Pfi

[Snoopy]

Net Profit Margin = (Net Operational Profit after Tax) / (Rental and Management Fee Income)

FY2018: $32.045m / $89.710m = 35.7%
FY2019: $34.488m / $96.051m = 35.9%
FY2020: $34.379m / $97.392m = 35.3%
FY2021: $39.622m / $108.653m = 36.5%
FY2022: $36.631m / $110.909m = 33.0%

I am struck by how extraordinarily consistent the net profit margin after tax is! We did gain a bit between FY2018 and FY2021, only to slide back to five year lows in FY2022 (albeit the margin is still good in absolute terms). I believe the FY2022 margin drop could be because PFI is preserving capital in preparation for the brownfields projects at Bowden Road and Springs Road in industrial Auckland. PFI is in a strong enough position to 'look through' one off earnings downturns in view of an improving future earnings picture. Despite 'earnings per share' dropping over FY2022, PFI said this (from AR2022 p4):

"Overall, dividends continued to trend upward. Assessed over a three-yearly framework, the 2022 dividend looks past the higher earnings in 2021, which were a result of record low interest rates and holding the Carlaw Park properties until the end of that year. Dividends rose to 8.10 cents per share (cps)."

I can't argue that margins did not improve over the years FY2018 to FY2021, even if the margin improvement was small.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

We fell at the third hurdle! - the old 'return on equity' test. This is no surprise for an asset heavy property company. But even with this 'failed' test (and remember it is important to clear all four of the Buffett hurdles for the likes of Buffett to be interested - 3 out of 4 is not good enough), some positives stand out.

If we compare 'Property for Industry' (PFI) with what some might see as a more glamorous property owning company: Investore (IPL) -the supermarket owning specialist-, those 'dull industrial sheds' look to be making twice the return on shareholder equity, compared to the supermarket big boxes. Helping the ROE figures is the fact that PFI will celebrate its thirtieth year in business in 2024. Why does that make a difference? Because when I calculate 'return on equity', I remove from that calculation any 'property revaluation equity' that has occurred over the years. And thirty years of such cumulative re-valuatiuons, (even including the six years over which valuations went backwards), add up to a lot if revalued equity. This 'revalued equity' is 'free incremental equity' from a unit holder perspective.

Look across to the net profit margin for the five years under our 'Investorscope'. Five years ago, PFI was five percentage points above IPL (35.7% vs 29.8%). By 2023 it was twelve percentage points higher (33.0% vs 21.0%)! IPL has stores on the property market in a bid to shore up their capital position. PFI is under no such pressure. In fact over the whole 30 year history of PFI, unit issues of new capital have only been used to acquire significant property assets that has made PFI incrementally larger. Never to satisfy the capital ratio concerns of the company's funding banks.

PFI gets very little discussion on this forum, and as a result is probably a candidate for being the most boring of NZX listed shares. But in the world of investment, being boring is not such a bad thing. For new investors, the less hype in the share price the better! Sometimes managers who go about their jobs doing ordinary things are the true investment champions. And thirty years of 'sticking to your knitting' without going off on any headline grabbing 'fashion inspired tangents' I think is a kind of record to be proud of. Plus being a PIE, means that PFI has a tax advantage for dividends paid to earners in those higher tax brackets.

In summary, while I don't expect Warren will be appearing on the share register of PFI any time soon, compared to other options in the property sector, I think fundamentally there is a lot to like here. But what would be a fair price to pay for PFI units under an alternative 'non Buffett' investment criteria? That is the question I will tackle next.

SNOOPY

discl: do not hold

[Valuegrowth]

PFI gets very little discussion on this forum, and as a result is probably a candidate for being the most boring NZX listed share. But in the world of investment, being boring is not such a bad thing. For new investors, the less hype in the share price the better! S

SNOOPY

Boring is beautiful. I was able to survive in the investment world thanks to boring stocks. Coming period is going to be good for Boring stuff.

[Snoopy]

The financial year for Property for industry is the same as the calendar year. Thus the figures below is the latest comparative data available.

Dividend	Gross (cps)	Net (cps)	Imputation Credits (cps)	No. Shares on Issue (2)	Net Total Payout	Annual Total
Q3 FY2022 ex10-11-2022	1.806 (1)	1.850	0.5058	503.275m	$9.311m
Q2 FY2022 ex29-08-2022	2.379	1.800	0.5793	504.759m	$9.087m
Q1 FY2022 ex12-05-2022	1.946	1.800	0.1460	505.494m	$9.100m
Q4 FY2021 ex28-02-2022	2.700	2.450	0.2501	505.494m	$12.388m	$39.886m
NPAT over FY2022 (refer post 13 table 1)						$28.326m

Notes

1/ This particular dividend is unusual in that the 'Gross taxable amount' is greater than the 'Net Taxable amount' (the dividend actually paid). How is this possible? The actual net payment included an 'excluded amount' of 0.549cps. An 'excluded amount' generally means a profit that is non-taxable, like capital profits from asset sales. This excluded amount of $2.76m is part of the reason the company could afford to pay more in dividends than their NPAT earnings.

2/ There was a share buyback which started during the year, which explains why the number of shares, after May, is changing at each ex-dividend date after that.

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

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.5058+0.5793+0.1460+0.2510) / (1.806+2.379+1.946+2.700) = 16.8%

Something does not sit right with me here. 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 16.8% over the same period on those same earnings.

Oh and about those 'same earnings'. Apparently only $28.236m of profits were earned over the period, yet nearly $12m more ($39.886m) than that in tax paid dividends were paid out. Where did that phantom $12m difference in tax paid earnings paid out come from?

If I was an investment advisor, I would caution against clients investing in PFI. This is because PFI management are issuing pieces of paper that allow rich unit holders to claim tax paid that is in excess of the actual tax paid by the company. I would report PFI to Inland Revenue as a 'scam outfit' cheating the taxpayers of New Zealand. However, in this instance the loop hole that has allowed this 'scam' to take place is the PIE tax regime, which is administered by the IRD itself. So it would appear that Inland Revenue are just scamming themselves, and the whole arrangement is perfectly legal for unit holders after all!

I would love it if a tax lawyer or tax accountant was willing to explain how all of this works.

SNOOPY

[Snoopy]

Reconciliations are a bit hard to do over a single financial year. That is because the earnings behind dividends and tax paid can spill over into adjacent years. So here is what happened over FY2021. I wonder if that will make the multi-year picture clearer?

Dividend	Gross (cps)	Net (cps)	Imputation Credits (cps)	No. Shares on Issue (2)	Net Total Payout	Annual Total
Q3 FY2021 ex11-11-2021	2.485	1.850	0.6348	504.455m	$9.311m
Q2 FY2021 ex26-08-2021	2.409	1.800	0.6088	503.478m	$9.087m
Q1 FY2021 ex12-05-2021	2.392	1.800	0.5921	502.493m	$9.100m
Q4 FY2020 ex01-03-2021	2.764	2.250	0.5141	501.303m	$12.388m	$38.723m
Cumulative Shares bought back over FY2021 (1)						($11.649m)
NPAT over FY2021 (refer post 13 table 1)						$33.674m

Notes

1/ These shares have been bought back as a result of unit holders participating in the dividend reinvestment plan. This total should be subtracted from cumulative dividend total paid over the year to get the 'net cash outflow' for the year to unit holders.

2/ There was a dividend reinvestment plan in operation during the year. This explains why the number of shares on issue is changing at each ex-dividend date.

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

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.5141+0.5921+0.6088+0.6348) / (2.764+2.392+2.409+2.485) = 23.4%

This means PFI paid a greater percentage of income tax than occurred in FY2022, the subsequent year. Nevertheless 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 23.4% over the same period on those same earnings. And once again my calculated earnings, as recognised by the IRD lag behind the dividend payout in size (the old pay out more than you earn trick).

I had thought that excess earnings from FY2021 might have flowed through into FY2022, to help explain the very high payout ratio in that year (payout ratio for FY2022 was $39.886m/$28.326m= 141%). However, this did not happen, because, over FY2021, PFI paid fully imputed dividends were significantly in excess of underlying earnings as well ($38.723m/$33.674m= 115%). It looks like the 'self scamming scheme' managed by Inland Revenue has some more history! I am still none the wiser as to 'how they can get away with it' though! At least over FY2021, the dividend reinvestment scheme did reduce the net dividend outlay in cash to below earnings.

SNOOPY

[Snoopy]

I think it is worth doing this exercise on a third year of operations, to see if we can gain more insights into how the PIE system of earnings is operating.

Dividend	Gross (cps)	Net (cps)	Imputation Credits (cps)	No. Shares on Issue (2)	Net Total Payout	Annual Total
Q3 FY2020 ex06-11-2020	2.385	1.850	0.5351	500.595m	$9.311m
Q2 FY2020 ex10-09-2020	2.291	1.800	0.4906	499.855m	$9.087m
Q1 FY2020 ex14-05-2020	2.293	1.800	0.4925	498.723m	$9.100m
Q4 FY2019 ex23-02-2020	2.952	2.150	0.8015	501.303m	$10.724m	$37.961m
Cumulative Shares bought back over FY2021 (1)						($6.585m)
NPAT over FY2020 (refer post 13 table 1)						$29.855m

Notes

1/ These shares have been bought back as a result of unit holders participating in the dividend reinvestment plan. This total should be subtracted from cumulative dividend total paid over the year to get the 'net cash outflow' for the year to unit holders.

2/ There was a dividend reinvestment plan in operation during the year, from the May dividend forwards. This explains why the number of shares on issue is changing at each ex-dividend date.

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

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.8015+0.4925+0.4906+0.5351) / (2.952+2.293+2.291+2.385) = 23.4%

This means PFI paid a greater percentage of income tax than occurred in FY2021, the subsequent year. Nevertheless 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 23.4% over the same period on those same earnings. And once again my calculated earnings, as recognised by the IRD lag behind the dividend payout in size (the old pay out more than you earn trick).

This means that for the third year in a row, dividend payments have exceeded earnings this time by $37.961m/$29.855m= 27%. Obviously a company cannot go on paying out such significant dividends above earnings for year after year. Something is going to break in the end if they keep doing that. So I conclude there is something about the PIE earnings regime that I do not fully understand.

One hint as to what might be happening is that some dividends (e.g. the one with the ex date 14-05-2020) report gross payments that include an 'excluded amount'. I believe that 'excluded amount' indicates that this part of the payment is technically not a dividend at all. It is merely PFI giving their unit holders some of their capital back. The dividend statement is worded as though this is a 'special thing' that is applicable to listed PIEs only. But any company is allowed to make a capital repayment free of tax deductions. So I don't see what is 'unique' to PIEs in giving unit holders their own capital back.

Practically, over FY2020, the dividend reinvestment scheme did reduce the net dividend outlay almost to cash earnings (as it did in FY2021). So the DRP managed to steady the cashflow ship. But I am not comfortable with the DRP being used to close the cash deficit on a regular basis. If enough investors pull out of the DRP, doesn't that make PFI's cash distribution policy unsustainable?

SNOOPY

[JeffW]

The financial year for Property for industry is the same as the calendar year. Thus the figures below is the latest comparative data available.

Dividend	Gross (cps)	Net (cps)	Imputation Credits (cps)	No. Shares on Issue (2)	Net Total Payout	Annual Total
Q3 FY2022 ex10-11-2022	1.806 (1)	1.850	0.5058	503.275m	$9.311m
Q2 FY2022 ex29-08-2022	2.379	1.800	0.5793	504.759m	$9.087m
Q1 FY2022 ex12-05-2022	1.946	1.800	0.1460	505.494m	$9.100m
Q4 FY2021 ex28-02-2022	2.700	2.450	0.2501	505.494m	$12.388m	$39.886m
NPAT over FY2022 (refer post 13 table 1)						$28.326m

Notes

1/ This particular dividend is unusual in that the 'Gross taxable amount' is greater than the 'Net Taxable amount' (the dividend actually paid). How is this possible? The actual net payment included an 'excluded amount' of 0.549cps. An 'excluded amount' generally means a profit that is non-taxable, like capital profits from asset sales. This excluded amount of $2.76m is part of the reason the company could afford to pay more in dividends than their NPAT earnings.

2/ There was a share buyback which started during the year, which explains why the number of shares, after May, is changing at each ex-dividend date after that.

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

Of course Property for Industry (PFI) is a PIE or 'Portfolio Investment Entity'. This means that unit holders are required to pay tax at a rate of no more than 28% on company profits, no matter what their marginal tax rate. However, we can see that the actual tax rate paid by the company for the year, as represented by the imputation credits, amounts to tax at a rate of:

(0.5058+0.5793+0.1460+0.2510) / (1.806+2.379+1.946+2.700) = 16.8%

Something does not sit right with me here. 'Rich' unit holders are allowed to claim that they have paid the equivalent of 28% tax on their dividends, despite the company only paying tax at a rate of 16.8% over the same period on those same earnings.

Oh and about those 'same earnings'. Apparently only $28.236m of profits were earned over the period, yet nearly $12m more ($39.886m) than that in tax paid dividends were paid out. Where did that phantom $12m difference in tax paid earnings paid out come from?

If I was an investment advisor, I would caution against clients investing in PFI. This is because PFI management are issuing pieces of paper that allow rich unit holders to claim tax paid that is in excess of the actual tax paid by the company. I would report PFI to Inland Revenue as a 'scam outfit' cheating the taxpayers of New Zealand. However, in this instance the loop hole that has allowed this 'scam' to take place is the PIE tax regime, which is administered by the IRD itself. So it would appear that Inland Revenue are just scamming themselves, and the whole arrangement is perfectly legal for unit holders after all!

I would love it if a tax lawyer or tax accountant was willing to explain how all of this works.

SNOOPY

The company's taxable profit is less than their cash profit, by virtue largely of depreciation. The mismatch you're talking about is in essence the partial distribution of the depreciation.

[Snoopy]

The company's taxable profit is less than their cash profit, by virtue largely of depreciation. The mismatch you're talking about is in essence the partial distribution of the depreciation.

Firstly JeffW, thanks for your response.

There is a distinction in the accounts mentioned between depreciation of 'building fit out' and 'building structure' (AR2022 p64). The former is a regular wear and tear item (for example carpets that have to be rep[laced every few years). The latter you could argue does not depreciate in a day to day use sense. If money does not have to be spent regularly updating the 'structure' of a building, then you can argue this money is 'cash income' over and above what the accounts are telling you the building has earned over the year. Is this what you are referring to as the incremental 'cash profit' JeffW?

I have estimated this incremental cash income, based on building structure depreciation claimed, for PFI over FY2022 to be:
$20.836m - $9.300m = $11.536m (refer my post 13).
This is enough to bridge the gap between 'dividends paid' over FY2022 and 'profit earned' over FY2022, as you suggest JeffW, However this "incremental cash profit" does not have imputation credits attached to it, because no incremental income tax has been paid on this "incremental cash profit". So where do the imputation credits come from to allow a dividend payout of "cash income' to be fully imputed? This is the question that I find so baffling.

SNOOPY

[JeffW]

Firstly JeffW, thanks for your response.

There is a distinction in the accounts mentioned between depreciation of 'building fit out' and 'building structure' (AR2022 p64). The former is a regular wear and tear item (for example carpets that have to be rep[laced every few years). The latter you could argue does not depreciate in a day to day use sense. If money does not have to be spent regularly updating the 'structure' of a building, then you can argue this money is 'cash income' over and above what the accounts are telling you the building has earned over the year. Is this what you are referring to as the incremental 'cash profit' JeffW?

I have estimated this incremental cash income, based on building structure depreciation claimed, for PFI over FY2022 to be:
$17.958m - $9.300m = $8.658m (refer my post 13).
This is enough to bridge most of the gap between 'dividends paid' over FY2022 and 'profit earned' over FY2022, as you suggest JeffW, However this "incremental cash profit" does not have imputation credits attached to it, because no incremental income tax has been paid on this "incremental cash profit". So where do the imputation credits come from to allow a dividend payout of "cash income' to be fully imputed? This is the question that I find so baffling.

SNOOPY

Yes, that's what I was referring to. For a NZ Tax Resident investor, if there are not sufficient imputation credits, then that part which is not 28% imputed is an "excluded dividend" and not taxable irrespective of the tax rate of the recipient.

[Snoopy]

For a NZ Tax Resident investor, if there are not sufficient imputation credits, then that part which is not 28% imputed is an "excluded dividend" and not taxable irrespective of the tax rate of the recipient.

I have been thinking about JeffW's comment above, believing it cannot be correct. Yet when I check the official IRD reference document on the subject:

https://www.ird.govt.nz/-/media/proj...20220119011852
From p19
Distributions or dividends from listed PIEs to shareholders
Distributions or dividends to New Zealand resident natural persons and New Zealand resident trustees that are shareholders in a listed PIE are excluded income unless the shareholder includes the dividend in their tax return. The amount of any distribution or dividend that is not fully imputed is also considered excluded income of the shareholder. ('Excluded income' is more commonly used as a term for a capital repayment where no tax payment would be due anyway). These dividends are not liable for Resident Withholding Tax nor NRWT

...it appears JeffW is 100% correct!

This is watershed post for me in better understanding the PIE dividend system.

I had conjectured that PFI tax paid PIE income could only come from tax paid by the underlying parent company (PFI). Wrong!

What JeffW is saying here is that surplus cashflow being made available from depreciation, -cashflow which has not been taxed- (in fact this depreciation money has been used as an expense reducing the income tax bill of the PFI company), can be paid out as a dividend under exactly equivalent conditions as if this cashflow was tax paid profit! (when in fact no tax had been paid on this non-existent 'profit'). I think it is worth stopping for a moment and contemplating this point for a time......

This 'depreciation money' -that has been used to reduce company income tax- is being paid out to shareholders as cash 'earnings' (sic), which amounts to the same net payment as those shareholders would have got had those 'earnings' (sic) been 'tax paid', with a 28% slice of tax removed (which was NOT done). Unbelievable! 'Mr tax man' has been hit over the head not just once, but twice!

And no-one gives a fig......(although maybe Nicola Willis does as she looks to sort out those double dipping tax dodging PIE property owners)

SNOOPY