Negotiation Troubles at Investore?
Quote:
Originally Posted by
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.
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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.
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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