IPL - Investore Property

[Snoopy]

Taking account of all of these factors, my overall opinion is that the hyenas are ruling the carcass at IPL. Yet so fat is the IPL beast, in relative terms, there is sufficient fat on the bone left for the dogs to dive in after the hyenas have had their share. But as always, the "dive in price" has to be right.

A further argument, in shareholder value terms, is that Mr Market will sort all of the hyenas out. Because if those hyenas are really denying the dogs their rightful dividend stream, the respective company share prices will be marked down accordingly. And that will bring the dividend yield back to 'fair value'. But does that argument hang together in this context?

I have added some snapshot valuation metrics, to be part of the ensuing discussion.

Dividend and Capital Movements FY2021	Investore As Presented	Investore with In House Staff	Argosy As Presented	Property For Industry As Presented	Goodman Property Trust As Presented
Dividend Payments over FY2021	($27.980m)	($27.980m)	($53.464m)	($37.961m)	($78.3m)
Normalised Profit (After Tax) {A}	$24.121m	$24.121m	$48.324m	$47.602m	$72.864m
New Capital Raised over FY2021	$102.652m	$102.652m	$16.404m	$6.585m	$172.0m
Shareholder Equity (EOFY) {B}	$765.674m	$765.674m	$1,280.635m	$1,562.662m	$2,962.9m
Total Operating Expense to Operating Asset Ratio (OEOAR)	1.85%	1.85%	1.95%	1.28%	1.70%
Return on Equity (ROE) {A}/{B}	3.18%	3.18%	3.77%	3.05%	2.46%
Gross Earnings Yield (Based on SP @ EOCY2021)	4.71%	4.71%	5.00%	4.34%	2.82%

Notes

1/ Earnings related calculations are based on Operating Earnings.

2/ Normalised NPAT Calculations:
2a/ Investore: 0.72($29.679m+$3.553m+$0.294m-$0.024m) = $24.121m
2b/ Argosy: 0.72($95.625m-$32.691m+$4.183m) = $48.324m
2c/ Property for Industry: 0.72($517.151m-$392.518m-$2.636m-$12.271m-($44.324m-$0.702m)) = $47.602m
2d/ Goodman Property Trust: 0.72($114.9m-$13.7m) = $72.864m

3/ New capital raised includes dividends reinvested under the respective 'Dividend Reinvestment Plans' (Argosy, Property for Industry) and separate 'New Capital Raisings' (Investore, Goodman Property Trust).

4/ Gross earnings yield calculations:
4a/ Investore: ($24.121/0.72)/($1.95x365.135m) = 4.71%
4b/ Argosy: ($48.324/0.72)/($1.60x839.528m) = 5.00%
4c/ Property for Industry: ($47.089/0.72)/($2.98x505.494m) = 4.34%
4d/ Goodman Property Trust: ($72.864m/0.72)/($2.58x1,391.228m) = 2.82%

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

Students of property may observe that in all cases (bar PFI), the dividend paid exceeded the normalised profit. This has implications for future company growth. Because if you wish to grow your company and your cash outgoings exceed your income, then this means you will have to attract new capital if your company is to expand. Some companies have a subtle way of doing this, by implementing a dividend investment plan. The example to note here is Argosy. Argosy have persuaded enough people that reinvesting their dividend is a good idea, so that paying out a dividend greater than the earnings received becomes a sustainable policy.

Other companies that:
(i) have just made an acquisition OR
(ii) are raising more capital with the idea of making an acquisition OR
(iii) are doing an own build
have gone the more conventional capital raising way (Investore, Goodman). BUT (and here is the key point of this post):

If your company is cursed with an inefficient cost structure, then all of the new capital raised will also be deployed under that inefficient cost structure. Mr Market cannot account for this difference in execution efficiency, because he doesn't know when in advance significant new capital will be raised, or even if it will be raised. Yet because of the high payout ratio of these property companies (often over 100% in my examples), it is almost certain that when a significant new asset is to be acquired, then a capital raising will be necessary.

How then, do we use all this information, when evaluating what property company to buy?

OEOAR lowest to highest (*)	PFI	GMT	IPL	ARG
ROE highest to lowest	ARG	IPL	PFI	GMT

(*)Note: OEOAR= Operating Expense to Operating Asset ratio


If OEOAR was a contra-indicator of return, then the names in the columns in the above table should line up. The fact they don't, and the highest management cost provider also uses its shareholder funds most efficiently (the exact opposite of what a casual observer might expect) suggests that other factors are important. This is further discussed in post 111.

PFI has the lowest OEOAR, but also the second lowest ROE (which is disappointing). But PFI is the only one of the protagonists to cover its dividend from rent returns.

GMT has the second lowest OEOAR, but the lowest ROE. This is a terrible result and points to inefficiencies elsewhere in the GMT company structure

ARG has the highest ROE (a surprise, given the high OEOAR). This means it is good enough to finish first in overall capital efficiency terms.

IPL is mediocre in this comparative set with a higher than average OEOAR, but still an above average ROE.

In 'capital efficiency' terms, I rate these shares from best to worst: ARG, IPL, PFI and GMT. Nevertheless this is not the end of the story from an investment perspective. If you can't buy your capital efficient shares at the right price, or one of more these four is excessively leveraged, then your actual investment returns can become undone.

SNOOPY

[Beagle]

WOW...you really got your snout into that with dogged determination. The $64,000 question is are they worth buying at $1.75 or should we buy DDOG or BARK on the US markets instead

[Recaster]

My take on the recent bond issue:

https://recastinvestor.substack.com/...store-property

[mcdongle]

My take on the recent bond issue:

https://recastinvestor.substack.com/...store-property

Thank you for that...

[Waltzing]

DDOG

dropped

agri stocks and tractor supplies ...

Farming ...

[Snoopy]

I have added some snapshot valuation metrics, to be part of the ensuing discussion.

FY2021	Investore As Presented	Investore with In House Staff	Argosy As Presented	Property For Industry As Presented	Goodman Property Trust As Presented
Total Operating Expense to Operating Asset Ratio (OEOAR)	1.85%	1.85%	1.95%	1.28%	1.70%
Return on Equity (ROE) {A}/{B}	3.18%	3.18%	3.77%	3.05%	2.46%
Gross earnings Yield (Based on SP @ EOCY2021)	4.71%	4.71%	5.00%	4.34%	2.82%

PFI has the lowest OEOAR, but also the second lowest ROE (which is disappointing). But PFI is the only one of the protagonists to cover its dividend from rent returns.

GMT has the second lowest OEOAR, but the lowest ROE. This is a terrible result and points to inefficiencies elsewhere in the GMT company structure.

ARG has the highest ROE (a surprise, given the high OEOAR). This means it is good enough to finish first in overall capital efficiency terms.

IPL is mediocre in this comparative set with a higher than average OEOAR, but still an above average ROE.

In 'capital efficiency' terms, I rate these shares from best to worst: ARG, IPL, PFI and GMT. Nevertheless this is not the end of the story from an investment perspective. If you can't buy your capital efficient shares at the right price, or one of more these four is excessively leveraged, then your actual investment returns can become undone.

There is a problem with investing in the 'best' business you can find in a sector of business opportunities. Mr Market is always one step ahead of you. He has already driven up the price of your favoured investment to make the 'marginal price risk' on purchase, similar to all of those other alternative sector investments. In theory Mr Market is very efficient at doing this. In practice, not always so.

For this exercise, to equalise the return on alternative capital investments, Mr Market should rightfully pay a higher price for a company with a higher ROE. Thus we can calculate a relative 'price premium guidance formula' that will provide a guidance to 'relative return'. But a 'relatively' good return may still be poor if the base rate we are comparing that with is too low. So attention shifts back to the IPL 'base earnings rate', and we are ASSUMING:

a/ That the seemingly low reference ROE figure for IPL, is...
b/ Modified by a market discount factor so that our investor can buy the associated implied revenue stream at an appropriate discounted rate, and....
c/ So harvest an acceptable return for the said investor,

appropriate for this class of investment, .....that our investor may be seeking.

Equalised Return and Market Premiums 2021	Investore Property Limited	Argosy Property	Property for Industry	Goodman Property Trust
Return on (Net) Equity (ROE) (based on normalised profit)	3.18%	3.77%	3.05%	2.46%
Investment Property Premium/Discount Factor	1.000	1.186	0.9591	0.774
Equity per Share	$2.20	$1.64	$3.09	$2.496
Equalised Equity per Share (ROE equalised against IPL)	$2.20	$1.95	$2.96	$1.93
Share Price 31-12-2021	$1.95	$1.60	$2.98	$2.58
Shares on Issue 31-12-2021	368.135m	844.658m	505.494m	1,397.303m
Market capitalisation 31-12-2021	$589.016m	$1,351.5m	$1,506.4m	$3,605.0m
SP Premium/Discount @31-12-2021 to Equalised IPL Net Equity 31-12-2021	-11.4%	-17.9%	+1.0%	+33.7%
Share Price 08-03-2022	$1.71	$1.40	$2.645	$2.34
SP Premium/Discount @08-03-2022 to Equalised IPL Net Equity 31-12-2021	-22.3%	-28.2%	-10.6%	+21.2%

OK, what does the above table mean? In the centre of the table are two emboldened figures reading $2.20. The first figure is the net asset backing of IPL shares (see Listed Property Trust Thread post 1182). The second figure is the adjusted net asset backing of IPL shares which is still $2.20 - exactly the same number. This gives you a clue about what this table is showing. This table is a comparative set of numbers outlining the virtue of investing in a different property share, relative to IPL. The relative virtue of investing in IPL compared to itself is 'no difference'. This is why the table is showing no difference in the 'asset backing' of IPL and the 'adjusted net asset backing' of IPL (the 'adjustment factor' in this instance is 1).

If you had bought IPL shares on 31st December 2021, then you would have bought an asset giving a return of 3.18% on the value of the net assets invested. However, those shares were offered on the market at a discount to face value on that date, at $1.95. Because you were able to buy these shares at a discount, this means the return on the money you outlaid will be higher than the calculated ROE (retrospective coupon rate). Your underlying rate of return on equity will be at a figure of:

(220/195) x 3.18% = 3.59%, in fact.

The real implied retrospective 'dividend rate' is even higher than this. That is because Investore have a history of paying out more than their earnings as dividends (See post on this thread 'Dogs vs Hyenas part 8'). I make no judgement -at this point- as to whether that underlying implied return rate is 'good' or 'bad'. That decision is entirely up to the investor. But what the table above is trying to tell us is whether other 'alternative investments in the same sector' are 'better' or 'worse' than Investore, and by how much. Next - a working example of what I am talking about.

Suppose, on 31-12-2021, you bought some shares in Investore at $1.95 each. That price is an 11.4% discount to the asset backing of the share (see above table for all these referenced numbers). Buying something for less than it is worth is a good thing for an investor to do. In fact, doing that is the basis for all successful investing. However the asset backing of a property share can go up and down for different reasons. So just because you bought a share below asset backing on a particular date, does not rule out the possibility of that asset backing falling back towards the price you paid at a later date (a very real possibility with rising interest rates). Interest rates are not the only factor in determining the 'worth' of a property share though. The rental income stream you can achieve from the net tangible assets is another. A higher rental income stream from the same dollar value of net assets manifests itself as a higher 'return on equity'. It is this effect I have tried to capture in my 'equalisation of equity' calculations.

Nominally on that same date you could have bought some Argosy shares at $1.60, which would still have been at a discount to the NTA of $1.64. But the percentage discount on that deal would have been 2.4%, verses 11.4% on the hypothetical IPL purchase on the same date. So the IPL deal was the better deal, right? Actually no, because it is ARG that are 'working their net assets harder' (this is where my adjustment factors in that table come in). So once you make the ROE equalizing adjustment, you can see that the Argosy deal is the better deal with 22.3% -28.2% = a 5.9 percentage point further discount than was available on the IPL deal. At this point I need to jump in and say that a 5.9 percentage point margin on the relative value of the purchase price of an asset is not that great a difference. Such a variation is within the realm of 'normal sharemarket trading' over a month. So if you were building a property portfolio of listed property assets, it would not be unreasonable to take up both deals. The whole point of this table is that basing a value criterion strictly on net asset backing, particularly when the book value of assets are vulnerable, is perhaps not the best option when taking an investment return perspective.

Yet basing an investment decision purely on a return calculation, such as I am suggesting, is still a 'one dimensional' calculation. There are other factors to consider.

SNOOPY

[Snoopy]

Yet basing an investment decision purely on a return calculation, such as I am suggesting, is still a 'one dimensional' calculation. There are other factors to consider.

Here follows a little lesson on ranking potential investments only on returns.

Valuation Metrics FY2021	Investore As Presented	Investore with In House Staff	Argosy As Presented	Property For Industry As Presented	Goodman Property Trust As Presented
Dividend Payments over FY2021	($27.980m)	($27.980m)	($53.464m)	($37.961m)	($78.3m)
Normalised Profit (After Tax) for FY2021 {A}	$24.316m	$24.316m	$48.324m	$47.602m	$72.864m
Market capitalisation 31-12-2021 {G}	$589.016m	$589.016m	$1,351.5m	$1,506.4m	$3,605.0m
Normalised PER 31-12-2021 {G}/{A}	24.2	24.2	28.0	31.6	49.5
New Capital Raised over FY2021	$102.652m	$102.652m	$16.404m	$6.585m	$172.0m
Shareholder Equity (EOFY) {B}	$765.674m	$765.674m	$1,280.635m	$1,562.662m	$2,962.9m
Return on Equity (ROE) {A}/{B}	3.18%	3.18%	3.77%	3.05%	2.46%
Gross PIE equivalent Dividend Yield (EOCY2021)	5.52%	5.52%	5.65%	3.59%	2.91%
Gross Income from rentals {C}	$64.514m	$64.514m	$111.522m	$107.941m	$182.0m
Net Operating Profit Margin {A}/{C}	37.7%	37.7%	43.3%	44.1%	40.0%
Bank and Bond Debt (EOFY) {D}	$277.363m	$277.363m	$754.421m	$598.653m	$730.1m
MDRT {D}/{A}	11.4 years	11.4 years	15.6 years	12.6 years	10.0 years
Total expenses {E}	($17.925m)	($17.925m)	{$37.844m}	($24.218m)	($58.5m)
Building Portfolio Valuation (avg) {F}	$966.5m	$966.5m	$1,938m	$1,841.9m	$3,431.7m
Total Operating Expense to Operating Asset Ratio {E}/{F}	1.85%	1.85%	1.95%	1.31%	1.70%

Notes

1/ Earnings related calculations are based on Operating Earnings.

2/ Normalised NPAT Calculations:
2a/ Investore: 0.72($29.949m+$3.553m+$0.294m-$0.024m) = $24.316m
2b/ Argosy: 0.72($95.625m-$32.691m+$4.183m) = $48.324m
2c/ Property for Industry: 0.72($517.151m-$392.518m-$2.636m-$12.271m-($44.324m-$0.712m)) = $47.602m
2d/ Goodman Property Trust: 0.72($114.9m-$13.7m) = $72.864m

3/ New capital raised includes dividends reinvested under the respective 'Dividend Reinvestment Plans' (Argosy, Property for Industry) and separate 'New Capital Raisings' (Investore, Goodman Property Trust).

4/ Gross PIE equivalent dividend yield is from the 'Listed Property Trusts' thread, post 1178.

5/ Market Capitalisation from this thread, post 106

6/ PFI revenue excludes $0.712m of 'management fee income', that has been treated instead as an offsetting expense (see note 2c).

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

.
The previous post in this series talked about Argosy offering a better deal to investors than Investore, based on how well each company utilises their assets and based on current market prices. One way of getting more out of your unit holder equity is to leverage that equity up via borrowing. Companies call this 'making efficient use of their capital'. But such a game does not come without associated risk. There are different metrics with which to measure leveraged risk. But my preference is something called 'Minimum Debt Repayment Time' (MDRT). Put simply, this is the answer to the question:

"How many years would it take to pay off all of a company's underlying debt, if all of the current year after tax profits were put towards paying off that company debt?"

The answer to that question, in years, is the current MDRT figure

If we look at Argosy vs Investore, we can see that MDRT is a whopping 4 years longer. And at 15.6 years, it is nearly three years longer than any of the three protagonists. Given the marginal difference in purchase price value, as outlined in part 7, and the outlier MDRT value of 15.6, this would be enough to drop Argosy from my preferred purchase list in favour of Investore.

My rule of thumb to evaluate the MDRT answer in years is:

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

Looked at in this light, the debt levels of all of our protagonists are a 'cause for concern'. Is my 'worry scale' too sensitive on debt, because I am not used to looking at property companies? It could be, as the more steady and predictable a company's cashflows are (and rent payments are that), the more debt can be safely serviced. And big company tenants tend to be reliable at paying their rent. There are two ways to quickly reduce debt for a property company:

1/ Sell some properties.
2/ Raise more equity to replace some debt via a cash issue of new shares.
3/ Revalue some of your existing properties upwards (improves debt:equity ratio).

There has been a lot of '3' going on in recent times from all of the protagonists. But in a new climate of falling property values, it may be that option '2' is the best solution for squaring up balance sheets in the near future. Solution '2' is not usually great for existing shareholders when future earnings streams are diluted as a result.

Taking all of the table's information into account, I like to balance yield against the security of of the ability to pay back company debt, and then balance that against the discount it can be bought at on market. I would tend to look on property as a steadying conservative base to build other more risky shares around. Argosy offers the best yield but at the highest debt repayment risk.

My verdict:

1/ I am calling IPL the winner of this contest, but only if that market discount to underlying earnings potential exists (see post 106. on March 8th the discount was 22.3%). IPL offers a slightly lower gross PIE equivalent dividend yield to ARG, with a significantly lower debt risk. I am not recommending ARG in this 'big box' race because of the outlier MDRT position. Nevertheless ARG makes a better show of itself in the 'Toffs into Offs' series as written up in the Argosy thread.

2/ PFI has the greatest dividend cover from earnings, and the lowest operating expense to operating income ratio, Purely on reported market measures, PFI offers the second lowest dividend yield. But if it paid out all its earnings it would offer a much more competitive dividend yield of: 47.602/37.961 x 3.59% = 4.50%. Looking at operational statistics I think PFI would be my pick. Unfortunately for new investors Mr Market knows this and has driven the PFI price up accordingly.

Note that both of our two winners are able to be bought on market at a discount to 'equalised net equity' (see post 106) which is an essential ingredient of earning a top two position.

Also rans (no third place awarded)/ GMT looks very sound but at a market yield I can only describe as miserable (again post 106 shows market investors are paying an 'equalised net asset' premium). ARG loses out on a recommendation in this tussle because of its significantly higher MDRT figure for a not that much greater return.

Yet being the winner of a contest like this only points to the underlying question, does the investment stack up inside a much broader pot of alternative investment opportunities in other investment classes?

SNOOPY

[Grimy]

Many thanks for all your time and effort Snoopy.

[LaserEyeKiwi]

Interesting reads Snoopy! hope you don’t mind if I copy them to the Listed Property Trusts thread.

[Snoopy]

I have looked at various comparative investments. But the question I have not answered is that with all the share price movements since the start of the calendar year, is investing in Investore today 'the go'? The alternative way to put money into Investore is via the listed bonds. These currently are trading on the debt market at:

a/ 3.85% (offer of IPL010 4.4% coupon 18-04-2024 bonds, no buy bidders)
b/ 4.45% (offer of IPL020 2.4% coupon 31-08-2027 bonds, no buy bidders)
c/ 3.75% (offer of IPL030 4.0% coupon 25-02-2027 bonds, 3.95% buy bidders)

for a best return of 4.45% (option B)

Gross earnings yield (which is different from dividend yield, as Investore's dividends are higher than their earnings) for the head share at 31-12-2021 based on a share price of $1.95 was:

4.71% x (24.316/27.980) = 4.09%

But with the decline in share price in the interim, this yield has improved to:

4.09% x (195/169) = 4.72%

There are no earnings retained to fund further growth of the portfolio in this modelling. So this yield is the best sustainable yield an investing shareholder can ever expect to get from IPL going forwards, (unless the IPL share price declines further of course).

Where there is an option of either buying a share or a bond as alternative ways of getting into the same company, I generally look for the bond option to have a higher yield to compensate for missing out on the growth prospects over time of the alternative option of owning the share. The history of the IPL share since listing in 2016 at around $1.65 has been a generally rising share price as interest rates fell followed by a falling share price as interest rates rose. At a closing price of $1.69 today, we are almost back to where we started five years ago.

Were there any other perks small shareholders accumulated along the way? The 20th May 2020 capital raise offered new shares at a discounted $1.65 early in the FY2021 year. That discount doesn't look so generous at today's IPL share price. Institutional shareholders ended up with the same deal a month earlier. It looks like a well managed capital raising by the company, where shareholder stakeholders long term broke even on their new shares.

It comes down to this: A 4.72% gross return for the shareholder verses a 4.45% gross return for the bondholder. Despite the security of the cashflow, I can't help feeling both are overpriced. A yield of 5% sounds better, That means a share price of:

$1.69 x (4.72/5) = $1.60

The share price has been there prior to the second half of 2019, and that is a price level where I can start to see shareholder value.

Verdict: A 'Nah' at today's prices.

SNOOPY

discl: do not hold