Pfi

[Snoopy]

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

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

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

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

	FY2018	FY2019	FY2020	FY2021	FY2022	Total
Reduction of prima facie income tax from depreciation (AR Note 5.2, Tax) (1)	$2.620m	$2.598m	$4.439m	$4.917m	$5.834m
Profit before other expense/income and income tax (as declared)	$89.816m	$96.109m	$97.395m	$108.655m	$110.921m
less Depreciation Charge	$9.357m	$9.279m	$15.854m	$17.561m	$20.836m
less Property Costs	$12.507m	$14.850m	$16.262m	$16.753m	$17.598m
less Interest Expenses & Bank Fees	$18.766m	$19.008m	$18.233m	$20.106m	$24.638m
less Administrative Expenses	$4.679m	$5.072m	$5.851m	$7.465m	$8.508m
equals IRD Profit before other expense/income and income tax {A} (2)	$44.507m	$47.900m	$41.465m	$46.770m	$39.341m
less Current tax expense (AR Note 5.2 'Tax') {B}	$8.886m	$13.106m	$10.066m	$10.605m	$10.525m	$53.188m
equals IRD Operational Net Profit After Tax	$34.794m	$34.794m	$31,399m	$36.165m	$28.816m
Tax paid - cashflow statement	$0.049m	$9.044m	$19.681m	$10.300m	$11.080m	$50.154m
Incremental Deferred Taxation Benefit (P&L cashflow reconciliation)	$3.316m	$0.985m	$12.875m	$9.412m	($3.114m)	$23.474m
Implied Current tax rate {B}/{A}	20.0%	27.4%	24.3%	22.7%	26.8%

Notes

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

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

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

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


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

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

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

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

SNOOPY

[Snoopy]

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

	FY2018	FY2019	FY2020	FY2021	FY2022	Total
Current tax expense (AR Note 5.2 'Tax') {B}	$8.886m	$13.106m	$10.066m	$10.605m	$10.525m	$53.188m
Tax paid - cashflow statement	$0.049m	$9.044m	$19.681m	$10.300m	$11.080m	$50.154m
Incremental Deferred Taxation Benefit	$3.316m	$0.985m	$12.875m	$9.412m	($3.114m)	$23.474m

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

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

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

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

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

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

From section 5 of NZIAS12

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

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

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

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

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

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

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

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

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

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

SNOOPY

[Snoopy]

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

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

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

What actually happened

i/ Building Depreciation Allowed FY2020,FY2021,FY2022	FY2018	FY2019	FY2020	FY2021	FY2022	Total
Profit before other expense/income and income tax (as declared)	$89.816m	$96.109m	$97.395m	$108.655m	$110.921m
less Depreciation Allowance (1)	$9.357m	$9.279m	$15.854m	$17.561m	$20.836m
less Property Costs	$12.507m	$14.850m	$16.262m	$16.753m	$17.598m
less Interest Expenses & Bank Fees	$18.766m	$19.008m	$18.233m	$20.106m	$24.638m
less Administrative Expenses	$4.679m	$5.072m	$5.851m	$7.465m	$8.508m
equals IRD Profit before other expense/income and income tax {A}	$44.507m	$47.900m	$41.195m	$46.770m	$39.341m
less Income Tax expense @ 28% (this calculated scenario) (2)	$12.462m	$13.412m	$11.535m	$13.096m	$11.015m	$61.520m
equals IRD Operational Net Profit After Tax	$32.045m	$34.488m	$29.660m	$33.674m	$28.326m
add Cashflow from 'Structural Depreciation' not reinvested (3)	$0m	$0m	$6.554m	$8.261m	$11.536m
equals 'Cash Earnings' available for distribution	$32.045m	$34.488m	$36.514m	$41.935m	$39.962m
(Reference Only) Current tax expense (AR Note 5.2 'Tax')	$8.886m	$13.106m	$10.066m	$10.605m	$10.525m	$53.188m

Notes

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

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

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



What would have happened

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

ii/ If Building Depreciation DisAllowed	FY2018	FY2019	FY2020	FY2021	FY2022	Total
Profit before other expense/income and income tax (as declared)	$89.816m	$96.109m	$97.395m	$108.655m	$110.921m
less Depreciation Allowance (scenario for FY2020-FY2022)	$9.357m	$9.279m	$9.300m	$9.300m	$9.300m
less summed Property, Administration and Interest Costs	$35.952m	$38.930m	$40.346m	$44.324m	$50.744m
equals IRD Profit before other expense/income and income tax {A}	$44.507m	$47.900m	$47.749m	$55.031m	$50.877m
less Income Tax expense @ 28% (this calculated scenario)	$12.462m	$13.412m	$13.370m	$15.409m	$14.246m	$68.899m
equals IRD Operational Net Profit After Tax	$32.045m	$34.488m	$34.379m	$39.622m	$36.631m

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

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

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

SNOOPY

[Snoopy]

Building Depreciation Allowed FY2020,FY2021, FY2022	FY2018	FY2019	FY2020	FY2021	FY2022	5 year Total
Dividends Paid during Financial Year (1)	$37.902m	$37.654m	$37.961m	$38.723m	$39.886m	$192.126m
Profit before other expense/income and income tax (as declared)	$89.816m	$96.109m	$97.395m	$108.655m	$110.921m
less Depreciation Allowance	$9.357m	$9.279m	$15.854m	$17.561m	$20.836m
less summed Property, Administration and Interest Costs	$35.962m	$38.930m	$40.346m	$44.324m	$50.744m
equals IRD Profit before other expense/income and income tax	$44.507m	$47.900m	$41.195m	$46.770m	$39.341m
less Income Tax expense @ 28%	$12.462m	$13.412m	$11.535m	$13.096m	$11.015m
equals IRD Operational Net Profit After Tax	$32.045m	$34.488m	$29.660m	$33.674m	$28.326m	$158.193m
Dividends reinvested during year (1)	$0.0m	$0.0m	$6.585m	$11.649m	$0.0m	$18.234m
New long term incentive shares paid up	$0.0m	$0.270m	$0.500m	$0.313m	$0.164m	$1.247m
Building revaluations and sales proceeds during year	$66.370m	$125.193m	$72.546m	$395.133m	($56.160m)	$603.082m
New Capital raised during year (2)					($8.658m)	($8.658m)
EOFY shareholder equity {A}	$915.135m	$1.054.037m	$1,136.613m	$1,562.662m	$1,500.338m
EOFY total assets {B}	$1,358.898m	$1,522.696m	$1,687.359m	$2,217.006m	$2,162.787m
Equity Ratio {A}/{B}	67.3%	69.2%	67.4%	70.5%	69.4%

Notes

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

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

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

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

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

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

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

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

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

SNOOPY

[FTG]

Are your numbers correct Snoopy?

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

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

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

[Snoopy]

Hi FTG, thanks for keeping me honest

Are your numbers correct Snoopy?

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

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

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

$38.723m - $11.649m = $27.074m

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

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

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

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

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

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

SNOOPY

[FTG]

Thanks for clarifying Snoopy.

[Snoopy]

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

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

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

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

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

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

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

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

Conclusion: PASS TEST

SNOOPY

[Snoopy]

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

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

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

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

Conclusion: PASS TEST

SNOOPY

[Snoopy]

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

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

Notes

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

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

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

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

FY2017	+$43.595m
FY2016	+$88.214m
FY2015	+$46.471m
FY2014	+$36.286m
FY2013	+$12.326m
FY2012	+$12.302m
FY2011	+$3.653m
FY2010	+$2.590m
FY2009	($28.371m)
FY2008	($43,128m)
FY2007	+$26.463m
FY2006	+$33.493m
FY2005	+$33.933m
FY2004	+$29.972m
FY2003	+$7.128m
FY2002	+$7.408m
FY2001	+$0.790m
FY2000	($5.353m)
FY1999	($0.443m)
FY1998	($0.479m)
FY1997	+$6.275m
FY1996	$0
FY1995	+$1.539m
FY1994	+$0.252m
Total 'R'=	+$314.916m

Conclusion: FAIL TEST

SNOOPY