HYR2024 earnings update: Snoopy reaction!
Quote:
Originally Posted by
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 HY2024 |
Period HY2023 |
Difference |
Total Corporate Expenses |
$4.148m |
$4.612m |
($0.464m) |
Net Finance Expense |
$8.618m |
$7.909m |
0.709m |
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
Properties not sold: addendum
Quote:
Originally Posted by
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/blenh...ng-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/m...r-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/n...i-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
'Debt:Asset' Banking Covenant
Quote:
Originally Posted by
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%."
Quote:
Originally Posted by
Snoopy
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 Covenant |
FY2021 |
FY2022 |
FY2023 |
HY2024 |
Sum |
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} |
33.6pp |
31.2pp |
15.8pp |
12.1pp |
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
Declared Tax Rates: Part 6
Quote:
Originally Posted by
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.
|
FY2019 |
FY2020 |
FY2021 |
FY2022 |
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.
|
FY2019 |
FY2020 |
FY2021 |
FY2022 |
FY2023 |
Total |
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 |
$25.099m |
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