IPL - Investore Property

[Aaron]

Valuations taking a $143m hit or 12% as portfolio revalued

I’m no expert in such matters but an average cap rate of 5.6% still seems a little low.

http://nzx-prod-s7fsd7f98s.s3-websit...855/391288.pdf

I am no expert either, but what do you reckon is a reasonable cap rate? 8%. I would have thought buying property at 5% hardly keeps up with eventual replacement or refurbishment but then I suffer from long term thinking.

Pretty solid tenant and solid leases in good locations?

Maybe taking into account interest rates falling in 2023/24.

NTA is pretty bogus for these property companies.

Of more interest do you know what banks require when lending on commercial property. What would be the LVR and debt service requirements. What other requirements should we be aware of?

What about non-property companies. Bank requirements might become important if inflation stays strong.

I remember Bruce Sheppard doing this years ago and identified Provenco/Cadmus as an absolute dog based on bank lending requirements. It went bust not long after.

[Snoopy]

Guidance full year cash dividend 7.9 cents

NO pay rise this year for shareholders

Don't they know there's a cost of living crisis

No problem Winner. Just wait for the share price to go down. That means the yield will go up. There is your 'pay rise' ;-P

Valuations taking a $143m hit or 12% as portfolio revalued

I’m no expert in such matters but an average cap rate of 5.6% still seems a little low.

http://nzx-prod-s7fsd7f98s.s3-websit...855/391288.pdf

NPBT (and before property re(de?)valuations) $35.247m

AGM today and share price down to $1.35. No. of shares on issue at EOFY 367.503m => Current market Value $1.35 x 367.503m = $496m

Gross Capitalisation Rate = Net Operating Income / Current Market Value = $35.247m/$496m = 7.1%

Winner got his pay rise. All good?

SNOOPY

[Snoopy]

Do you know what banks require when lending on commercial property. What would be the LVR and debt service requirements. What other requirements should we be aware of?

Aaron's question, answered at the AGM2023. When talking about slide 8:
"During FY2023, $75m of bank facilities were refinanced.and extended for a further two years to November 2025. As part of this refinancing, Investore also renegotiated its banking covenants with its banking syndicate, removing the covenant relating to its weighted average lease term of Investores portfolio, and reducing the LVR (Loan to Value Ratio) covenant from a maximum of 65% to a maximum of 52.5%."

Further down the page, under the discussion on Slide 9, we learn:
"Investores FY23 acquisitions and developments were funded from its available debt facilities. This coupled with portfolio devaluation has resulted in Investores LVR increasing to 36.5% as at 31st March 2023."

It reads like the banks are tightening up on these property companies with their decreasing property valuations altering the debt/equity picture. But with an average weighted lease term of 8.1 years (AR2023 p16), I can see why the banks were not worried about letting go of this part of the financial covenant with IPL.

SNOOPY

[Snoopy]

It reads like the banks are tightening up on these property companies with their decreasing property valuations altering the debt/equity picture.

A bit more from the AGM address
"As shareholders will be aware, during FY2023, Investore undertook a share buyback program of up to 5% of the shares on issue. acquiring and cancelling 632,398 shares (actually only 0.172% of shares were bought back) for a total cost of $1.1m (that equates to a average buyback price of $1.58). As previously announced the board has decided to cancel this share buyback program."

Fair enough. But later on in the talk we also learn that:
"Investore is pleased to announce the adoption of a dividend reinvestment plan, which will allow eligible shareholders to reinvest dividends into additional Investore shares."

I guess if you were an 'eligible shareholder' that would sound good. Yet with the share price currently sitting at $1.35, and extra shares liable to be issued at less than that price, the overall strategy of the last few months looks to have been to 'cancel existing shareholder capital at a high price', while 'planning to bring in new shareholder capital at a low price'. (more shares now need to be created at a lower price to reverse the lesser number of earlier higher priced shares cancelled). That sounds like a 'net eps dilution' exercise to me. 'Sound capital management' by the board?

SNOOPY

[Aaron]

Aaron's question, answered at the AGM2023.
It reads like the banks are tightening up on these property companies with their decreasing property valuations altering the debt/equity picture. But with an average weighted lease term of 8.1 years (AR2023 p16), I can see why the banks were not worried about letting go of this part of the financial covenant with IPL.

SNOOPY

Thanks Snoopy glad someone takes the time to read the annual report. Dropping the LVR from 65% to 52.5% and removing a covenant relating to lease terms does not sound like tightening up by the banks to me. More like bending over backwards.

I was banned for a time but remember seeing this article and wonder if Investore discussed why they are selling these two properties.

https://www.oneroof.co.nz/news/two-s...for-sale-43632

Probably real estate agent hype but if it is to be believed why would they be selling. Property company overtrading again? Does this disguise poor performance. Beagle pointed out a while ago how the KPG earnings did nothing for 20yrs(I think) and the share price of property companies has come up again on a thread somewhere. Without a decent yield for your purchase price the bonds provide a better yield for less risk, although high inflation may change this dynamic. Although raising rents as tenants are struggling might be difficult.

NZX-listed Investore Property is selling two of its regional South Island Countdown supermarket properties, both with long leases to General Distributors Ltd, owned by a subsidiary of Australia’s ASX-listed Woolworths Group.

The supermarkets for sale are in Stoke, Nelson and the prosperous regional centre of Blenheim, an area that has outstripped New Zealand’s GDP growth over the past two decades.

Thompson says single-tenanted, large-format retail properties like these, and especially those categorised as being an essential service provider, are held in high regard among investors because they’re seen as providing a defensive income with minimal management.

“Retail assets of this calibre seldom become available for that reason. They’re very tightly held,” he adds.

[Aaron]

"As shareholders will be aware, during FY2023, Investore undertook a share buyback program of up to 5% of the shares on issue. acquiring and cancelling 632,398 shares (actually only 0.172% of shares were bought back) for a total cost of $1.1m (that equates to a average buyback price of $1.58). As previously announced the board has decided to cancel this share buyback program."SNOOPY

It makes you wonder why companies do not just pay higher dividends rather than buying back shares. Tax free capital gains from higher value shares perhaps or stock price manipulation. I think share buybacks were made illegal a long time ago and brought back with the Companies Act 1993 (possibly fake news have not DMOResearch) suspect they may be again banned again before too long. I do not see the benefit of buybacks other than pumping up stock prices and management performance fees. Perhaps someone could enlighten me as to the benefits of share buybacks.

[Snoopy]

Dropping the LVR from 65% to 52.5% and removing a covenant relating to lease terms does not sound like tightening up by the banks to me. More like bending over backwards.

Maybe I am reading this wrongly. But my interpretation of what is being said here is that:

a/ 'BEFORE' the banking syndicate was comfortable with advancing to the company a maximum loan totalling equal to 65% of the value of the properties held by the company.
b/ 'AFTER' they are only prepared to loan up to 52.5% of the value of properties held by the company.

When I say 'value of these properties', I believe the banks talking about 'market value'. Not 'cost of acquisition'.

As at the end of year balance date 31-03-2023, the Investore LVR 'actual value' was 36.5%. So no action is required by Investore managers right now. The banks are just saying 'watch what you do from here on'.

That sounds like an effective downgrade in the recognised creditworthiness of Investore to me. The removal of the requirement on the weighted average length tenancy agreements (WALT), whatever it was, is, I think, a bit if a sop to show that Investore are not being punished too badly. I would regard the current WALT of 8.1 years as pretty good.

SNOOPY

[Snoopy]

I wonder if Investore discussed why they are selling these two properties.

https://www.oneroof.co.nz/news/two-s...for-sale-43632

Probably real estate agent hype but if it is to be believed why would they be selling. Property company overtrading again? Does this disguise poor performance. Beagle pointed out a while ago how the KPG earnings did nothing for 20yrs(I think) and the share price of property companies has come up again on a thread somewhere. Without a decent yield for your purchase price the bonds provide a better yield for less risk, although high inflation may change this dynamic. Although raising rents as tenants are struggling might be difficult.

NZX-listed Investore Property is selling two of its regional South Island Countdown supermarket properties, both with long leases to General Distributors Ltd, owned by a subsidiary of Australia’s ASX-listed Woolworths Group.

The supermarkets for sale are in Stoke, Nelson and the prosperous regional centre of Blenheim, an area that has outstripped New Zealand’s GDP growth over the past two decades.

Thompson says single-tenanted, large-format retail properties like these, and especially those categorised as being an essential service provider, are held in high regard among investors because they’re seen as providing a defensive income with minimal management.

“Retail assets of this calibre seldom become available for that reason. They’re very tightly held,” he adds.

This is what Investore said on property sales after slide 17 of the AGM address:
"While Investores balance sheet and portfolio are well positioned, the ongoing higher interest rate environment means the board will continue to focus on how to prudently manage capital. Accordingly, the board announced capital management initiatives with the release of Investores FY23 annual results, designed to manage gearing over the near term. These included the intent to sell selected non-core assets of approximately $25m-$50m, provided appropriate value can be realised for the assets. The net proceeds received from these investments, if they proceed, will be used to repay existing bank debt."

"Investore is also pleased to announce the adoption of a dividend reinvestment plan."

"The purpose of these initiatives is to ensure that Investore is well placed, to withstand further potential valuation headwinds, in case they eventuate, as well as preserve balance sheet headroom to pursue further strategic initiatives across its portfolio."

I see Countdown supplies 64% of Investores rental income (AGMPR2023 slide 14). So to call these two Countdown supermarkets on the block as 'non-core assets' sounds like corporate communication officer drivel to me.

Investore need the money to shore up their balance sheet before any more market related shocks tank the IPL share price further, and a 'capital call' on shareholders is required. I imagine both the Nelson and Blenheim Countdown supermarkets are currently among IPLs lower yielding assets (because of the high quality of the assets, which also means they should be easy to sell). That is how I read the situation.

SNOOPY

[Aaron]

a/ 'BEFORE' the banking syndicate was comfortable with advancing to the company a maximum loan totalling equal to 65% of the value of the properties held by the company.
b/ 'AFTER' they are only prepared to loan up to 52.5% of the value of properties held by the company. SNOOPY

Sorry, your right my misunderstanding.

I probably should read the annual report but wonder if Countdown is 64% Anchor Tenant Classification by Contract Rental as at 31 March 2023. Does this give a lot of power to one tenant when renegotiating lease terms? I guess they need the buildings and locations as much as IPL need the tenant.

Wow having to sell shops due to rising interest rates. Does that mean they paid too much for the purchase and/or development of some of their properties? Maybe Winner could get a pay cut and we can buy more IPL shares at a much lower price. Or maybe they sell valuable tightly held, in demand property and hang on until interest rates are suppressed by central govt again. If the real esate agents blurb is slightly factual then the properties they are selling sound like they are the good ones for which there is a demand not the ****ty ones. Tightly held means they are unlikely to ever get them back.

I wonder what makes these two shops "non-core" for a property company. Low yielding but sellable will hardly instill investors with confidence in Management.

I wonder if mgmt should have "cooled their jets" while interest rates were at historical lows. Did they buy high and now are selling low. Not a good strategy for wealth accumulation.

[Snoopy]

The overall strategy of the last few months looks to have been to 'cancel existing shareholder capital at a high price', while 'planning to bring in new shareholder capital at a low price'. (more shares now need to be created at a lower price to reverse the lesser number of earlier higher priced shares cancelled). That sounds like a 'net eps dilution' exercise to me. 'Sound capital management' by the board?

Perhaps my comment above was a little cynical. I doubt if the board (or anyone) could have reasonably foreseen that interest rates in NZ would rise so far so fast.

It makes you wonder why companies do not just pay higher dividends rather than buying back shares. Tax free capital gains from higher value shares perhaps or stock price manipulation. I think share buybacks were made illegal a long time ago and brought back with the Companies Act 1993 (possibly fake news have not DMOResearch) suspect they may be again banned again before too long. I do not see the benefit of buybacks other than pumping up stock prices and management performance fees. Perhaps someone could enlighten me as to the benefits of share buybacks.

The fundamental theory behind share buybacks, the process where shares are bought back and cancelled, is that, -with less shares on issue-, earnings per share will increase - even if overall earnings for the company remain flat. The negative part of a 'share buyback plan' is that, in order to do a buyback, you have to spend 'spare' cash. Spare cash could come from profits not paid out as dividends. Or it could come from 'borrowed money', if debt levels are judged to be sub-optimally low.

So why would having any debt at all be better? If you have a company which earns a 'high return on assets', then it can make sense to minimise (to a point) the share equity of owners and maxmise the bank debt to finance those company assets. As long as the company are earning above 'bank borrowing rates', that means any returns you earn by using the bank's capital, above bank borrowing rates, are able to be distributed to shareholders. And the less 'shareholder capital' that shareholders have invested in the business, that means all of that excess earnings that come from using bank borrowings can be distributed over that smaller pool of shareholder capital. The smaller the pool of share capital, the greater the amount of excess earnings derived from the borrowed bank capital that can be distributed 'per share' to the equity holders.

This is how a company optimises 'capital efficiency' to favour the shareholder. However, to make this work, a company must have a 'good business model' to start with. The key factor in a 'good business model' is to make sure the 'return on shareholder assets' is well above the borrowing rate that you have negotiated with your banking syndicate. OK so there is the reasoning why you might want to do a share buyback. If you have read and understood the above, you have probably already figured out why a share buyback strategy might be upset by rising bank interest rates. So how does all this affect IPL? For that you will have to read 'Part 2'.

SNOOPY