IPL - Investore Property

[Snoopy]

Following the revelation (to me) that Investore has no employees, I thought it might be useful to restate expenses in a way that compares with other companies that do employ people. Effectively I am looking at what would happen if the 'contract work' was brought in house. Furthermore I am looking to compare those returns with similar property companies.

Property Expenses FY2021	Investore As Presented	Investore with In House Staff	Argosy As Presented	Property For Industry As Presented	Goodman Property Trust As Presented
Management expenses	$0m	$1.102m	$0m	$4.612m	$0m
Management Services Contracted	$1.102m	$0m	$0m	$0m	$0m
Other administration expenses	$0.831m	$0.831m	$11.888m	$2.652m	$2.700m
Direct property operating expenses	$8.701m	$8.701m	$25.762m	$16.753m	$29.0m
Accounting expenses	$0.250m	$0.250m	$0.194m	$0.201m	$0.300m
Performance fee expense	$2.076m	$0m	$0m	$0m	$13.7m
Asset Management fee expense	$4.965m	$7.041m	$0m	$0m	$12.8m
Expense Recoveries	$0m	$0m	$0m	($0.712m)	$0m
Total Operating Expenses {A}	$17.925m	$17.925m	$37.844m	$23.506m	$58.5m
Gross Income from rentals	$64.514m	$64.514m	$111.522m	$107.941m	$182.0m
Total Operating Expense to Rental Income ratio {A}/{B}	27.4%	27.4%	33.9%	21.8%	32.1%
Building Portfolio Valuation (avg) {C}	$966.5m	$966.5m	$1,938m	$1,841.9m	$3,431.7m
Total Operating Expense to Operating Asset Ratio {A}/{C}	1.85%	1.85%	1.95%	1.28%	1.70%

Notes

i/ 'Building portfolio average value' for ARG is from Argosy thread post 368. 'Building portfolio average value' for 'Property for Industry' on post 5 of the PFI thread. 'Building Portfolio average value' for Investore is from post 243 on the Stride thread.2021

What constitutes a 'similar' property company is open for debate.

I have selected Argosy for four reasons:

1a/ At the end of Calendar Year date, and considering the big 8 property companies, Argosy was the closest in yield to 'Investore'. That is equivalent to saying it has an equivalent 'market risk' from an investor perspective.
1b/ Argosy does own some big box retail stores - like Investore - albeit making up only 12.5% of the total portfolio (Refer Argosy thread post 368).
1c/ Argosy no longer has external managers, having bought them out in 2011 (in contrast to Investore).
1d/ Argosy has a very high occupation rate of their properties of 99% (c.f. Investore 0.9% vacancy rate)

Furthermore I have selected 'Property for Industry' as a second comparator because:

2a/ They have long term stable tenants.
2b/ They have a very high occupation rate, 100% as of EOFY2021.
2c/ Property for Industry does not have external property managers (the external management contract was bought out in 2017).
2d/ The construction of the buildings in the portfolio is generally 'big box type', even though they are not used for retail purposes.
2e/ Building property valuation is on post 5 of the PFI thread.

Finally I have selected the 'Goodman Property Trust', as a third comparator because:

3a/ they operate 'big box buildings' (albeit not in retail) AND
3b/ they do have an external property manager (the same situation Investore is in).
3c/ Building property valuation for GMT averaged over the year is (from GMT AR2021):

0.5 ($3,074.0m + $3,789.3m) = $3,431.7m

3d/ they have a high portfolio occupancy rate of 98%

This post is a follow up to one of my 'Dogs verses Hyenas' series of posts in 2022. examining the relative merits of potentially internalising the management contract at IPL. The reference post that I have quoted above is from one of the glory years of property management: FY2021. FY2023 was a lot tougher for property managers. So how did those operating costs pan out under quite different market conditions? (those bonus payments have disappeared)! I am looking at IPL both as it exists now, compared with what it might look like if the 'contracted work' was brought in house. Furthermore I am looking to compare those 'running costs' with similar property companies.

Property Expenses FY2023	Investore As Presented	Investore with In House Staff	Argosy As Presented	Property For Industry As Presented	Goodman Property Trust As Presented
Management expenses	$0m	$1.013m	$0m	$5.170m	$0m
Management Services Contracted	$1.013m	$0m	$0m	$0m	$0m
Other administration expenses	$1,434m	$1,434m	$10.575m	$2.806m	$3.000m
Direct property operating expenses	$10.730m	$10.730m	$31.760m	$17.598m	$36.8m
Accounting expenses	$0.250m	$0.250m	$0.217m	$0.264m	$0.400m
Performance fee expense	$0m	$0m	$0m	$0m	$0m
Asset Management fee expense	$6.158m	$6.158m	$0m	$0m	$17.6m
Expense Recoveries	$0m	$0m	$0m	($0.742m)	$0m
Total Operating Expenses {A}	$19.585m	$19.585m	$42.552m	$25.364m	$57.8m
Gross Income from rentals {B}	$70.987m	$70.987m	$124.323m	$110.167m	$213.8m
Total Operating Expense to Rental Income ratio {A}/{B}	27.6%	27.6%	34.2%	23.0%	27.0%
Building Portfolio Valuation (avg) {C}	$1,117m	$1,117m	$2,177m	$2,127.6m	$4,782.2m
Total Operating Expense to Operating Asset Ratio {A}/{C}	1.75%	1.75%	1.75%	1.19%	1.21%

Notes

i/ 'Building portfolio average value' for ARG is from Argosy thread post 677. 'Building portfolio average value' for 'Property for Industry' on post 10 of the PFI thread (note the results I am using for PFI are from the December 2022 year, the closest comparative period for the FY2023 year of the other protagonists). 'Building Portfolio average value' for Investore is: ($1033.2m+$1201.3m)/2=$1,117m (Stride AR2023 p33)

What constitutes a 'similar' property company is open for debate.

I have selected Argosy for four reasons:

1a/ At the end of Calendar Year date, and considering the big 8 property companies, Argosy was similar in yield to 'Investore'. That is equivalent to saying it has an equivalent 'market risk' from an investor perspective.
1b/ Argosy does own some big box retail stores - like Investore - albeit making up only 9.9% of the total portfolio (Refer Argosy thread post 677).
1c/ Argosy no longer has external managers, having bought them out in 2011 (in contrast to Investore).
1d/ Argosy has a very high occupation rate of their properties of 99.3% (c.f. Investore 99.5% occupancy rate by area)

Furthermore I have selected 'Property for Industry' as a second comparator because:

2a/ They have long term stable tenants.
2b/ They have a very high occupation rate, 100% as of EOFY2022.
2c/ Property for Industry does not have external property managers (the external management contract was bought out in 2017).
2d/ The construction of the buildings in the portfolio is generally 'big box type', even though they are not used for retail purposes.
2e/ Building property valuation is on post 10 of the PFI thread.

Finally I have selected the 'Goodman Property Trust', as a third comparator because:

3a/ They operate 'big box buildings' (albeit not in retail) AND
3b/ They do have an external property manager (the same situation Investore is in).
3c/ Building property valuation for GMT averaged over the year is (from GMT AR2022 balance sheet):

0.5 ($4,791.2m + $4,773.2m) = $4,782.2m

3d/ They have a high portfolio occupancy rate of 99.5%

SNOOPY

[Snoopy]

Do property managers 'do their bit' for looking after unit holders in bad times? This is the discussion topic relating to post 161.

The dogs vs hyena allegory on this subject is that the hyenas (property managers) rip into the carcass (manged properties) first 'eating their fill' while what remains is what is on the plate for the dogs (the shareholders, i.e. us).

In the area of management expense to asset ratio, there was a 'big push' a few years back from certain leading market property players to stop using wild hyenas -with a seemingly uncontrollable appetite-, and instead use domestically trained in house hyenas, that would feed from the menu as determined by the property company that trained them. Of the four protagonists looked at here, two still use wild hyenas (Investore and Goodman) while Property for Industry and Argosy use their own company trained in house hyenas. But just because a hyena is 'house trained', that doesn't stop it being greedy.

The example making that point here is the Argosy 'house trained hyena', which turns out to be the greediest of the lot! Perhaps that is a slightly unfair observation, given that Argosy is the only one of our four protagonists here that manages a proportion of their portfolio that are office buildings - more tenants in the same space take more managing. But it does call a lie to the myth that 'house trained hyenas' are always better for the dogs.

Of the four protagonists, it is Property for Industry (PFI) -with their company trained hyena- that is the most economical to feed, both in good times and in bad. In fact all the protagonists have reduced their fee-to-asset ratio by at least 10 basis points as good times (FY2021) turned to bad (FY2023). Argosy did better with their fee to asset expense ratio down by 20 basis points (albeit still ending up as the equal most expensive), while Goodman (GMT) really surprised by trimming their 'fee to asset' ratio by a massive fifty basis points, to be (almost) on par with PFI on a cost basis. Impressive as unlike PFI, GMT still uses wild hyenas.

How did GMT look after their unit holders so well (in relative terms anyway) as the property market turned tough? Their somewhat egregious 'bonus fee', which made up 23.4% of operating expenses in good times (FY2021) dropped to nothing. Perhaps the real lesson here is that when a big property player is behaving badly (in a management expense to asset ratio sense), - but then comes good- it is more 'noticeable' than if a good manager in good times only gets 'just a little bit more efficient' as the property market turns for the worse.

Management expense to income ratio did get worse as the property market headed south (the sole exception being GMT for the reason I have explained above.) This is not surprising. Company wages still have to be paid to those looking after the operational aspects of their company property portfolios, no matter what the rent return from those properties is doing. Ironically the worst performer in the good to bad transition in this regard was PFI. But again this stands to reason. PFI -being the leanest operator in good times- meant there was less opportunity to cut in house costs in bad.

To summarise, yes all the property managers (be they contracted or in house) did 'do their bit' to 'contain costs', as property market conditions went south. What has made Investore look bad in this comparison is that underlying property values at Investore have fallen more in value, in relative terms, than the other protagonists. So reducing operating expenses (the numerator) while property values (the denominator) are shrinking just as fast makes it look like little progress was made in terms of the 'operating expenses' to 'asst value' ratio. By contrast, the property company where the values of the properties held reduced the least (PFI and GMT) , got an immediate benefit. Even a small reduction in expenses reduced the 'operating expenses' to 'asset value' ratio. Little work making a bigger impact looks good on paper.

SNOOPY

[Snoopy]

Actual dividend paid over FY2021:	4x $6.995m = $27.980m
AFFO for FY2021 =	$27.801m
Normalised profit for the year FY2021:	$24.316m	Calculation: 0.72($29.949m+$3.553m+$0.294m-$0.024m) = $24.316m

I will leave readers to decide if they think that the current dividend payout policy is sustainable.

We are two years down the track in result terms. Time to front up with an answer.
Did the dividend payment turn out to be sustainable or not? (For those who came in late. the acronym AFFO stands for 'Adjusted Funds From Operations'). According to some, AFFO is the best measure of the dividend paying capability of a company, such as Investore.

	FY2021	FY2022	FY2023
Actual Dividend Paid	$27.980m	$28.808m	$29.050m
AFFO	$27.801m	$26.187m	$28.618m
Normalised Profit	$24.316m	$24.180m	$25.373m

Notes: Normalised Profit Calculations

FY2021/ nNPAT= 0.72($29.949m+$3.553m+$0.294m-$0.024m) = $24.316m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for a one off 'swap termination finance expense' loss, a loss booked on a rental guarantee and a gain made on the fair value of financial instruments.

FY2022/ nNPAT= 0.72($34.265m-$0.157m-$0.576m+$0.052m) = $24.180m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for income from a swap termination, the gain on the disposal of an investment property and a loss made on the fair value of financial instruments.

FY2023/ nNPAT= 0.72($35.207m+$0.033m) = $25.373m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for a loss made on the fair value of financial instruments.

Whichever way you measure it, the dividend payment rate still looks unsustainable. So what happened to the company borrowings over that time?

SNOOPY

[Snoopy]

Whichever way you measure it, the dividend payment rate still looks unsustainable. So what happened to the company borrowings over that time?

	Borrowings	Incremental Annual Borrowings	Incremental Properties Purchased	Annual fair value Adjustment
EOFY 2020	$(236.946m)
EOFY 2021	$(277.363m)	$(40.417m)	$133.647m	$139.287m
EOFY 2022	$(351.530m)	$(74.167m)	$73.784m	$91.017m
EOFY 2023	$(385.037m)	$(33.507m)	$34.060m	$(185.246m)
Total		$(148.091m)	$241.491m	$45.058m

We are looking at a big increase in borrowings over three years, although this is more than offset by the inclusion of new property assets (and older property revaluations) on the other side of the ledger. However the banks have revised their loan covenant to demand that overall loans make up no more than 52.5% of property assets. If we consider what has happened over the last two years on an incremental basis, that would mean new loans should be no higher than:
0.525x ($241.491m + $45.058m)= $150.438m

That new incremental debt ceiling leaves very little 'wriggle room' above the actual net new incremental loans taken out ($148.091m). Are the banks in defacto control of Investore now? These kinds of numbers would suggest they might be, which would explain why two core IPL Countdown supermarket properties, one in Blenheim and the other in Nelson, are now for sale. And why a Dividend Reinvestment Plan has been quickly brought into play! Let's hope enough people sign up for that to allow 'top up borrowing' to 'pay the dividend' to cease.

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."

Investments make a positive contribution to a company when the return from the investment exceeds the cost of holding them. Investore has multiple sources of funding which include fixed rate bonds and some bank financing. We can get some idea of the cost of funding by dividing the interest paid during the year, by an estimate of the average funds drawn down over that year. To estimate that average draw-down balance, I take a 'triangulated average' of the the borrowed funds balances declared at reporting dates. These are the borrowings owed at the start of the financial year, the borrowings owed at the end of the financial year, and the borrowing balance at the interim reporting date in the middle.

Borrowed Funds Average Estimate = ($351.530m+$387.576m+$385.037m)/3= $374.704m

The finance expense for the year was $16.287m

This gives an indicative average interest rate of: $16.287m/$374.704m = 4.35%. If 4.35% seems low, remember IPL030 bonds carry a coupon rate of 4%, the IPL020 bonds are on a coupon rate of 2.4% (both with 2027 maturing dates) and even the IPL010 bonds that mature in April 2024 are only at a coupon rate of 4.4%. Nevertheless with refunding these $100m worth IPL010 bonds, rolling over at a higher rate in April 2024, borrowing costs should tick higher. Given this, I find it somewhat galling to learn that the new Countdown development in Kaiapoi is due to be rented out on a projected 5.5% yield. That doesn't leave much of a profit margin. I shudder to think that when the remaining two sets of IPL bonds roll over in 2027, that lease deal for Kaiapoi Countdown could even end up being loss making for Investore.

Nevertheless there was some further information on the 'turnover rent' clauses in Countdown contracts (including this one) declared on slide 8 in the HY2023 presentation.

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

Turnover rent

Turnover income and percentage of stores above turnover threshold

(Turnover income and turnover thresholds are as at and for the 12 months to 30 September 2022 and are based on unaudited sales figures.)

The proportion of Countdown stores with sales over turnover thresholds has doubled since March 2018, with 26% of the Countdown portfolio now paying 'turnover rent'.

• Countdown leases (which comprise 63% of portfolio Contract Rental) generally contain a five yearly review of base rent and MAT (Moving Annual Turnover) relative to thresholds. When MAT is higher than the turnover threshold at the review date, the base rent is increased by the three-year average turnover rental paid.
• All the Countdown-anchored portfolio is subject to a ‘review event’ over the next three financial years:
• 78% of stores have a turnover rent review event, which will result in an uplift in base rental if store turnover is above the MAT threshold.
• 11% of stores (which are currently below the turnover threshold) have a fixed uplift of between 3–5% over the next 18 months.
• 11% of stores have an expiry event

.• For example, in FY25, 48% of the Countdown portfolio has a rent review event: 17% of the Countdown portfolio is over turnover threshold and generating turnover income; 20% of the Countdown portfolio is between 80 – 100% of turnover threshold; and 11% is less than 80% of turnover threshold.

• Investore’s portfolio comprises 61.1 hectares of commercial property with an average site coverage of 41%, providing future development opportunities.

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


It does sound like there will be some 'rent raising relief' before, those likely sharply higher funding costs kick in over 2027.

SNOOPY

[Snoopy]

Notes: Normalised Profit Calculations

FY2023/ nNPAT= (1-0.28)($35.207m+$0.033m) = $25.373m
This calculation takes the income BEFORE other income (mainly property valuations) and BEFORE income tax expense. Adjustments are then made respectively for a loss made on the fair value of financial instruments.

I have been assuming that over the long term tax at Investore was being paid at a rate of 28%. My table below suggests this was a wrong assumption. Why does this matter? If the tax bill was not as high as I had assumed, this means the shortfall of after tax earnings to dividends may not be as I had assumed.

	FY2019	FY2020	FY2021	FY2022	FY2023
Profit before other expense/income and income tax {A}	$26.993m	$26.749m	$29.949m	$34.265m	$35.207m
Current tax expense (AR Note 7.3 'Tax') {B}	$5.341m	$5.559m	$3.652m	$4.925m	$4.972m
Tax paid - cashflow statement {C}	$5.308m	$5.387m	$4.395m	$4.711m	$5.298m
Implied Current tax rate {B}/{A}	19.8%	20.8%	12.2%	14.4%	14.1%

From AR2021 p7
"income tax expense (was) $2.2 million lower than it would otherwise haven been due to the reintroduction of building depreciation deduction claims for commercial properties from April 2020."
But even if we add that $2.2m back, the tax rate for FY2021 works out to be just: $5.842m/$29.949m= 19.5%

An explanation of how the nominal tax rate of 28% was reduced to something significantly less may be found in section 7.3 of the annual report, sub-titled 'income tax'. So let's have a deep dive into that to see if we can figure out what is going on with the tax rates.

SNOOPY

[Snoopy]

An explanation of how the nominal tax rate of 28% was reduced to something significantly less may be found in section 7.3 of the annual report, sub-titled 'income tax'. So let's have a deep dive into that to see if we can figure out what is going on with the tax rates.

While others settle down to tackle the weekend crossword, I have decided to launch in to the great section 7.3 puzzle. To make things easier I will look at what happened in FY2022 (as referred to in AR2023), For that was a more typical year without huge property write downs of FY2023. The following is my 'expanded with explanation' version of the table found in section 7.3.

			Calculation Detail
Profit before Income tax for FY2022	$125.806m
=> Prima facie Income tax @28%		${35.226m)	($125.806m x 0.28 = $35.226m)
add back Notional tax on property valuation gains (not chargeable)		$25.485m	($91.017m x 0.28 = $25.485m, AR2023 p29)
equals Base Current Tax Expense (excluding revaluations)		$(9.741m)
add back Notional tax on property sold: Maclaggan St,, Dunedin (not chargeable)		$0.161m	($0.576m x 0.28 =$0.161m, AR2023 p29)
add back tax effect of Lease liability on property sold (1)		$0.018m
Subtract Tax on financial derivative movement		$(0.015m)	($(0.052m) x 0.28= $0.015m, AR2023 p29)
add back Refund of tax on non-taxable income		$0.083m	( Cannot find more details )
add back Refund of tax on other permanent differences		$0.101m	( Cannot find more details )
add back tax effect of Depreciation (2)		$4.461m
subtract Non-deductable expenses tax (3)		$(0.053m)	( $0.190m x0.28= $0.053m, AR2023 p53)
less Temporary differences (4)		$(0.040m)	(unable to find source)
add back Losses Utilised (5)		$0.100m	(unable to find source)
equals Current Tax Total		$(4.925m)

Notes

(1) I am not sure how this entry relates to the MacLaggan St Dunedin St property sale as outlined in the line above, the only documented property sale during the year. Generally a lease liability relates to the tenant, not the landlord. Could it be that the anchor tenant took on a site that had one or more smaller sub tenancies that they were not interested in? Some big box developments have a cafe on site run by a third party as an example. To get around this, maybe Investore leased those sub tenancies back from the anchor tenant? This is all pure speculation on my part, as I struggle to explain why a landlord (Investore) has lease liabilities, outside of the context of 'leasehold land'.

(2) This is the key entry in the table. I believe this tax entry is related to depreciation claimed each year. That depreciation is not listed separately anywhere else in the annual report. So it looks like it is included as part of direct property related expenses' in the income statement.

When a building is recognised as increasing in value over the year, the depreciation charge on those assets goes up as well. But only for reporting to shareholders purposes. As far as the IRD is concerned, the buildings value remains on the Investore books at 'construction cost' or 'acquisition cost' on a second set of Investore accounts that only the IRD reads.

From an IRD perspective, IF the depreciation costs are recorded in the annual report at a level that is too high (as a result of property revaluations), THEN this means the 'operating profit', -as recorded in the annual report-, (which is set off against those too high depreciation expenses) will be too low. Thus the IRD will be looking for 'more tax' than Investore superficially claims it owes, given Investore's declared operating profit. However, the $4.461m depreciation tax adjustment shown in the above table will result in the company paying 'less tax'. The conclusion must be that I have no idea what I am talking about on this issue

(3) This figure fits with audit fees not being deductible for tax. Why would audit fees not be deductible? One counter-argument is that actually they are. And the fact that the $53m of tax reduction from non-deducible expenses just happens to align with the audit fees is a co-incidence. IOW the $53m comes from an unrelated expense area that was not further disclosed. Another possibility that I have considered is that the audit fees have been previously claimed as an expense by the parent property manager Stride. So when the overall Stride auditing fees were apportioned amongst their managed property owning units, of which Investore is one, it would be 'double claiming' to claim that tax back again. All of this is my own speculation, so make of it what you will.

(4) Deferred tax is provided, using the liability method, on all temporary differences between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. This kind of tax adjustment is termed a 'temporary difference'. I thought this is what I was talking about under note (1), albeit in this context $0.040m seems a very small adjustment. However AR2023 p55 spells out other kinds of temporary difference:

i/ tax asset arising from loss allowance;
ii/ tax liability arising from certain prepayments and other assets; and
iii/ tax asset/liability arising from the unrealised gains/losses on the revaluation of interest rate swaps

I suspect this $40k adjustment relates to one or a combination of all of the above.

(5) If existing losses are utilised in the current financial year it means that less income tax is payable.

SNOOPY

[Snoopy]

While others settle down to tackle the weekend crossword, I have decided to launch in to the great section 7.3 puzzle. To make things easier I will look at what happened in FY2022 (as referred to in AR2023), For that was a more typical year without huge property write downs of FY2023.

As you can see from my post 167, I did finish the 'crossword' over the weekend. But rather than get 'bogged down' in all that detail, I am going to edit down my table concentrating just on the 'nitty gritty'.

			Calculation Detail
Profit before Income tax for FY2022	$125.806m
=> Prima facie Income tax @28%		${35.226m)	($125.806m x 0.28 = $35.226m)
add back Notional tax on property valuation gains (not chargeable)		$25.485m	($91.017m x 0.28 = $25.485m, AR2023 p29)
equals Base Current Tax Expense (excluding revaluations)		$(9.741m)
add back Summed 'rats and mice' tax adjustments		$0.355m
add back tax effect of Depreciation (2)		$4.461m
equals Current Tax Total		$(4.925m)

Notes

(2) This is the key entry in the table. I believe this tax entry is related to depreciation claimed each year. That depreciation is not listed separately anywhere else in the annual report. So it looks like it is included as part of direct property related expenses' in the income statement.

When a building is recognised as increasing in value over the year, the depreciation charge on those assets goes up as well. But only for reporting to shareholders purposes. As far as the IRD is concerned, the buildings value remains on the Investore books at 'construction cost' or 'acquisition cost' on a second set of Investore accounts that only the IRD reads.

From an IRD perspective, IF the depreciation costs are recorded in the annual report at a level that is too high (as a result of property revaluations), THEN this means the 'operating profit', -as recorded in the annual report-, (which is set off against those too high depreciation expenses) will be too low. Thus the IRD will be looking for 'more tax' than Investore superficially claims it owes, given Investore's declared operating profit. However, the $4.461m depreciation tax adjustment shown in the above table will result in the company paying 'less tax'. The conclusion must be that I have no idea what I am talking about on this issue

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

If we go back to Part 1 of this series, the declared operational profit over FY2022 (i.e. excluding property valuations) was $34.265m.

Using the 'base current tax expense' calculated above I get a tax rate of:
$9.741m/$34.265m= 28.4% (pretty close to the standard 28% company tax rate)

But if I use the 'current tax total', the tax rate drops to:
$4.925m/$34.265m= 14.4% (pretty close to HALF the standard 28% company tax rate)

The above simplified table shows that it was the 'depreciation tax adjustment' that allowed this massive reduction in the tax bill to happen. And remember we are talking about FY2022 when the tax deduction for depreciation on commercial buildings had been reinstated. How is Investore getting out of paying tax like this? It doesn't seem like it can be real.

SNOOPY

[Snoopy]

When a building is recognised as increasing in value over the year, the depreciation charge on those assets goes up as well. But only for reporting to shareholders purposes. As far as the IRD is concerned, the buildings value remains on the Investore books at 'construction cost' or 'acquisition cost' on a second set of Investore accounts that only the IRD reads.

I am doing a bit more sleuthing, trying to get a handle on these depreciation numbers. The most recently fully documented acquisition by Investore that I can see is the Briscoes/Rebel Sport big box complex at 4 Carr Road in Mt Roskill, Auckland.

From AR2022 p17 "4 Carr Road, Mt Roskill, Auckland, acquired in August 2021 for $36.0 million, with a WALT of 10 years at the time of acquisition."

The 6th August 2021 press release gives further details:
"The property is a 1.1 hectare, high profile, fully occupied site anchored by Rebel Sport and Briscoes with two other retail tenancies. It is located immediately adjacent to Investore’s existing property on Carr Road which is occupied by Bunnings Warehouse, and takes Investore’s aggregate land holding at Carr Road to 3.85 hectares. The property was extensively redeveloped in 2019 and comprises 5,332 sqm of net lettable area with a weighted average lease term of 10 years as at the date of settlement. The initial passing yield on acquisition is 4.0% and settlement is expected to occur in August 2021."

1.1 hectares is 11,000 square metres. So we can see the big boxes occupy around half of the acquired land, the rest presumably being utilised as car parks.

In AR2022 p50, the 4 Carr Road property was valued at $36.250m, value that had shrunk to $30m a year later (AR 2023 p40)

The breakdown in a valuation from June 2021 (FY2022) may be found here:
https://www.oneroof.co.nz/estimate/4...ckland-2089587

$29.3m (improvements) + $9.1m (land) = $33m (total)

The improvement value had gone up by 159% since the buildings were last rated in 2017. I am guessing that whatever was there in 2017 was demolished to make way for the new Bunnings and Rebel Sports big box stores. So that $29.3m would be close to the acquisition price of the buildings, with the land likely shouldering the subsequent FY2023 year depreciation.

The straight line depreciation rate for buildings is 1.5% of the original cost price.
https://www.ird.govt.nz/-/media/proj...ir260-2020.pdf

So I am estimating the annual depreciation charge on this acquisition to be:
0.015 x $29.3m = $0.440m

There are 44 big box properties in the Investore portfolio. Some are larger some are smaller than 4 Carr Road. But a quick and dirty depreciation assessment on this portfolio, I think would show an annual whole of portfolio depreciation charge of:

$0.440m x 44 = $19.36m

That figure is likely to be too high because it is based on FY2020 construction costs and earlier builds would have been done at historical construction prices. If the average age of a big box in the Investore portfolio is 10 years, and construction costs have doubled over that time period, this would suggest an annual depreciation charge at Investore of: $19.36m/2= $9.68m.

SNOOPY

[Snoopy]

add back tax effect of Depreciation (2)

$4.461m

Notes

(2) This is the key entry in the table. I believe this tax entry is related to depreciation claimed each year. That depreciation is not listed separately anywhere else in the annual report. So it looks like it is included as part of direct property related expenses' in the income statement.

Either the plot is thickening or I am thickening. As yet, I am not quite sure which!

I had another look at the AR2023 'Statement of Comprehensive Income' (AR2023 p29). That $9.649m entry for 'direct property expenses over FY2022? It is broken down under Note 2.1 (AR2023 p37). And guess what? There is nothing in that breakdown that suggests any depreciation is included! IOW my suggestion on where the depreciation charge was hidden looks to be wrong.

After studying the statement of Comprehensive Income again, I can't see where the annual depreciation charge might be hiding.

So how is it that a property owning company can produce a statement of comprehensive income with no allowance for any depreciation, and yet seemingly claim back tax a result of depreciation ($4.631m). (AR2023 p54)? Baffling, or am I just getting thicker?

SNOOPY