IPL - Investore Property

[Snoopy]

Using our 2023 Investore Example I guess ROIC would be.

$51,402/(675,020+385,037) = 4.8% for 2023 or 48,310/(855,042+351,530) = 4.0% for 2022

You have divided the profit before finance expense and tax by the sum of the shareholder equity and borrowings. Assets are funded by a combination of shareholder equity and borrowings. So I would argue you have calculated ROA rather than ROIC. Also by using earnings before interest and tax (EBIT) as your measure of profit you have taken out the variable connected to how the assets are funded, and also not considered the government tax rake off. Please note I am not saying you are wrong to do this. I am just pointing out explicitly what you have done to put it in context.

The equity portion of the denominator gets moved around a lot by the change in property valuations.

Yes absolutely right. And this may be what Winner was getting at when he says he uses 'Return on Invested Capital' is his preferred measure. If you buy a property and it appreciates in value, that does not change the amount of money you bought the property for. In that sense any capital gain you make on a property is not adding to your 'invested capital'. You should only use the capital you originally put up to buy the property to represent your invested equity. Thus you might define 'invested capital' as

shareholder equity + shareholder borrowings - the property revaluation reserve

If you worked out ROIC that way, missing out the property valuation reserve from the denominator, that would mean ROIC (as defined by me in this post) is higher than ROA, reflecting the fact that any capital gain you got is a 'free lunch', which it is - a 'desirable free extra' as your reward for playing in the property market game. However, I am not sure if this was the point Winner was making re ROA and ROIC. Perhaps he will clarify?

SNOOPY

[winner69]

Aaron and Snoops …..your points just show that ROIC isn’t the best way to look at property companies and banks. I forgot to mention that when I said (in response to a request) that ROIC was my ‘preferred’ metric over ROE or ROA

[Snoopy]

Using our 2023 Investore Example I guess ROIC would be.

$51,402/(675,020+385,037) = 4.8% for 2023

So at 4.8% ROIC (if I have this right)
NZDX says Investore bonds are trading at 6.91% although this might jump around depending on who needs to cash up.

And how would you measure the cost of equity. I am guessing $29,050dividends/ $675,020 equity = 4.3% Weighting 64% equity + 34% debt (4.3%*.64) + (6.91% * .36) = 5.23% WACC so currently subtracting economic value ON THE DEBT PORTION???

'Cost of Equity' in investment circles is generally worked out for a particular listed entity according to the formula:

'Risk Free rate of Return' + 'Beta' x ('Overall market rate of Return' - ''Risk Free Rate of Return')

where 'Beta' is an historical measure of how the volatility of the share you are looking at compares to the volatility of the overall market. Nothing whatever to do with any of the calculations you have provided above.

However if we put aside the above commonly understood definition of 'Cost of Equity', and return to the logic of your post, I guess you could consider that if a company has capital, the cost of the company renting that capital off shareholders could be considered the dividend, as that is the money the company has to pay out each year as a price for shareholders lending them that equity capital. However the logic of this thought does get strange if, for instance, a company decides not to pay a dividend. Does the cost of capital then drop to zero? I guess using this logic, when no dividend is paid, it does!

Next you are telling us that the 'cost of borrowing' depends on what some market player is prepared to buy IPL listed bonds for on the day. That figure does not necessarily reflect what the company is paying on those bonds. The company does not 'see' the fluctuations in any associated company bond prices affecting their everyday business. By my way of thinking you are going off the track here.

Finally you are 'weighting' the combination of cost of debt and the cost of equity as a weighted sum total? Yes that is how a more conventional 'cost of capital' model works. Technically I think the 'conventionalists' like to take into account how the debt equity ratio changes over the year as well. However, I prefer to use just the end of year figures. I calculate an equity ratio at EOFY2023 of:

675,020 / 1,080,288 = 62.5%

This is not the 64% you have used.

I feel you may have gone down a rabbit hole in this post. Maybe flick those ears back, have a bit of a sleep, eat a carrot, get your thoughts squared up and come back to us?

SNOOPY

[kiora]

Down the bottom all worked out for an investor?
Under "Balance Sheet Analysis"
"ROE (net income / shareholders' equity)"
https://www.marketscreener.com/quote...8742/finances/

PS not invested

[Snoopy]

Down the bottom all worked out for an investor?
Under "Balance Sheet Analysis"
"ROE (net income / shareholders' equity)"
https://www.marketscreener.com/quote...8742/finances/

PS not invested

Thanks for that reference, nice presentation. I guess it is all auto-generated by a spreadsheet. The projections for FY2024 look suspect. ROE predicted to be 4.85%, greater than ROA of 5.29%. I don't think it is possible to have ROA greater than ROE, so something funny is happening with the computer modelling here.

Personally when I calculate ROE I take the accumulated asset revaluations, adjusted for present day debt to equity ratio, off the equity total. If you include them, by just blindly using the equity listed in the annual report, you are effectively punishing a property company like this for having the foresight for investing in property assets that increase in value. Not what you want, when you are evaluating the success or otherwise of a property company.

SNOOPY

[Aaron]

'Cost of Equity' in investment circles is generally worked out for a particular listed entity according to the formula:

'Risk Free rate of Return' + 'Beta' x ('Overall market rate of Return' - ''Risk Free Rate of Return')

where 'Beta' is an historical measure of how the volatility of the share you are looking at compares to the volatility of the overall market. Nothing whatever to do with any of the calculations you have provided above.

However if we put aside the above commonly understood definition of 'Cost of Equity', and return to the logic of your post, I guess you could consider that if a company has capital, the cost of the company renting that capital off shareholders could be considered the dividend, as that is the money the company has to pay out each year as a price for shareholders lending them that equity capital. However the logic of this thought does get strange if, for instance, a company decides not to pay a dividend. Does the cost of capital then drop to zero? I guess using this logic, when no dividend is paid, it does!

I feel you may have gone down a rabbit hole in this post. Maybe flick those ears back, have a bit of a sleep, eat a carrot, get your thoughts squared up and come back to us?

SNOOPY

Cheers Snoop, way off track by the sounds of it. Realised IPLs cost of debt will be very low for quite some time after posting, although the NZDX might indicate what debt investors will require when IPL goes back to the market in a few years time all things being equal.

Seems reasonable to me that if a company is not paying a dividend the cost of equity is 0% although a shareholder shares in any gains from the capital reinvested. That is another reason why debt is less risky. You have a contractually enforceable interest payment and you rank higher than equity in the event of a bankruptcy.

[Aaron]

Aaron and Snoops …..your points just show that ROIC isn’t the best way to look at property companies and banks. I forgot to mention that when I said (in response to a request) that ROIC was my ‘preferred’ metric over ROE or ROA

Hey Winner what is IPLs ROIC based on the 2023 annual report??? Long form calculations would be handy.

[Snoopy]

Seems reasonable to me that if a company is not paying a dividend the cost of equity is 0% although a shareholder shares in any gains from the capital reinvested.

Such a comment would be sacrilege to any professional accountant reading what you have written. Nevertheless, I cannot help but to agree with you!

SNOOPY

[Snoopy]

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.

Following Investores call, to look to sell two of their blue chip anchor Countdown stores (Nelson and Blenheim), I thought the announced change in discount rates over the year was worth a further look.

From AR2023 p42:
The 'big box retaill' portfolio has been valued at a discount rate of 5.38-11.0% (Avg 8.19%), up from 3.00-8.50% (Avg 5.75%) the previous year. This represents an increase of 8.19%-5.75%= 2.44 percentage points. Likewise the Terminal Yield is now 4.75-10.25% (Avg 5.5%), up from the 4.00-11.0% (Avg 7.00%). This is an decrease of 5.50%-7.00%= -1.50 percentage points.

IF the terminal yield (representing the discount of cumulative rental yield value on the property portfolio, following on from the short to medium term detailed future forecasting period) discount rate is reduced,
THEN that means value of that pool of collective far future earnings is worth more.
AND YET the overall Investore result for the year showed a large decrease in the discounted value of the property portfolio.

Logic suggests to me that the only way this is possible is for the value of the short to medium term earnings capitalised back to today to have taken a massive hit, more than wiping out the forecast longer term gains. I wonder if Countdown have now got Investore 'over a barrel' in the contract negotiation pit? (in figurative terms).

A very strange 'negotiation' with Countdown was reported on AR2023 p6:
"Investore has agreed with Countdown to expand the customer amenity at Countdown Rangiora, including the addition of an online fulfillment area and five new covered pickup bays. These improvements will deliver Investore a 7.5% per annum rent return on cost of up to $1 million over the remaining term of the lease. As part of this arrangement, Investore has also secured a four year lease extension at Countdown Morrinsville."

Morrinsville is in rural Waikato. So what has this to do with building new grocery pick up bays at Countdown Rangioira in greater Christchurch? The above wording makes it sound like the Morrinsville deal was a 'concession', in return for Investore spending $1m that they would rather not spend. Why Investore would not want to spend $1m (small change in the big picture) at a 7.5% investment yield return is not explained. Is a 7.5% investment not a good return, when set off against current bank borrowing costs?

From AR2023 p23
"During FY23 Investore refinanced two bank facilities totalling $75 million, extending their tenor by a further two years."
No doubt this refinancing was at the higher market rates prevailing today.

From AR2023 p4
"(Investore) Completed the acquisition of land at Hakarau Road, Kaiapoi, for $10.1m, and commenced construction of a new Countdown supermarket on this site targeting a 5 Green Star rating and delivering an expected yield on cost of 5.5%."

If the 7.5% yield referred top above is marginal, 5.5% must be below cost. Why have Investore signed a deal with Countdown, renting out their new supermarket at below cost?

Further on in AR2023 p21 we also get some information on 'turnover' rent top ups at Countdown supermarkets.

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

Countdown Turnover Rental

Countdown leases (which comprise 64% of portfolio Contract Rental) contain turnover-linked rental mechanisms under which additional turnover rent is paid when moving annual turnover (MAT) at a store exceeds a specified threshold. There has been a continued increase in stores that are paying turnover rent since 2018, with 30YET% of stores now paying turnover rent, up from 9% in FY18. Turnover rent has also
continued to increase across the portfolio on a like-for-like basis, to $1.4m as at 31 March 2023, up from $0.3m as at 31 March 2018.

A higher inflationary environment can help drive growth in nominal MAT, which is positive for Investore’s turnover rental income. In addition, historical data suggests that once stores exceed their MAT thresholds, they typically continue to generate turnover rental and do not dip below the threshold again.

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

AR2023 p21 goes on to display a 'turnover rent' graph, showing a $0.4m rise in the rent received over FY2023, with the text above suggesting that once a turnover rent threshold is reached, such rent payments are likely to continue. This seems very positive for Investore. So why has the short and medium term outlook for the company turned so negative? Perhaps if a Countdown supermarket does well enough to demand a rebuild, then the old supermarket is closed and all of the old onerous rent contracts (from a Countdown perspective) are torn up?

On p12 of AR2023, we are told what a good job SIML are doing at renegotiating rents on Investore's behalf:
"On behalf of Investore, SIML also negotiated 82 rent reviews during the year, over more than half of Investore’s portfolio by net Contract Rental1 which resulted in 3.3% rental growth on previous rentals. Of these rent reviews, 33 were CPI-linked rent reviews, delivering a 7.0% increase on previous rentals."

If 33 of the rent reviews delivered a 7% annual increase, and the average of all rent reviews resulted in 3.3% rental growth, what was the average rent review increase 'R' negotiated on the remaining 82-33= 49 agreements? Solving the equation below should tell us.

33x7+52xR=82x3.3 => R= 0.762%

That doesn't seem like a very good result! I wonder if more of Investore's tenants are playing 'hard ball' in rent negotiations then Investore are letting on?

SNOOPY

[Aaron]

Snoops I can't give you more good reps without spreading it around more. You would assume Investore(Stride) mgmt and Woolworths executives would have similar power in negotiations as it is mutually beneficial relationship.

But Investore would not be able to dictate to the tenant like say a big mall with a Mum and Pop retail shop. I would worry if Countdown/Woolworths start building or owning their own shops. I assume they don't already.

The whole discussion on cap rates is annoying as I imagine without central govt control of interest rates and money supply the debate would be on cash generation and return on investment rather than speculating on where interest rates will be in 2024.

You can buy IPL shares for a 6.47% gross yield according to the NZX site or 7.13% on their bonds maturing in Feb 2027. If interest rates stay high will dividends get cut? Or do we have a govt guarantee of low interest rates and easy money despite inflation? Based on today's prices investors have obviously chosen the latter.