IPL - Investore Property

[winner69]

Do stride/IpL still own Johnsonville Mall

There’s 15 vacant stores in it at the moment

[Snoopy]

Do stride/IpL still own Johnsonville Mall

There’s 15 vacant stores in it at the moment

I have just checked on the mall map.
https://www.johnsonvilleshoppingcent...ore/store-map/

I see what you mean! Lots of shop number xx descriptions, rather than the name of a business that should be renting. On a positive note, still 82% tenanted. I see Zampelles is still there though. That is one of my 'go to' lunch stops when going in and out of Wellington. Good range of cabinet and hot food. Have you tried it?

Yes the Johnsonville Mall is still owned by Stride. The list of what 'town centre' precincts they own is on AR2023 p59. But a WALT of only 2.3 years! Is that when the bulldozer goes in?

There is an historical piece on when Stride acquired the mall back in 2015
https://www.stuff.co.nz/business/723...-of-countdowns

"The sale represented a yield of 6.5 per cent, which was quite low and was therefore a huge vote of confidence in the Wellington market."
"We are extremely pleased with the result. (seller)"

Blimey, now Investore is trumpeting how smart they are by developing a new supermarket in Kaiapoi, just out of Christchurch on a 5.5% yield. I can write the press release for that development off the cuff.

"The development represents a yield of 5.5 per cent, which is extremely low and is therefore a humongous over the top blue sky vote of confidence in the Kaiapoi market"
"We are insatiably pleased with the result. (seller)"

I wonder how pleased Investore shareholders should be?

SNOOPY

[Snoopy]

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.

Allow me to explain how 'mutually beneficial' at Woolworths works. Woolworths orders food from suppliers on 60 day payment terms. Goods arrive at the store on a 'freight included' basis. Goods are put on shelf and sell within a few days. Woolworths banks the money for the goods they haven't bought yet. Eventually Woolworths pays their suppliers for the goods they sold a few weeks ago. So Woolworths clips the ticket without having to put any cash up front for the goods. It is called the 'capital light' food retail model. And Woolworths are the masters at it.

Woolworths would be no less ruthless when negotiating with their landlords. How many times have you seen a 'big box' successfully rebadged for alternative use? I expect Woolworths use their 'threatening to relocate' tactic with full force come rent renegotiation time.

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.

No need to lay out for bricks and mortar yourself if you can bully a landlord into doing it for you.

SNOOPY

[Snoopy]

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.

Investore have been quite canny with their funding in the past. The amounts and terms of Investore company bonds issued to date are as follows:

IPL010 April 2018 to April 2024: $100m bond at a bond coupon rate of 4.40%
IPL020 February 2022 to February 2027: $100m at a bond coupon rate of 4.00%
IPL030 August 2022 to August 2027: $125m at a bond coupon rate of 2.40%

It doesn't look like Investore will be going to the public soon to replace those April 2024 expiring bonds:
"$100 million of Investore’s senior secured fixed rate bonds (IPL010 bonds) will mature in April 2024, and consistent with Investore’s prudent and proactive approach to capital management, Investore is pleased to confirm that, post balance date, it has secured commitment from its lenders for a new three year bank facility to refinance these bonds."

I suspect borrowing at market rates from the banks will see Investore paying more than 4.4% on that $100m of expiring borrowings from April 2024. Yet the expected yield on their new Kaiapoi Countdown Supermarket is just 5.5% (AR2023 p4). That doesn't leave much of a yield margin does it? And this is assuming Investore has a tight rein on construction costs.

Aaron those 6.47% and 7.13% interest rates are on the secondary market. Investore does not pay those. Investore are locked into 4.40%, 4.00% and 2.40% as I have described above. Come April 2024, Investore will be exposed to market interest rates on the capital in that expiring IPL010 bond. If bank borrowing rates are 6%, that will mean an incremental interest bill of: $100m x ( 6.00% - 4.40% ) = $1.6m, kicking in for the FY2025 year. On the un-matured bonds, those lower coupon interest rates continue.

You ask if dividends are liable to be cut? If there is not enough take up on the recently announced dividend reinvestment plan, then I would say 'possibly'. One way of looking at a DRP is to consider it a 'dividend cut'.

On the subject of inflation and regulating lower interest rates, I feel the loss of tourism, post Covid-19 arriving, will continue to be a drag on NZ's external balance of payments for some time. That is likely to lead to a lower NZ dollar, which will, in turn, increase the overseas funded component of interest costs for domestic banks on lending within New Zealand. Consequently I do not see borrowers interest rates following inflation down, until the country's external balance of payments improves. And that may take some years. No guarantee of easy money, nor low interest rates is my view. If 'investors' are thinking the opposite, I would say those 'investors' are wrong. Hopefully those 'investors' do not include the board. But if the board are prepared to sign off a long term rental deal on a new Countdown supermarket in Kaiapoi at a loss, you do wonder.

SNOOPY

[FTG]

Investore have been quite canny with their funding in the past. The amounts and terms of Investore company bonds issued to date are as follows:

But if the board are prepared to sign off a long term rental deal on a new Countdown supermarket in Kaiapoi at a loss, you do wonder.

SNOOPY

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

Is it a triple Net Lease? What are the Rent Review terms E.g. Fixed annual increases or CPI + perhaps? Capped and collared ? etc etc.

The essence being that it may appear, from a cursory glance, to be an unprofitable exercise for IPL the first year or two. But basically they have front-ended inducement/incentives & then the proposition gets a very nice roll-on after a while and looks very good over the long term.

[Aaron]

Aaron those 6.47% and 7.13% interest rates are on the secondary market. Investore does not pay those. Investore are locked into 4.40%, 4.00% and 2.40% as I have described above SNOOPY

I appreciate that thanks Snoopy I was just pointing out in the "free" market investors are getting more yield for less risky bonds than they are for the shares. But then there is the cash is trash argument which in todays world is valid so I guess they are reasonably relying on inflation and capital gain.

[Snoopy]

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

What are the Rent Review terms E.g. Fixed annual increases or CPI + perhaps?

The essence being that it may appear, from a cursory glance, to be an unprofitable exercise for IPL the first year or two. But basically they have front-ended inducement/incentives & then the proposition gets a very nice roll-on after a while and looks very good over the long term.

I wouldn't expect Investore to be too specific on individual rent contracts (commercial sensitivity and all of that). But we do get 'snippets' of collective information such as below:

"Completed 82 rent reviews during FY23 across 130,000 sqm, comprising over half of the portfolio Contract Rental (p4 AR2023)."
"On behalf of Investore, SIML also negotiated 82 rent reviews during the year, over more than half of Investore’s portfolio by net Contract Rental(*) which resulted in 3.3% rental growth on previous rentals. Of these rent reviews, 33 were CPI (Consumer Price Index) -linked rent reviews, delivering a 7.0% increase on previous rentals." (AR2023 p12)

(*) Note: "Contract Rental is the amount of rent payable by each tenant, plus other amounts payable to Investore by that tenant under the terms of the relevant lease as at the relevant date, annualised for the 12-month period on the basis of the occupancy level for the relevant property as at the relevant date, and assuming no default by the tenant."

When I broke this down the quoted information further, in post 149:

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?

it did not sound favourable for the 'other' 49 rent agreements renegotiated! Investore admits above that more than half of the agreements (49) did not have a CPI related factor in their rent review.

SNOOPY

[Snoopy]

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

Is it a triple Net Lease?

Thanks for your response FTG. I am not as familiar with some of these 'building lease terms as you are so resorted to Google to interpret your reply.

A triple net lease (triple-net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance.

Call me naive. But I though all NZ commercial property leases were like that!.

SNOOPY

[Snoopy]

Snoopy I'm not familiar with the specifics on the Kaiapoi deal but suggest that 'normally' these supermarket leases are certainly structured favourably for the Lessor over the longer term, whilst still giving GD surety of tenure etc.

A couple things to perhaps ponder over with Kaiapoi, as with any deal...

Is it a triple Net Lease? What are the Rent Review terms E.g. Capped and collared ?.

The essence being that it may appear, from a cursory glance, to be an unprofitable exercise for IPL the first year or two. But basically they have front-ended inducement/incentives & then the proposition gets a very nice roll-on after a while and looks very good over the long term.

Quoting from google again

Collar restrictions prevent the rental from falling below a predetermined level (sounds like good for landlords) , while the Cap restriction prevents the rental from rising above a predetermined amount (sounds like good for tenants). Essentially it reflects the best and worst case scenarios for both Landlords and Tenants.

p21 of AR2023 contains some information about this, in relation to Countdown.
"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."
"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."

(*)Note: Moving Annual Turnover (MAT) is determined by calculating the net sales over a 12 month period from April to March, with the calculation being done on a rolling basis.


IOW inflation will generally stop turnover dropping back below a certain turnover level, that has previously generated some 'extra turnover rent'. That 'turnover rent' does sound like a 'collar arrangement'?

Nevertheless that bar graph on AR2023 p21 is telling. It goes back six years. But for the last 3 years 'base rent' at Countdown has been stuck at $35.2m. This indicates no annual CPI adjustment in the Countdown rent contracts. The only increase has been the 'turnover rent adjustment'.

The increase in 'Countdown rent' increment for FY2022 was: $36.2m/$36.1m= 0.28%, and for FY2023: $36.6m/$36.2m= 1.10%

So it looks like rent from Countdown is increasing at well under the rate of inflation! (a defacto cap restriction?)

SNOOPY

[FTG]

I wouldn't expect Investore to be too specific on individual rent contracts (commercial sensitivity and all of that). But we do get 'snippets' of collective information such as below:

"Completed 82 rent reviews during FY23 across 130,000 sqm, comprising over half of the portfolio Contract Rental (p4 AR2023)."
"On behalf of Investore, SIML also negotiated 82 rent reviews during the year, over more than half of Investore’s portfolio by net Contract Rental(*) which resulted in 3.3% rental growth on previous rentals. Of these rent reviews, 33 were CPI (Consumer Price Index) -linked rent reviews, delivering a 7.0% increase on previous rentals." (AR2023 p12)

(*) Note: "Contract Rental is the amount of rent payable by each tenant, plus other amounts payable to Investore by that tenant under the terms of the relevant lease as at the relevant date, annualised for the 12-month period on the basis of the occupancy level for the relevant property as at the relevant date, and assuming no default by the tenant."

When I broke this down the quoted information further, in post 149:



it did not sound favourable for the 'other' 49 rent agreements renegotiated! Investore admits above that more than half of the agreements (49) did not have a CPI related factor in their rent review.

SNOOPY

Well done on the investigative work Snoopy. Makes interesting reading.

I reckon your findings re the IPL's portfolio 'rent (incl review process) profile' is likely reflective of what's been happening in the broader Commercial Property sector.

That being, whilst inflation was rather benign for a few years, less leases had CPI related clauses in them. Instead the market shifted more to model of fixed rent increases (if it be annually, 2 yrly etc), with perhaps a market review periodically thrown in for good order.

So maybe IPL has a few legacy leases in play here and hence they hang on tight until those market reviews kick in for the 49 lease cohort.

It would be interesting to know how they have structured the Kaiapoi lease, but understand that's not likely for now, with 'commercial sensitivities' in play. Maybe IPL have changed their approach in this 'new era'?

In saying that, albeit being a new building, I wouldn't be surprised if the lease was struck back prior to inflation getting off the benign mat.