Just for you mate.
https://www.bing.com/videos/search?q...F78B&FORM=VIRE
Are they good buying at the current level ?
Printable View
Just for you mate.
https://www.bing.com/videos/search?q...F78B&FORM=VIRE
Are they good buying at the current level ?
Valuation Metrics FY2021: Earnings Precinct Properties Argosy Vital Healthcare Properties Stride Property Group Kiwi Property Group Normalised Profit (After Tax) {A} $59.8m $48.324m $36.010m $56.076m $83.773m Market capitalisation 31-12-2021 {G} $2,647.6m $1,351.5m $1,818.9m $1,139.8m $1,876.3m Normalised PER 31-12-2021 {G}/{A} 44.3 28.0 50.5 20.3 22.4 Shareholder Equity (EOFY) {B} $2,220.6m $1,280.635m $1,503.451m $1,017.786m $2,134.786m Gross PIE equivalent Dividend Yield (EOCY2021) 5.10% 5.65% 3.74% 5.07% 6.63% Gross Income from rentals {C} $168.1m $111.522m $113.622m $127.563m $232.436m Net Operating Profit Margin {A}/{C} 35.6% 43.3% 31.7% 44.0% 36.0% Bank and Bond Debt (EOFY) {D} $1,052.7m $754.521m $929.3m $303.029m $1,048m MDRT {D}/{A} 17.6 years 15.6 years 25.8 years 5.4 years 12.5 years
Notes
1/ Adjusted gross income from rental revenue:
1a/ PCT: I have removed $31.7m in expense recoveries from profit, and re-expressed that as an 'expense reduction' (see post 375).
1d/ SPG: $66.428m+$25.057m+$36.078m = $127.563m. I have included $25.057m of external company management fees that form part of the Stride business model. I have also included $36.078m of proportional rent revenue from equity investments (see note 5 on post 375 on this thread).
1e/ KPG: I have removed $1.547m of property management income, and offset that against management expenses (see post 375).
Discussion
The way I see things, It comes down to this. Would you rather buy an 'office' investment company which has:
a/ The lowest 'Operating Expense to Operating Asset Ratio.'?
b/ A competitive 'Gross PIE Equivalent Dividend Yield', supported by the lowest actual dividend payout ratio compared to earnings? (except for KPG which reduced its dividend payout over the initial Covid-19 period).
c/ The highest Return on Shareholder Equity? (refer post 387)
d/ The largest market discount compared to underlying earning ability? (refer post 399)
e/ The largest net profit margin? AND
f/ The lowest debt in relation to earnings?
.....The company I am talking about is Stride Property Group by the way, in case you have got this far and not figured it out ....OR
Would you rather buy an alternative Office Facility holding vehicle that is inferior in EVERY measure (except Gross PIE Equivalent Dividend Yield), referring to the a/ to f/ listed above.
Stride is so far ahead of the chasing pack, I am not sure it matters who they are. Argosy looks like nosing ahead of Precinct Properties with Vital Healthcare Properties bringing up the rear. I want to make clear that I am not a property investor 'per se', and so I came into this comparative analysis green with no shareholding in any of the above. My first reaction to a result like this is that I must have made a mistake. In an efficient market, there is no way one of the protagonists should be that far in front in my comparison stakes. So for any of you property gurus reading this please find my error and I will fix it. However, I have slept on the matter and found 'no issues'. So I shall arrogantly assume I am right, and carry on. (Edit: I had miscalculated the 'gross yield' of Stride, because the way the dividends were laid out on the NZX website was not consistent, and also the SIML and SPL tax treatment for yield was different. Looking up the original Stride material, I have corrected the error which decreased the gross yield I had previously reported numerically, and relative to the others).
Argosy looks better among this lot than amongst those 'big box' competitors. But I am having trouble stomaching the displayed high debt burden of each of the protagonists, bar SPG. As far as the MDRT measure for debt goes, my rule of thumb says that if you take an MDRT figure in years then:
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
Following this rule, the debt levels at Argosy, Precinct Properties and Vital Healthcare Property and yes, even the Kiwi Property Group, are a 'cause for concern'. I know it is common to leverage up on property more than other asset classes. But MDRT = nearly 26 years at VHP? Are they for real? Given VHP have a 17 year average lease term, I suppose they are. But with VHP trading at a gross interest return of under 4%, VHP is just too expensive to warrant further scrutiny for potential investment by me. I wonder if the current market price for VHP is just reflecting the fashion for 'all things health'?
The fact that I deem four of these protagonists too expensive on the debt scale, could be because I am not familiar with what 'normal' debt in a property investment company is. Yet I note that when Precinct Properties and Vital Healthcare Properties wanted to expand over FY2021, they went back to shareholders for more funds. That would suggest that these companies, at least, are 'mortgaged to the max', and discounted shares offered to the market for the next expansion are likely to be around the corner. Argosy at a gross yield of 5.65% has my attention, given it is a full PIE status vehicle. By contrast, parts of the SPG dividend (the non-SPL bit) will be taxed at an investors full marginal rate. PCT looks to be paying a lot more dividend than their underlying income allows, This is consistent with a potential dividend cut coming on an already on a far from generous gross yield rate rate of 3.43% (refer post 387).
My verdict:
1/ SPG is invest-able, albeit no bargain, at a gross yield of around 5%.
2/ ARG would be a reasonable bit of office owning diversification, particularly as it is a full PIE and has a dividend reinvestment plan.
Also rans (there is no third place!)/ Forget about PCT and VHP. They are good companies, but priced out of the investment market at today's inflated share prices by my value equation (look at the debt risk in post 407).
Note that SPG and ARG are currently trading at a discount to adjusted equity, but PCT and VHP do not (post 399)
KPG is harder to judge in this company. Don't pay too much attention to any historical 'bottom of the pack' gross dividend yield . That is an historical effect of reducing dividend payments from the retail shutdown with forced store closures from Covid-19 over our study period. Yet dividends are expected to reduce in the short term once the shopping malls at Northlands in Christchurch and the mall at Palmerstion North are both sold. Superficially KPG looks like relative value, and the debt levels are below the industry norm. However management have indicated they plan to ramp up spending as the holistic community vision (incorporating residential towers, with shops and offices) development plan kicks into action. It strikes me there is significant execution and ongoing management risk in suddenly taking on hundreds of domestic dwellers as long term residential tenants. Perhaps that risk is why KPG trades on the market at the largest discount to unadjusted net asset backing? Purely on this snapshot view (and disregarding their somewhat chequered history of building shareholder value), I would take KPG as a 'spread the risk' investment punt, mainly because it trades at a discount to adjusted equity (post 399).
SNOOPY
discl: do not hold any of the above shares under discussion
As a special Sunday present to you Beagle, I have relented and included KPG in my 'Toffs into Offs' 'Office Investment' comparison series. All posts (375, 384, 387, 399 and 402) have now been rewritten and updated to include KPG. I think it must be my most extensive cross company comparison to date. I can't even be accused of bias as I don't hold any of them! Plenty to 'chew over' in there as you crunch down on your Sunday saveloy in your dog dish. Happy reading.
SNOOPY
Fantastic comparison of the property companies. Well done Snoopy
Debt in the commercial property sector could be view as against the properties structural life times rather than say debt in retail sector operations.
However note that WHS and HLG have no term debt.
Land and Buildings are usually seen as bankable from the lenders perspective.
Therefore the RISK profiles of there Term LIAB might be viewed by the lender in a different light.
Investment bankers used to call this GEARING as Mike Faye used to say walking around the office.
Gosh those were the days of champagne and Melbourne cups...
Just glancing at the paintings of champion sires.
What a good Beagle doggie you are, thank you...and just the other day I questioned if there might be some poodle breeding mixed into you, shame on me :blush:
Too many bones to chew over at once but on a quick sniff over your amended work I am not surprised at all to see KPG's management expense ratio is by far the highest. It would seem they're especially good at patting themselves on the back for worst of sector performance over the medium to long term. Cheap for very good reasons I've barked about in that thread. Excellent growth in just one area of their business model, staff remuneration lol
25-40% gearing for commercial property with a good spread of tenants is good business practice in my view as it gives better return on equity employed.
Time to look a bit closer at the debt position of our five companies.
Gearing = (Bank and Bond Liabilities)/(Capital Employed)
Valuation Metrics FY2021: Debt Precinct Properties Argosy Vital Healthcare Properties Stride Property Group Kiwi Property Group Normalised Profit (After Tax) {A} $59.8m $48.324m $36.010m $56.076m $83.773m Market capitalisation 31-12-2021 {G} $2,647.6m $1,351.5m $1,818.9m $1,139.8m $1,876.3m Shareholder Equity (EOFY) {B} $2,220.6m $1,280.635m $1,503.451m $1,017.786m $2,134.786m Bank and Bond Debt (EOFY) {D} $1,052.7m $754.521m $929.3m $303.029m $1,048.000m Capital Employed (EOFY) {C} $3,456.4m $2,156.779m $2,662.56m $1,383.618m $3,366.311m Gearing ratio {D}/{C} 30.5% 35.9% 34.9% 21.9% 31.1% MDRT {D}/{A} 17.6 years 15.6 years 25.8 years 5.4 years 12.5 years
What is of interest here is the debt position of a company in relation to its asset base (gearing ratio), verses the debt position of a company to its income base (MDRT).
With interest rates crashing in the Covid-19 pandemic, the ability to service debt has increased (providing that is your income did not crash as a result of the Covid-19 pandemic as well!) So to some extent, gearing has become less relevant, even if I do note that the gearing ratios of these companies remain within Beagle's 'capital efficient' ball park limits of between 25-40% (the naughty exception being 'Stride' who have not borrowed enough, tut tut!). The ability to service debt by income is a different matter.
I haven't yet gone fully into AFFO which is meant to be some 'proxy for profit' of property companies. Without even opening Chapter 1 of the explanatory notes, I know I don't like AFFO though. My mind casts across to the power sector where assets with a life stretching out to maybe hundreds of years are 'depreciated' according to accounting rules. This creates a mismatch between profit and cashflow. So I fully understand these power generators managing their businesses on a cashflow basis. Yet I don't see an analogous position with property companies.
I think Waltzingironman's comment on looking at buildings in terms of their structural life (inferring that is a long time), and the fact that banks see buildings and land as 'bankable' assets comes to the fore here. I have seen multi-story buildings 'stripped to their shells' and repurposed (the old Post Office Administration Building recycled into the new City Council Offices here in Christchurch for example). But that would be a rare success. I think most repurposing is more complex - for example transforming office space into residential apartments with all the associated change in plumbing requirements. Then there is the 'restoration' of the 'Theatre Royal' in central Christchurch. Let's not mince words here. This is a completely new building, built behind the old facade with the original front of house staircase and some interior detailing -like the theatre boxes- put back in. Don't get me wrong. I see that rebuild as 'a good thing', because the original 'Theatre Royal', especially the behind the stage facilities for the performers, was an anachronism. But the point I am making is that, facades apart, very few commercial buildings are 'fit for purpose' with the passing of years. The Christchurch earthquakes simply accelerated the repurposing that was desirable. Thus depreciation for building owners is a 'real thing', because construction and repurposing costs tend to -if anything- go up faster than general inflation. And the 'commercial structural life' for many buildings is rather less than the 'building code structural life' for the same. I guess the saving grace for a business district building is that there will always be a buyer, even if the 'remodeling exercise' to bring a building site 'up to date' starts with the touch point of a wrecking ball.
This means I am back to seeing MDRT or EBITDA/I or AFFO/I (these are all similar because 'I' is correlated with the size of the debt) as the more critical measurements in looking at debt serviceability. If you have land and buildings on it, then surplus property can always be sold off (although if it was truly surplus and you were doing you fiduciary duty as a director, then surely that surplus property would have already been sold off before the property company even looked like getting into trouble). I am not sure I would want to be selling off property in a genuine deep property recession. Despite the 'rules of thumb' on gearing levels, my inkling is that much attention would be paid to the cashflow to avoid at all costs the selling off of property to square up a gearing ratio.
SNOOPY
Mr B is on the front lines these days..
Just quoting how M Faye operated in the Golden days and how com property was valued by investment banks and the model probably hasnt changed much.
its bankable stuff in NZ... those land and buildings portfolios ...
Dont think any of these new buildings in auckland and central Golden Triangle are going to be stripped down any time soon.
Dont think ARG is going to be buying any old theatres anytime soon.
The above post was written in May 2021.
Now the FY2022 year is closed off, I thought it might be worth revisiting what did happen to those dividend payments over the financial year.
Payable dividend date Amount {A} Imputation {B} Imputation Percentage (i) {B}/({A}+{B}) Gross Dividend {A}+{B} 30th March 2022 1.638cps 0.120cps 6.83% 1.758cps 22nd December 2021 1.638cps 0.072cps 4.21% 1.710cps 29th September 2021 1.638cps 0.138cps 7.77% 1.776cps 23rd June 2021 1.613cps 0.000cps 0.0% 1.613cps Total FY2022 6.527cps 0.330cps 4.81% 6.857cps
Note
(i) For a fully imputed dividend, the imputation percentage is 28%
I calculate the backward looking gross dividend, based on Friday's closing share price of $1.37, to be: 6.857/137= 5.005%
If I go to the ARG page on the NZX website, the gross yield displayed is 4.967%. I am not quite sure why there is a difference, although I do recall that sometimes the NZX website 'rounds off' dividends when they display them on their site (that would put my gross yield calculation slightly out).
However, since ARG is a PIE, unitholders don't normally concern themselves with tax matters as it is all done for them. The maximum PIE tax rate is 28%. This means Argosy unitholders can consider themselves as being taxed at the equivalent of 28%, because the net dividend they receive is not subject to any further tax. In actuality ARG does not pay tax at 28%, because not all of their income is taxable. However, this matters not one jot to the Argosy unitholder if they compare the dividend they receive with other dividend yielding investment opportunities in the market. Using this alternative logic, the gross return earned by Argosy unitholders over FY2022 was:
(6.527/0.72) / 137 = 6.617%
Or if you are a 33% taxpayer
(6.527/0.67) / 137 = 7.110%
The above looks like the way Beagle sees it. So why does the NZX see the gross yield for ARG very differently, at just 4.967%? Who has the right number?
SNOOPY
ARG was a big buy back in april 2020....
2020......
time to find a new horizon....
something that will "Fill ya Boots" as WH Turner was fond of saying ... well at least in the movie...