what might have happened.

I am pleased to say that 5.85% sounds a lot more reasonable that 14.02%, even if it is significantly higher than the 4.4% being paid on the $100m of maturing IPL010 bonds. The annual interest bill on that loan will rise from $4.4m to an indicative $5.85m, a rise of $1.85m which will not be welcome to unit holders that have nevertheless had it very good for a long time, courtesy of those locked in low rate IPL bonds. The big question mark is what happens to funding rates when the rest of those IPL low rate bonds mature in 2027?

SNOOPY

[Snoopy]

This post is a repeat of post 182, but this time focussed on the change in 'Net Profit after Tax' specifically related to the change in depreciation laws

The 'what actually happened table' includes FY2019 and FY2020, two years where the depreciation allowance on buildings was not allowed. Yet there was still some 'fit out' depreciation allowed for in the accounts. To reflect this element, I have assumed that even with building depreciation disallowed in our hypothetical FY2021-FY2023 measure up (i.e. where there is no 'building depreciation', the 'What would have happened' scenario), that an annual depreciation charge of $6.200m remains. For the purpose of this exercise I have used the legislated company tax rate of 28%, when I calculate 'income tax paid'. 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.


What actually happened



i/ Building Depreciation Allowed FY2021,FY2022, FY2023FY2019FY2020FY2021FY2022
FY2023Total


Profit before other expense/income and income tax (as declared)$26.993m$26.749m$29.949m$34.265m$35.207m


less Depreciation Charge$6.621m$6.171m$15.600m$15.932m$15.229m


equals IRD Profit before other expense/income and income tax $20.372m$20.578m$14.349m$18.333m$19.908m


less Income Tax expense @ 28%$5.760m$5.762m$4.018m$5.133m$5.574m$26.247m


equals IRD Operational Net Profit After Tax {A}$14.617m$14.816m$10.331m$13.200m$14.334m








What would have happened




ii/ If Building Depreciation DisAllowedFY2019FY2020FY2021FY2022FY2023Total



Profit before other expense/income and income tax (as declared)$26.993m$26.749m$29.949m$34.265m$35.207m


less Depreciation Charge$6.621m$6.171m$6.200m$6.200m$6.200m


equals IRD Profit before other expense/income and income tax$20.372m$20.578m$23.749m$28.065m$29.007m


less Income Tax expense @ 28%$5.760m$5.762m$6.650m$7.858m$8.122m$34.182m



equals IRD Operational Net Profit After Tax {B}$14.617m$14.816m$17.099m$20.207m$20.885m





Scenario Difference




FY2019FY2020FY2021FY2022FY2023


Incremental IRD Operational Net Profit After Tax {B}-{A}$0.000m$0.000m$6.797m$7.007m$6.551m



Although I have already done the 'Buffett Test' calculations for this company, I am wondering if it is fair to take the actual profit figures I have used for FY2021, FY2022 and FY2023 when a very large impact on the profitability over those years was because of a change in depreciation tax rules, a factor over which management had no control. After all, it is management performance we are trying to measure here - not the government's. As an extreme example, if the government put up the company tax rate to 100%, and the net profit for IPL dropped to zero as a result, could we blame company management for that?

Given this, I intend to rework those 'numerical' 'Buffett Tests', using the profit adjustment figures for FY2021, FY2022 and FY2023 that I have worked out in this post.

SNOOPY

[Snoopy]

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

I am using the Net Profit After Tax figures derived in my post 180 as the basis for this post.

FY2019: $15.031m / 260.076m = 5.78cps
FY2020: $15.019m / 304.499m = 4.93cps
FY2021: $10.697m / 368.135m = 2.91cps
FY2022: $13.408m / 368.135m = 3.64cps
FY2023: $14.936m / 367.503m = 4.06cps

Two setbacks, before the 'great 'eps' climb back' from FY2021. The financial year ends on 31st March. This means FY2021 was the principal Covid-19 affected year.

Conclusion: FAIL TEST




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

I am using the Net Profit After Tax figures derived in my post 180 as the basis for this post.

FY2019: $15.031m / 260.076m = 5.78cps
FY2020: $15.019m / 304.499m = 4.93cps
FY2021: ($10.697m + $6.797m) / 368.135m = 4.75cps
FY2022: ($13.408m + $7.007m) / 368.135m = 5.55cps
FY2023: ($14.936m + $6.551m) / 367.503m = 5.85cps

Two setbacks, before the 'great 'eps' climb back' from FY2021. The financial year ends on 31st March. This means FY2021 was the principal Covid-19 affected year.

Conclusion: FAIL TEST

SNOOPY

[Snoopy]

The 'return on shareholder equity' test.

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

I have removed all annual portfolio revaluations (and devaluations) from the equity base since listing. Over time the value of the real estate tends to increase. These increases are nominally a net benefit to the unit holder. However in the case of a 'return on equity' calculation, the 'return on book equity' will decrease as the equity on the books goes up. Changes in book equity are made both from changes in wider market interest rates and changes in rental contracts. It is only the latter that is under the control of Investore management, and these rent increases are also reflected in the numerator of our calculation. Thus removing property valuation changes from the denominator of our calculation is the better way to measure Investore management's contribution to the change in the return on equity picture over time. Change in property valuations are not an annual cashflow consideration, but changes in rents are very important to cashflow, and operational profit.

FY2019: $15.031m / ($443.209m - $36.054m - $17.206m) = 3.85%
FY2020: $15.019m / ($526.691m - $36.054m -$24.922m) = 3.23%
FY2021: $10.697m / ($765.674m - $36.054m- $164.208m) = 1.89%
FY2022: $13.408m / ($855.042m - $36.054m -$255.802m) = 2.38%
FY2023: $14.936m / ($675.020m - $36.054m - $70.556m)= 2.63%

Notes

1a/ The base Incremental Property valuation to equity representing changes to valuations from the company's inception to the end of FY2018 is:
($0.801m) from 2HY2016, $13.720m (from FY2017), $23.135m (from FY2018), for a total of $36.054m. The company's first full year of operation was FY2017

1b/ Incremental Property valuations to equity for the five years being analyzed are as follows:
FY2019: $17.206m = $17.206m
FY2020: $17.206m + $7.716m = $24.922m
FY2021: $17.206m + $7.716m + $139.287m = $164.209m
FY2022: $17.206m + $7.716m + $139.287m + $91.593m = $255.802m
FY2023: $17.206m + $7.716m + $139.287m + $91.593m +($185.246m) = $70.556m

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

Not even close in any year! But not unexpected. Companies with substantial tangible assets rarely do well in this test.

Conclusion: FAIL TEST


The 'return on shareholder equity' test.

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

I have removed all annual portfolio revaluations (and devaluations) from the equity base since listing. Over time the value of the real estate tends to increase. These increases are nominally a net benefit to the unit holder. However in the case of a 'return on equity' calculation, the 'return on book equity' will decrease as the equity on the books goes up. Changes in book equity are made both from changes in wider market interest rates and changes in rental contracts. It is only the latter that is under the control of Investore management, and these rent increases are also reflected in the numerator of our calculation. Thus removing property valuation changes from the denominator of our calculation is the better way to measure Investore management's contribution to the change in the return on equity picture over time. Change in property valuations are not an annual cashflow consideration, but changes in rents are very important to cashflow, and operational profit.

FY2019: $15.031m / ($443.209m - $36.054m - $17.206m) = 3.85%
FY2020: $15.019m / ($526.691m - $36.054m -$24.922m) = 3.23%
FY2021: $17.494m / ($765.674m - $36.054m- $164.208m) = 3.09%
FY2022: $20.415m / ($855.042m - $36.054m -$255.802m) = 3.62%
FY2023: $21.487m / ($675.020m - $36.054m - $70.556m)= 3.78%

Notes

1a/ The base Incremental Property valuation to equity representing changes to valuations from the company's inception to the end of FY2018 is:
($0.801m) from 2HY2016, $13.720m (from FY2017), $23.135m (from FY2018), for a total of $36.054m. The company's first full year of operation was FY2017

1b/ Incremental Property valuations to equity for the five years being analyzed are as follows:
FY2019: $17.206m = $17.206m
FY2020: $17.206m + $7.716m = $24.922m
FY2021: $17.206m + $7.716m + $139.287m = $164.209m
FY2022: $17.206m + $7.716m + $139.287m + $91.593m = $255.802m
FY2023: $17.206m + $7.716m + $139.287m + $91.593m +($185.246m) = $70.556m

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

Not even close in any year! But not unexpected. Companies with substantial tangible assets rarely do well in this test.

Conclusion: FAIL TEST

SNOOPY

[Snoopy]

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

FY2019: $15.031m / $50.394m = 29.8%
FY2020: $15.019m / $54.416m = 27.6%
FY2021: $10.697m / $64.514m = 16.6%
FY2022: $13.408m / $67.923m = 19.7%
FY2023: $14.936m / $70.987m = 21.0%

If we use an inflation rate for FY2023 of 7%, inflation adjusted profits for FY2023 would need to be $13.408m x 1.07 = $14.347m. This figure was exceeded in FY2023. We have not got back to pre-Covid-19 net profit margin levels. But the three results since FY2021 have shown that an improvement in net profit margin is possible.

Conclusion: PASS TEST




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

FY2019: $15.031m / $50.394m = 29.8%
FY2020: $15.019m / $54.416m = 27.6% (target with 2% inflation 30.4% not net)
FY2021: $17.494m / $64.514m = 27.1% (target with 2% inflation 28.2%, not met)
FY2022: $20.415m / $67.923m = 30.1% (target with 2% inflation 27.6%, met)
FY2023: $21.487m / $70.987m = 31.7% (target with 7% inflation 32.2%, not met)


If we use an inflation rate for FY2023 (YE31/03/2023) of 7%, then inflation adjusted profits for FY2023 would need to be $20.415m x 1.07 = $21.844m on the same revenue. This figure was not exceeded in FY2023 and the revenue went up. However, we have got back to (tax adjusted) pre-Covid-19 net profit margin levels (using non inflation adjusted figures) . Looking at the five results since FY2019, an improvement in net profit margin above inflation occurred only once (FY2022) , while in all other years the expected inflation adjusted profit margin was not met. One swallow is not proof of summer.

Conclusion: FAIL TEST

SNOOPY

[Snoopy]

We have a 'pass' on the 'substantial player in chosen market' test, but a 'fail' on all the other three quantitative tests. A pass in all four tests is needed for Buffett to consider this company a candidate for investment. Of course we have to recognize that this period covers the Covid-19 break out section of the pandemic. But many of Investore's tenants, being essential service providers, would have substantially benefitted from that. So for this particular share, I am not making any 'Covid allowances' in my analysis.

Have you ever met a person that you really want to like, but then they just keep on making stupid decisions? This is the anthropomorphic analogy feeling that I have had when analyzing Investore. The fail on 'Buffett test 3', the 'return on equity test', was not unexpected for a property investment company, which by their nature are 'asset heavy'. All property investors know that when assessing total return, capital gain does inevitably end up being added to your cash return (rent). Hopes are for the capital gain to match inflation at least. However, this just has not happened with Investore.

The total market valuation gain from 2HY2016 (the first reporting period since the company listed) up until the end of FY2023 was $70.556m. This has subsequently been offset by a property writedown of $82.712m in HY2024, with further property writedown losses likely, come 'full year reporting time'. So after eight years this portfolio of 'blue chip big box essential service retail property' outlets is worth less than it was eight years prior! Could Investore in the future go down as a case study as to how to manage a 'certain to win' professional property portfolio particularly badly? What has caused this 'far from wished for' performance?

Investore is signed up to an 'external management contract', where the company contracts out all of its management functions to external operator 'Stride Properties'. Many listed syndicated property company operators, 6-8 years ago, saw this business structure as a millstone around future profitability growth. To mitigate, they bought out their own equivalent of Investore's external management contract, at 'considerable expense.' Ironically this was about the time Stride was listing 'Investore' under the 'old style' 'external contract property management regime'. Is this the reason for Investore's relatively poor performance since listing? My 'Dogs vs Hyenas' series of posts, culminating in post 100 on this thread, was designed to answer exactly this question. Short answer: No, the slightly higher fees as a percentage of asset values, - relative to some other big box owning property companies - at IPL are probably justified by the smaller gross size of the company, relative to the minimum fixed management functions required.

Instead, the main 'issue' at Investore looks to have been that the negotiated tenant rent rates are low compared to:
a/ Other big box property owning companies., (from BT3/ the 'return on equity' is only half that of the big boxes for a different use company, 'Property for Industry', at the end of each respective company's financial year. PLUS from test BT4/, the net profit margin at Investore is consistently about five percentage points lower than that at Property for Industry/). -AND-
b/ The capitalised values of the buildings owned. The capitalisation rate is the rate applied to the market rental to assess a property’s value. The higher the capitalisation rate, the more the market value of the property concerned is discounted. (the portfolio capitalisation rate at EOFY2023 for Investore was 5.7%, verses 5.0% as at December 2022 for Property for Industry)

Some 'low percent rate' influenced capitalisation on the books is justified, given the 'essential nature' of most of Investore's tenants businesses and the 'blue chip' nature of those tenants names. But that does not mean leases with such tenants should be signed at any cost. The zero capital growth of the property portfolio as a whole over eight years is one sign that this may have happened.

Buffett won't be buying. That was ruled out in the first line of this summary. But is there a case for buying IPL purely as a yield investment? That question will be tackled next.

SNOOPY

[Snoopy]

Given we often learn more form our failures than our successes, there will have been lots of lessons learned during this difficult period. Are we now on the cusp of Investore coming right? What lessons have Investore put into place when commissioning their latest property development for Countdown/Woolworths?

From AR2023 p4
"(Investore) Completed the acquisition of land at Hakarau Road, Kaiapoi, for $10.1m, and commenced construction of a new Countdown supermarket on this site targeting a 5 Green Star rating and delivering an expected yield on cost of 5.5%."

Post 200 would suggest that the straight cost of borrowing (leaving out any bank set up fees) is currently above this 5.5% figure. But these rental agreements have inflation adjusted rents and and incremental turnover top ups that lift the real return above that bare 5.5% initiated return figure, right?

Look at the bar graph on AR2023 p21, to see the story on how the Countdown/Woolworths rental agreements are playing out. It goes back six years. For the last 3 years 'base rent' at Countdown has been stuck at $35.2m. This indicates no annual CPI adjustment in the Countdown rent contracts. The only increase has been the 'turnover rent adjustment' (which may be thought of as a delayed inflation adjustment several years after the inflation event). I say this because there is an existing Countdown/Woolworths supermarket nearer to the heart of Kaiapoi that is not closing. So the future growth in Kaiapoi is being taken up by the new supermarket, which will in turn remove much of the future 'turnover rent growth' from the existing supermarket, had the new build supermarket not been erected. Very clever rent management by client company Woolworths here!

In an environment where the overall property portfolio is not growing in value, new investments can be funded by selling properties with lower investment returns for those with investment returns that are higher. Investore has on the market already two Woolworths supermarkets, one in Blenheim and one in Stoke Nelson. If you refer to my post 171 you will see that both supermarkets are currently on the books, yielding a 6.9% rental, based on current rating values. To match the new Kaiapoi supermarket rate of return, the Blenheim and Nelson supermarket would have to sell for a price 25% above the most recent July 2023 and September 2021 valuations respectively.

My conclusion then is that Investore is preparing:
a/ To sell off a couple of higher yielding supermarkets to fund a lower yielding investment,
b/ Where the cost of bank funding exceeds the long term contract investment return.

Seriously, go back to those posts I have referenced for the proof to see that I am not making this stuff up! I wonder if Investore would be better of diversifying into the circus business? It does seem that their management advice team is composed of a bunch of professional clowns!

Fortunately the market is not stupid. Mr. Market knows everything I have just outlined. So Mr. Market knows to apply a valuation discount to fairly reflect management foolishness.

SNOOPY

[Snoopy]

Buffett won't be buying. That was ruled out in the first line of this summary. But is there a case for buying IPL purely as a yield investment? That question will be tackled next.


Posts 196/197 gives this company a no growth 'fair value' capitalised valuation share price of $1.27. This price does not factor in any capital losses that may have occurred over the last eight years, should those losses be indicative of what unit holders might expect in the future.

Capital losses over eight years: $70.556 - $82.712 = -$12.156m
-$12.156m/371.864m = 3.27cps

On an annual basis, this is a loss 'r' of: (1+r)^8=3.27cpc => r=0.16% per year

Incorporating this loss into the capitalised dividend model is done by adding the annual gross capital loss of 0.16%/0.72 = 0.22% onto the required return:

From post 197: Total modelled average net dividends over five years: 34.177c / 5 = 6.835c

As I write this the IPL010 and IPL020 bonds are trading around on the secondary market at the 7.0% level. For equity risk I require a gross level of return greater than that: 7.5%. This means my FY2023 capitalised valuation for IPL to get my required rate of return works out as:

(6.835c/0.72)/(0.075+0.0022) = $1.23

The IPL share price closed at $1.17 on Friday. But we have to remember that Mr. Market does factor in that that projected near future earnings are forecast to be a little less than earnings of the recent past. Capitalised dividend valuation is all about 'reversion to the mean'. So this explains why my loss adjusted capitalised dividend valuation is slightly higher than the market valuation. The market is strictly forward looking using the latest company supplied earnings guidance.

Buffett once said
"I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

My judgement is that we are likely nearing 'peak idiot' now at Investore. Management can only get better from here. So on this basis, and given my penchant for sniffing out shares at the bottom of the business cycle, I consider IPL worth accumulating at $1.17, for the income investor.

SNOOPY

discl: do not hold

[Snoopy]

This is what Investore said on property sales after slide 17 of the AGM address:
"While Investores balance sheet and portfolio are well positioned, the ongoing higher interest rate environment means the board will continue to focus on how to prudently manage capital. Accordingly, the board announced capital management initiatives with the release of Investores FY23 annual results, designed to manage gearing over the near term. These included the intent to sell selected non-core assets of approximately $25m-$50m, provided appropriate value can be realised for the assets. The net proceeds received from these investments, if they proceed, will be used to repay existing bank debt."

"Investore is also pleased to announce the adoption of a dividend reinvestment plan."

"The purpose of these initiatives is to ensure that Investore is well placed, to withstand further potential valuation headwinds, in case they eventuate, as well as preserve balance sheet headroom to pursue further strategic initiatives across its portfolio."

I see Countdown supplies 64% of Investores rental income (AGMPR2023 slide 14). So to call these two Countdown supermarkets on the block as 'non-core assets' sounds like corporate communication officer drivel to me.


Sorry I should have done this before. A quick look at the minimum debt repayment time (MDRT) progression is in order.




FY2020
FY2021
FY2022
FY2023
2HY2023+HY2024


Bank & Bond Term Debt
$238.400m
$280.000m
$355.000m
$385.037m
$400.300m


less Cash and Cash Equivalents
($4.229m)
($6.800m)
($7.229m)
($4.802m)
($5.093m)


equals Net Debt {A}
$234.171m
$273.200m
$347.771m
$380.234m
$395.207m


Declared NPAT {B}
$20.917m (a)
$22.243m (b)
$26.626m (c)
$35.079m (d)
$36.304m (e)


MDRT {A}/{B}
11.4 yrs
12.3 yrs
13.1 yrs
10.8 yrs
11.0 yrs



Notes

a/ Declared NPAT, ignoring one off asset re(de)valuations was: $26.749m - $5.832m = $20.917m
b/ Declared NPAT, ignoring one off asset re(de)valuations was: $29.949m - $7.706m = $22.243m
c/ Declared NPAT, ignoring one off asset re(de)valuations was: $34.265m - $7.639m = $26.626m
d/ Declared NPAT, ignoring one off asset re(de)valuations was: $35.207m - $0.128m = $35.079m.
e/ Annualizing earnings for HY2024. NPAT for 2HY2023 = $35.079m - ($17.696m-$2.740m) = $20.123m
NPAT for HY2024 was: $17.609m - $1.428m = $16.181m
=> NPAT for combination year, ignoring one off asset re(de)valuations, was 2HY2023 + HY2024 = $20.123m + $16.181m = $36.304m


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

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

By my normal measuring standards I would class the MDRT for Investore as a problem. However, there has not been much change over the last 3.5 years. I would say that this is evidence that the banks are not concerned by the debt position at Investore. Except for the resetting of the banking covenants which we were informed about in AR2023.



It looks like the build up in debt is instead due to Investore continuing to do what they were designed to do - invest in new big box development projects. The issue with this strategy is that the value of big box investments 'marks to market', which is absolutely great when the value of buildings go up. The problem is that in a market downturn, the debt used to purchase the investments does not mark to market. So the value of the buildings goes down while the debt stays the same. Not good!

The banks have reacted to this situation by lowering their LVR debt covenant (down from 65% to 52.5%) , and simultaneously, as measured by the reduction in undrawn banking facilities, lowering the amount of finance available to the company to buy new developments in the future.


Investore have responded by putting a couple of key supermarkets in Blenheim and Stoke, Nelson up for sale. If sold, they could bring in around $30m. But since they have been for sale for more than a year, following a failed tender process, I am not holding my breath. The dividend has been cut. But this looks like a token gesture. The projected dividend for FY2025 reduces 18% from FY2023. But in dollar terms this amounts to $5.3m per year. Even given the reintroduction of the DRP, the maximum cashflow being saved is unlikely to top $10m. Not that significant when your total debt is approaching $400m!

My view on the company debt is that it is not out of line with other property companies. But relatively poor profitability has seen Investore come onto the bankers watch list. If I was a unit holder, I would prefer a cash issue to shore the position of the company up as opposed to selling high yielding blue chip properties to do the same. But it doesn't look like the company has an appetite for either, unless those bankers force their hands! I don't think the debt position is sufficiently dire to put me off IPL as an investment. But I would invest in the knowledge that a cash issue was not out of the question.

SNOOPY

discl: do not hold

[SailorRob]

FY2023


Bank Term Debt
$385.037m


less Cash and Cash Equivalents
($4.802m)


equals Net Debt {A}
$380.234m


Declared NPAT {B}
$37.942m (iii)


MDRT {A}/{B}
5.3 yrs





My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern


Snoopy, this is an utter dog.

Wasting massive time, just find a way to amalgamate a few years of statements into one document on one page and you will be set free.

You need to be able to figure this out in 15 seconds.... Then spend your time looking at things that are not obviously dogs.

Or figuring out why it's not good to invest all your money in a 2 crop agrarian disaster https://www.stuff.co.nz/business/350160439/we-do-not-produce-enough-goods-and-services-maintain-our-lifestyle

[Snoopy]

Snoopy, this is an utter dog.


Well, it may surprise you. But I know a bit about dogs. Floated at $1.65 eight years ago. Now trading at under $1.20. OK there have been divvies on the way to ease most of that capital decline pain. But taking the big picture I have to agree with you. IPL is a dog, if you look backwards. With a sharemarket investment, you need to look forwards though.

The thing is, IPL does throw off not insignificant cash, and takes advantage of our PIE tax laws which allows them to pay unit holders more than their earnings indefinitely. This is a gift from the NZ government, only partially wound back by Nicola Willis clamping down on (some) of the depreciation top up payouts.

This is a case of buy in gloom and maybe sell in boom, or maybe just hold enjoying that 7.5% gross yield on purchase, with all the tax bills taken care of for you. The market gloom is caused by rising interest rates and poor management. The strategy is to take advantage of current cash rates and buy off a manic depressive Mr. Market the assets of a corporate idiot under bank pressure. My future assumptions are that current high interest rates will fall at some point (it doesn't matter when) and that management will improve their performance. A big improvement on what management are doing now, would be for them to do absolutely nothing.

Given the tightening corporate debt covenants imposed by the banks, it does indeed look like IPL management will be going nowhere for a few years. if this means an end to signing loss making rent contracts, this suits me fine, and it would be a big improvement.

This investment equation still stacks up, even if the share price declines modestly going forwards, as I am modelling it to do. I consider IPL more of a bond substitute than a share in the traditional sense. A kind of opposite to your OCA which has great capital gain potential but poor cashflow. To be honest, I don't see IPL as a 'great investment'. But as a potential horse for those on a different (income) course, it is worth a look.



Wasting massive time, just find a way to amalgamate a few years of statements into one document on one page and you will be set free.

You need to be able to figure this out in 15 seconds.... Then spend your time looking at things that are not obviously dogs.

Or figuring out why it's not good to invest all your money in a 2 crop agrarian disaster https://www.stuff.co.nz/business/350160439/we-do-not-produce-enough-goods-and-services-maintain-our-lifestyle

Back to your argument about the NASDAQ being the index that NZ investors should follow? Different market, different risk and cashflow issues with FIF so less tax friendly. Not saying don't do it, but come meal time, I like variety in my PIEs.

SNOOPY

[kiwikeith]

The thing is, IPL does throw off not insignificant cash, and takes advantage of our PIE tax laws which allows them to pay unit holders more than their earnings indefinitely. This is a gift from the NZ government, only partially wound back by Nicola Willis clamping down on (some) of the depreciation top up payouts.


Back to your argument about the NASDAQ being the index that NZ investors should follow? Different market, different risk and cashflow issues with FIF so less tax friendly. Not saying don't do it, but come meal time, I like variety in my PIEs.

SNOOPY[/QUOTE]


Yes the tax situation between NZ pies and US shares is pretty stark. On the former you can get decent dividends with no further tax to pay. On the latter you can receive minimal dividends and pay NZ tax on a hypothetical dividend.

[percy]

Perhaps Woolworths will be looking for reduced rent.?
https://www.rnz.co.nz/news/business/507824/woolworths-expect-42-percent-drop-in-earnings-for-last-six-months

[Snoopy]

This depreciation charge being allowed to be paid out as a tax paid dividend still does my head in. But I have realised that although I have now allowed for 'building structural depreciation' to be paid out, I did not consider the possibility of the 'depreciation on building fit out' to be paid out. So let's adjust for that too to try and bridge that gap between 'earnings'(sic) and dividends paid.





Building Depreciation Allowed FY2021,FY2022, FY2023FY2019FY2020FY2021FY2022FY20235 year Total



Dividends Paid during Financial Year (1) $19.676m$20.701m$27.980m$28.808m$29.050m$126.705m





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


equals Net dividends paid during year$19.676m$20.701m$27.980m$28.808m$29.050m$126.7 05m







Profit before other expense/income and income tax (as declared)$26.993m$26.749m$29.949m$34.265m$35.207m


less Depreciation Charge$6.621m$6.171m$15.600m$15.932m$15.229m


equals IRD Profit before other expense/income and income tax $20.372m$20.578m$14.349m$18.333m$19.908m


less Income Tax expense @ 28%$5.760m$5.762m$4.018m$5.133m$5.574m$26.247m



equals IRD Operational Net Profit After Tax (3)$14.617m$14.816m$10.331m$13.200m$14.334m$67.298 m



add Cashflow from 'Structural Depreciation' not reinvested$0m$0m$9.400m$9.732m$9.029m




add Cashflow from 'Building fit out' not reinvested$6.621m$6.171m$6.200m$6.200m$6.200m




'Cash Earnings' available for distribution$21.238m$20.987m$25.931m$29.132m
$29.563m$126.851m









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/ There was no dividend reinvestment plan offered over the period being analyzed.
3/ Refer post 183.



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

'At last' I have got the 'cash earnings' to match the 'dividends'. But do I really believe it? Not sure. But at least when the I see the figures written down as I have done, is that not evidence, in itself, that it is all true?

The coming law change regarding the removal of the ability to offset 'structural building depreciation' will have a negative effect on cash flows (because the government takes more tax) , and hence potentially dividends going forwards. Given it is only the ability to offset 'structural building depreciation' that is being mooted as being disallowed, then that effect may not be as great as some think on the overall dividend payout picture.

As an example of this, take FY2023. In this year there was a depreciation charge of $15.229m which 'apparently was able to be added back to the PIE dividend stream of unit holders. The 'Horror of horrors' for property investors is that it is National Party Policy to abolish 'building depreciation' from future tax periods. But if it is only 'structural building depreciation' no longer allowed as a deduction, that means the remaining depreciation is still allowed to be paid out as a supplementary dividend payment. So rather than the supplementary dividend payout dropping from $15.229m to zero, instead it drops from $15.229m to $6.200m. Yet the real drop is unlikely to be even that large. Why? Because removing structural depreciation as a deduction will also increase the profits of IPL that are able to be distributed.

If we assume a new regime of 'structural depreciation disallowed' had applied to the FY2023 year, then the revised IRD recognised income calculation would have been as follows:



Profit for FY2023 before other expense/income and income tax (as declared)$35.207m


less Depreciation Charge Allowed $6.200m



equals IRD Profit before other expense/income and income tax
$29.007m



less Income Tax expense @ 28% $8.122m



equals IRD Profit before other expense/income and after income tax
$20.885m



add Cashflow from 'Building fit out' not reinvested $6.200m



equals Cash earnings available for distribution $27.085m




Thus the distribution lost because of the new tax rules would have amounted to: $29.563m-$27.085m=$2.478m
OR $2.478m/367.503m= 0.67cpu

The actual distribution over FY2023 was 4x1.975cpu = 7.9cpu. So the amount of unit holder income that would have been lost, had these tax rules been in place, would have amounted to 0.67/7.9= 8.5% of the pre-tax adjustment total.

When I write this stuff I can't help look at that five year summary of tax paid payouts of $126.705m against underlying earnings of $67.298m and wonder when the scammer who allowed the switching of this tax burden from the rich property investor to the 'squeezed middle' will 'turn himself in'. But will the Commissioner of Inland Revenue ever turn himself in? With Nicola Willis giving him the big tick, probably not.

SNOOPY

[Snoopy]

Perhaps Woolworths will be looking for reduced rent.?
https://www.rnz.co.nz/news/business/507824/woolworths-expect-42-percent-drop-in-earnings-for-last-six-months

23 rats caught at Countdown Dunedin last week, and $200k lost revenue over that week as the central Dunedin store remained closed. Those are quite expensive rats! Just as well it is Woolworths losing the money though, as Investore does not get paid on store turnover --- oh wait.....

SNOOPY

[stoploss]

23 rats caught at Countdown Dunedin last week, and $200k lost revenue over that week as the central Dunedin store remained closed. Those are quite expensive rats! Just as well it is Woolworths losing the money though, as Investore does not get paid on store turnover --- oh wait.....

SNOOPY
Snoops 200 k revenue or Profit ????

[Snoopy]

Snoops 200 k revenue or Profit ????

Funny you should mention that as I made my post after hearing an audio news clip, and had to think again as to whether they said revenue or profit. I think the figure was revenue, because I doubt Woolworths/Countdown would willingly disclose profit figures for competitive reasons. If it was profit, and that $200k per week was typical, it means we are talking about a profit of $0.2mx52= $10.4m for one Dunedin store for the year.

The article linked to by percy claimed that the profit in the last 6 months at Woolworths NZ was $71m, or $142m annualised. There are 191 Countdown/Wookworths stores across the country. So we are talking an average profit of $142m/191= $0.743m per store. It seems unlikely this Dunedin store would be earning over $10.4m/$0.743m = 14x more than the average store. So I am fairly sure the figure I posted was revenue, not profit.

SNOOPY

[stoploss]

Funny you should mention that as I made my post after hearing an audio news clip, and had to think again as to whether they said revenue or profit. I think the figure was revenue, because I doubt Woolworths/Countdown would willingly disclose profit figures for competitive reasons. If it was profit, and that $200k per week was typical, it means we are talking about a profit of $0.2mx52= $10.4m for one Dunedin store for the year.

The article linked to by percy claimed that the profit in the last 6 months at Woolworths NZ was $71m, or $142m annualised. There are 191 Countdown/Wookworths stores across the country. So we are talking an average profit of $142m/191= $0.743m per store. It seems unlikely this Dunedin store would be earning over $10.4m/$0.743m = 14x more than the average store. So I am fairly sure the figure I posted was revenue, not profit.

SNOOPY
Snoops this article mentions 10 mio a year profit from a PaK n Save , quite a few years back . These are the numbers I have heard , look at the NBR Wealth list ….Not sure you can trust the countdown numbers , 400 mio to change the name …
https://www.stuff.co.nz/business/350190400/how-supermarket-owners-came-dominate-retail-landscape

[Snoopy]

Snoops this article mentions 10 mio a year profit from a PaK n Save , quite a few years back . These are the numbers I have heard , look at the NBR Wealth list ….Not sure you can trust the countdown numbers , 400 mio to change the name …
https://www.stuff.co.nz/business/350190400/how-supermarket-owners-came-dominate-retail-landscape


Thanks for that reference stoploss. Interesting reading. The article says:
"It was estimated at one point that Glen Innes Pak’nSave was making $10m a year."

I am not sure how much credence you could give that statement. It sounds like a hyped up theoretical peak point maximum with no supporting evidence, if $10m is indeed NPAT. But since Tahua is private, we don't know what their debt structure is. So I suspect $10m is probably EBIT, or maybe EBITDA. I don't see how some commentator could come up with $10m per year, without inside knowledge. And there would be no reason to give a private commentator such inside knowledge.

Having said that, I don't doubt that Pak’nSave 's are much more profitable than Countdown's because Pak’nSave s are individually owned, and part of the Foodstuffs co-operative grouping. No high paid corporate infrastructure to serve like at Woolworths. Plus being an 'international corporate', there is a possibility of Woolworth's 'transfer pricing' inflating the cost base of Woolworths doing business in NZ. I haven't looked into this in detail. But all the numbers I previously quoted, bar the $200,000 from the radio broadcast, I pulled out of the Woolworths annual report.

$400m (albeit over 3 years) to transform Countdown into Woolworths does sound to be an extraordinary amount of money, I agree. But if Woolworths do spend that money, it would be a legitimate tax deductible expense.

Given all this, I can understand why you say you don't trust the Countdown/Woolworths numbers. But I think your statement is more a commentary on corporate charging practice, rather than the declared profit numbers being 'wrong' as such. Woolworths are clearly fulfilling all of their tax obligations and complying with the tax laws on both sides of the Tasman. The fact that each individual Countdown/Woolworths supermarket could be making a lot more money under a Pak'n save ownership structure is likely true. But it is not relevant to the actual tax structure under which Countdown/Woolworths operates.

Finally the NBR rich list must be speculative for valuing non-listed assets, and of necessity does not take account of private indebtedness needed to hold that estimated wealth, because such information is not publicly available.

SNOOPY