IPL - Investore Property

[Snoopy]

I am unsure how 'depreciation' fits into this equation. There is certainly depreciation claimed for income tax purposes, and the operational profit that I have calculated above is 'after depreciation'. But as far as the building structure is concerned, whether this depreciation is 'real' over time, in terms of an income adjustment, is open to question.

Now that I know more about how the PIE income distribution system works, it is time to revisit this topic

Building Depreciation Allowed FY2021,FY2022, FY2023	FY2019	FY2020	FY2021	FY2022	FY2023	5 year Total
Dividends Paid during Financial Year (1)	$19.676m	$20.701m	$27.980m	$28.808m	$29.050m	$126.705m
less Dividends reinvested during year (2)	$0.0m	$0.0m	$0.0m	$0.0m	$0.0m	$0.0m
equals Net dividends paid during year	$19.676m	$20.701m	$27.980m	$28.808m	$29.050m	$126.705m
IRD Operational Net Profit After Tax (3)	$14.617m	$14.816m	$10.331m	$13.200m	$14.334m	$67.298m
'Cash Earnings' available for distribution (4)	$14.617m	$14.816m	$19.731m	$22.932m	$23.363m	$95.459m

Notes

1/ Dividends paid and dividends reinvested over the financial year are taken from each respective 'Consolidated Statement of Changes in Equity' in the Annual Reports.
2/ There was no dividend reinvestment plan offered over the period being analyzed.
3/ Refer post 183.
4/ Refer Post 182.


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Earnings will naturally vary from year to year. Companies set up as 'income generating vehicles', a category into which 'Property Owning PIEs' -like Investore- fall, will often look across annual income perturbations, to distribute to their unit holders a predictable income stream. This means that rather than taking an 'annual view', comparing how income relates to dividends over a five year period seems more appropriate. Yet, for the five years in the above table, declared dividends have exceeded operational earnings by: 126.705/67.298= 88%, or $59.407m. From an operational perspective, this would suggest an addition to the 'retained earnings fund' is needed. One such addition is the 'structural building depreciation', which is a source of cash generated by the business that is not immediately needed for reinvestment back into those same buildings. Add this in, to get the so called 'cash earnings' of the company (bottom line of table above).

Further to this, the 'cash earnings' of IPL (which is not a term I like because some of these 'earnings' are not earnings but rather 'behave as such' by the way certain cash flows are treated under the PIE regime) while substantially exceeded the IRD recognised net profit after tax over the five years, do not cover the dividends either. Thus, even 'cash earnings' need to be supplemented to cover the net 'cash paid out in dividends'. Capital has been raised over the last five years to allow this to happen. But is raising money from shareholders, so that you can pay some of it straight back to them in dividends, a sensible policy? Apparently yes, because the PIE regime allows any dividends paid under this funding method to be declared as 'exempt' - the equivalent of 'tax paid', despite not a skerrick of tax being paid! Nevertheless, the cashflow picture is still not as balanced as I would like, if you have to resort to such tricks to keep that dividend up!

The coming law change regarding the removal of the ability to offset 'structural building depreciation' will have a negative effect on cash flows, and hence potentially dividends going forwards. Given it is only the ability to offset 'structural building depreciation' that is being mooted as being disallowed, that effect may not be as great as some think in the overall picture. Increased profits from this change in policy should partially offset the former 'structural building depreciation' accounting entry that used to flow straight through to the dividend. The effective cash lost to unit holders in this policy change will be the increased government tax take on the increased profits between the pre-law change and post law change scenarios. That's how I now see things anyway.

SNOOPY

[Snoopy]

Further to this, the 'cash earnings' of IPL (which is not a term I like because some of these 'earnings' are not earnings but rather 'behave as such' by the way certain cash flows are treated under the PIE regime) while substantially exceeded the IRD recognised net profit after tax over the five years, do not cover the dividends either. Thus, even 'cash earnings' need to be supplemented to cover the net 'cash paid out in dividends'. Capital has been raised over the last five years to allow this to happen. But is raising money from shareholders, so that you can pay some of it straight back to them in dividends a sensible policy? Apparently yes, because the PIE regime allows any dividends paid under this funding method to be declared as the equivalent of 'tax paid', despite not a skerrick of tax being paid! Nevertheless, the cashflow picture is still not as balanced as I would like, if you have to resort to such tricks to keep that dividend up!

I may be suspicious of the ability of IPL to keep paying dividends at the rate they are paying them. But unlike some other property companies (I am looking at you PFI), they do at least have the decency to tell unit holders how they have conjured up the dividend money. AR2023 p45 section 3.2 on 'Distributable Profit' ostensibly tells the story of where all that dividend money came from. So how does the story stack up? I am going to look at the FY2022 referred figures for my 'worked example' as these are more 'normal', (lacking the large property write downs of FY2023).

FY2022 AFFO calculation

	As Presented	Snoopy modelled (includes depreciation): refer post 182
Profit Before Income tax	$125.806m
Net Change in value of investment properties (1)	($91.017m)
Sub Total	$34.789m
Reversal of right of use assets movement in net change of fair value of investment properties	($0.066m)
Gain on disposal of Investment Property (2)	($0.576m)
Net change in fair value of derivative financial instruments	$0.052m
Spreading of fixed rental increases	($0.051m)
Capitalised lease incentives net of amortisation	($0.073m)
Borrowings establishment cost amortisation (3)	$0.865m
Swap termination income	($0.157m)
equals Distributable Profit Before Income tax	$34.783m	$18.333m
less Current income tax	($4.925m)	($5.133m)
Depreciation Expense Reversed		$15.932m
equals Distributable Profit after Income tax	$29.858m	$29.132m
less Maintenance capital expenditure adjustment	($3.671m)
equals Adjusted Funds from Operations (AFFO)	$26.187m

There is no 'set in stone' definition on how to derive AFFO. But in this case, the figure arrived at does cover the total dividend payout of $28.808m (after tax) for the FY2022 financial year. The next question to answer is, do any of these adjustments make sense? Here is my assessment of the larger 'corrections'.

1/ Backing out the increase in value, on paper, of property on the books certainly does make sense. These 'transactions' are paper increases in value only. No cash changes hands, no transaction actually occurs. Yet property value movements are unpredictable and may even reverse in subsequent years (and did so in FY2023).
2/ A gain on the sale of an investment property is also written back. That makes sense as it is a capital transaction with that capital profit ear marked for investment in other buildings. It is certainly not day to day cashflow, and completely unrepresentative of how Investore make their money as a day to day going concern.
3/ Adding back a portion of the borrowing establishment cost from years ago is -to me- more contentious. My take on this is that Investore shelled out several million dollars to establish one or more loan facilities and is spreading out the cost of initiating this borrowing over several years. Note that this is just the cost of initiating the borrowing. Nothing to do with the regular interest bills that must be paid as part of the borrowing arrangement(s) themselves. However borrowing is part of the fabric of this business. Who buys a large commercial building without borrowing? It seems to me as though 'new loan facilities' will sporadically, but continually, need to be established - forever. Furthermore I would imagine the banks will require payment in full for setting up banking facilities on establishment. Not some kind of 'drip feed' payment arrangement. Investore seem to be arguing the 'drip feed' position. Namely that money paid in a lump years ago is causing a negative reporting effect echoing down through the years. So compensation should be added back annually as 'cash we should have had'. I may have interpreted what is going on here incorrectly. But this argument does not wash with me. Still, Investore are 'only' claiming $800k from this. Maybe not enough to affect the whole apple cart in the grand scheme of things?

One glaring omission I can see (or rather can't see) in these numbers is any mention of 'depreciation'. I think this is because there is an exemption in NZ accounting standards to allow property owning companies not to report depreciation, even though the IRD does account for it. Because depreciation, all $15.932m of it, is not recorded as an expense in the accounts, it simply flows 'unpaid' through to the bottom line of the above table un-noticed. 'Building depreciation' is split across 'structural assets'' and 'fit out assets'. In any given year, most likely the 'structural aspects' of a building will not require any day to day spending. But the 'fit out aspects' will. I believe the above table 'kind of acknowledges this' with a 'maintenance and expenditure adjustment' at the bottom. In effect the company is saying this part of the depreciation expense ($3.671m) is actually money we need to spend to keep our buildings in a 'best fit for use state' by our tenants. Another way of expressing this could be to say that $3.671m is a representation of 'fit out' depreciation after tax. That implies that the pre-tax value of fit out depreciation is $3.671m/0.72= $5.099m. And that implies that the 'structural building depreciation for the year' totals: $15.932m - $5.099m = $10.833m.

The column on the right reprises some earlier work I did on the FY2022 profit and loss statement (post 182). My work won't equate exactly to the official figures. That is because although I know the company tax rate, I do not know how much 'current year tax' of the tax payments 'spills over' into adjacent tax years. My main reason for including this column is to show how distorted the 'Distributable Profit Before Income tax' really is, when reported according to the official NZ accounting standards. If you believe the 'official reported figures', you will believe that the company tax rate is something under 15% ($4.925m / $34.783m = 14.2%). However, my using the IRD recognised income figures shows this is not true. It also highlights the process of adding onto profits the full cost of depreciation to make so much more 'distributable profit'. To me this aspect of the PIE tax rules is unfathomable and makes no commercial sense. But apparently, under PIE rules, a company is allowed to call this 'excluded income' and the whole process is box ticked by the IRD. If a private company told me to do this, I would call it a scam (effectively claiming tax paid on 'income' that was not earned). However because it is the IRD which has been set up to administer these PIE rules, I guess it is the duty of Investore unit holders to 'scam the tax man' as directed!

SNOOPY

[Snoopy]

The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed. While this was the case in FY2019 and FY2020, I have had to make adjustments to the free cashflow of the company, and hence money available for dividends in FY2021, FY2022 and FY2023. Post 182 provides detail on what these assumptions are. Dividends are considered in the financial year they are paid.

Per Share Dividends	Div Q1	Div Q2	Div Q3	Div Q4	Depn. Tax Adjustment (1)	Annual Total
FY2019	1.880c	1.865c	1.865c	1.935c	N/A	7.545c
FY2020	1.935c	1.900	1.900c	1.900c	N/A	7.635c
FY2021	1.900c	1.900	1.900c	1.900c	(0.715c)	6.885c
FY2022	1.900c	1.975c	1.975c	1.975c	(0.740c)	7.085c
FY2023	1.975c	1.975c	1.975c	1.975c	(0.693c)	7.207c
Five Year Total						36.375c

Notes

1/ 'Depreciation Adjustment' adds the incremental taxation element of 'structural building depreciation'. This 'structural building depreciation' is extra money over and above earnings as measured by NPAT that would previously have been part of what is sometimes described as 'cash earnings'.

If structural building depreciation is no longer allowed, this increases profits and hence the tax take, in comparison with the real situation of tax deductability over FY2021, FY2022 and FY2023 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 182. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.

FY2021: $6.650m - $4.018m = $2.632m. $2.632m/368.135m = 0.715cps
FY2022: $7.858m - $5.133m = $2.725m. $2.725m/368.135m = 0.740cps
FY2023: $8.122m - $5.574m = $2.548m. $2.548m/367.503m = 0.693cps

I am a newbie looking at these property PIEs. I think this is the right way to adjust the 'cash earnings' as they apply to dividends calculations, but I am prepared to be corrected. My Take: The 'helicopter view' of the cashflow, is that the only extra cash taken out of this money system by changing the depreciation rules goes to the government. So this means there is still some 'depreciation money' in the system that can be added to cashflow and be paid out in addition to net profit after tax earnings, even with the depreciation tax law changes. This means that dividends can still perpetually continue to be higher than NPAT. Just less so than before.

SNOOPY

[Snoopy]

Total modelled average net dividends over five years: 36.375c / 5 = 7.271c

As I write this the IPL010 and IPL020 bonds are trading around on the secondary market at the 7.0% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2023 capitalised valuation for IPL to get my required rate of return works out as:

(7.271c/0.72)/0.075 = $1.35

I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:

(7.271c/0.72)/0.065 = $1.55

We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.55 x 1.075 = $1.67

An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of IPL shares to $1.55 x 1.18 = $1.83

All of these valuations are well above current market prices of $1.20. Possibly contributing to this is a five year pattern of dividend decline, continuing into FY2024. Can Investore 'strong arm' any more money out of head tenant Woolworths? Or will the declining dividend trend continue? Hmmmmm......

SNOOPY

[Snoopy]

I have just seen this comment in HYR2024 on p13

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

4 Investment properties classified as held for sale

During the current period, the Board approved disposing the three properties located at 51 Arthur Street, Blenheim; Corner Putaitai Street & Main Road, Nelson; and 66-76 Studholme Street, Morrinsville. Upon the change in intention from holding the investment properties to disposing of them, Investore reclassified the properties from investment properties to investment properties classified as held for sale at a value of $26.5 million. An associated right-of-use asset of $0.6 million for the ground leases at 66-76 Studholme Street, Morrinsville ($0.1 million), and 51 Arthur Street, Blenheim ($0.5 million), were also reclassified from investment properties to investment properties classified as held for sale.

Management has assessed the value of 66-76 Studholme Street, Morrinsville, to be $6.5 million as at 30 September 2023 after considering recent comparable market evidence. The investment properties at 51 Arthur Street, Blenheim, and Corner Putaitai Street & Main Road, Nelson, were independently valued as at 30 September 2023 using the same respective valuer used for the 31 March 2023 valuations.

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So three properties classified for sale on the books at $26.5m. Take away the Morrinsville property part of that at $.6.5m. That means the Blenheim and Stoke supermarkets are on the Investore books at $20m combined, say $10m each at their 30-09-2023 very recent valuation date. If I am anywhere near right about that, then that Blenheim supermarket is currently yielding 6.9% x (12.05/10)= 8.3% on its book value. That sounds like a great investment to me. I would be wanting a very good price for that if I was Investore. Maybe they should give the Kaiapoi property the 'quick flick', so they can keep the one in Blenheim?

But I guess booking a real profit on a Blenheim sale will signal what great investors Investore (or Stride) really are?

The Countdown supermarkets at 12 Putaitai Street in Stoke Nelson (2021 RV $12.3m) and 51 Arthur Street Blenheim (2023 RV $12.05m) first went out to tender in September 2022. Here we are 18 months down the track and neither property has sold. If they are still on the books at a combined value of $20m, I wonder if the 'Oneroof' recorded market values are realistic? Maybe Investore are secretly hoping these two supermarkets do not sell? An absence of market transactions is a good excuse not to write the 'official' valuation of a property down.

SNOOPY

[Snoopy]

The HY2024 report, published on 16th November 2023 provided updated dividend guidance on dividends that unit holders might expect, going right through to the end of FY2025. It was not spelled out specifically whether these dividend projections take into account the expected loss of the ability to offset 'structural building depreciation' against profits from FY2025 going forwards. But since this has been well signalled as forming part of the new coalition government's tax reform package, my expectation is that this has been taken account of in the new lower projected dividend rates for Investore unit holders going forwards.

The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed in FY2021, FY2022, FY2023 and FY2024. Post 182 provides detail on what these assumptions are. Dividends are considered in the financial year they are paid.

Per Share Dividends	Div Q1	Div Q2	Div Q3	Div Q4	Depn. Tax Adjustment (1)	Annual Total
FY2021	1.900c	1.900	1.900c	1.900c	(0.715c)	6.885c
FY2022	1.900c	1.975c	1.975c	1.975c	(0.740c)	7.085c
FY2023	1.975c	1.975c	1.975c	1.975c	(0.693c)	7.207c
FY2024	1.975c	1.975c	1.625c	1.625c	(0.693c)	6.500c
FY2025	1.625c	1.625c	1.625c	1.625c		6.500c
Five Year Total						34.177c

Notes

1/ 'Depreciation Adjustment' adds the incremental taxation element of 'structural building depreciation'. This 'structural building depreciation' is extra money over and above earnings as measured by NPAT that would previously have been part of what is sometimes described as 'cash earnings'.

If structural building depreciation is no longer allowed, this increases profits and hence the tax take, in comparison with the real situation of tax deductability over FY2021, FY2022 and FY2023 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 182. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.

FY2021: $6.650m - $4.018m = $2.632m. $2.632m/368.135m = 0.715cps
FY2022: $7.858m - $5.133m = $2.725m. $2.725m/368.135m = 0.740cps
FY2023: $8.122m - $5.574m = $2.548m. $2.548m/367.503m = 0.693cps
FY2024: = 0.693c (estimate, based on FY2023 figure)

I am a newbie looking at these property PIEs. I think this is the right way to adjust the 'cash earnings' as they apply to dividends calculations, but I am prepared to be corrected. My Take: The 'helicopter view' of the cashflow, is that the only extra cash taken out of this money system by changing the depreciation rules goes to the government. So this means there is still some 'depreciation money' in the system that can be added to cashflow and be paid out in addition to net profit after tax earnings, even with the depreciation tax law changes. This means that dividends can still perpetually continue to be higher than NPAT. Just less so than before.

SNOOPY

[Snoopy]

Total modelled average net dividends over five years: 34.177c / 5 = 6.835c

As I write this the IPL010 and IPL020 bonds are trading around on the secondary market at the 7.0% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2023 capitalised valuation for IPL to get my required rate of return works out as:

(6.835c/0.72)/0.075 = $1.27

I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:

(6.835c/0.72)/0.065 = $1.46

We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.46 x 1.075 = $1.57

An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of IPL shares to $1.46 x 1.18 = $1.72

All of these valuations are well above current market prices of $1.20. However there still remains the prospect of a capital raising to appease the banking syndicates banking covenants, and the said banks do not appear to be in the mood to extend the debt headroom ceiling for this company. This, the announced dividends cut, and no progress with asset sales are three of reasons why I think the market price for IPL shares remains subdued.

SNOOPY

discl: do not hold

[Snoopy]

Long term property investors would argue that the long run attractiveness of investing in property is that not only do you get the net rent but over time property values rise with inflation.

I think it is worthwhile laying out exactly what changes in property re(de)valuations have occurred since Investore was formed

HY2024	($82.712m)
FY2023	($185.246m)
FY2022	$91.593m
FY2021	$139.287m
FY2020	$7.716m
FY2019	$17.206m
FY2018	$23,135m
FY2017	$13.720m
2HY2016	($0.801m)
Total 'R'=	+$23.888m

This total revaluation occurred over a period of eight years.

Over 8 years, that works out at an 8 year annual compounding rate 'r' of:

($596.711m - $23.888m)(1+r)^8 = $596.711m
=> $572.823m (1+r)^8 = $596.711m
=> (1+r)^8 = 1.0417
=> r=1.0051, or 0.5% per annum.

Given it looks like we are headed for a further write down at full year, I come to the fairly disappointing view that over the business cycle (indicative interest rates were in 3.3% September 2016 and 5.9% in September 2024) I am forecasting zero capital gain for the entire existence of Investore. Compare that to what happened to residential house prices over the period and it is a very sobering long term picture at Investore. And all this over a time period of rapidly rising construction costs too! 'No capital gain at all' is not a phrase you want to hear from what ostensibly is one of NZ's leading property investment prospects. Costs rise with inflation to be sure . But whether completed big box values rise with inflation, it seems, is a separate question.

SNOOPY

[Snoopy]

The following quote relates to FY2023

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.

I did the above overall funding take on Investore mid last year. I think we are all aware that Investore have been fairly canny with their bond market funding, keeping a lid on overall borrowing costs. But what about the bank element of the funding, taken alone? The interest rate level the banking professionals charge Investore, can give shareholders an idea of how well the bankers consider Investore, as a business, is bring managed. In the table below I have taken the bank financing bill for the year and spread it across a 'three point triangulated estimate' of the average annual loan balance. For any given year the 'three points' I refer to are:

i// The end of the financial year.
ii/ The end of the previous financial year.
iii/ The half year mid point between i/ and ii/

Calculated this way, the 'average annual loan balance' will be inaccurate if there is a sudden significant increase or decrease in loan balance close to a reference date. However, these numbers are as accurate as I can get with the publicly released information from the respective Annual and Interim reports.

Annual Bank Interest Charged: Multi Year Picture

	Annual bank interest charged {A}	Bank Loan Balance SOFY	Bank Loan Balance MOFY	Bank Loan Balance EOFY	Bank Loan Balance Average {B}	Borrowing Interest Rate {A}/{B}
FY2019	$10.106m	$307.400m	$213.000m	$218.530m	$246.310m	4.10%
FY2020	$8.670m	$218.530m	$204.700m	$138.400m	$187.210m	4.63%
FY2021	$8.150m	$138.400m	$55.000m	$55.000m	$82.800m	9.84%
FY2022	$4.990m	$55.000m	$119.200m	$5.000m	$59.733m	8.35%
FY2023	$3.887m	$5.000m	$40.600m	$37.600m	$27.733m	14.02%

The above table is interesting in that it tracks the company financing from SOFY2019 (EOFY2018) where the company was entirely bank funded, right up to EOFY2023 where the company became almost entirely bond funded, using the IPL010, IPL020 and IPL030 corporate bonds set up over that time. In fact by EOFY2022 the bank funding at balance date was a meagre $5m drawn, albeit banking facilities available were $125m. By EOFY2023 the bank funding draw down had reached $37.600m, under the same $125m debt ceiling. But look at what happened to the bank funded interest rate. It had ballooned out to a staggering 14.02%! Granted that $37.600m amounts to only $37.600m/$385.037m=9.76% of all borrowings. But isn't a banking syndicate charging the company a staggering 14.02% really saying 'we do not want your business!'. This is a huge turnaround from five years previously when the bank lending rate was a nearly ten percentage points lower (just 4.10%, albeit in a lower interest rate climate), and the banks were prepared to fund the whole company. What in the eyes of the bankers has gone so wrong? It has to be related to those banking covenants (refer post 177).

Working from the HY2024 balance sheet figures, on current debt levels, the asset value of the company must not dip below:

$410.324m / 0.525 = $781.569m

$1,014.731m were the assets on the books at balance date. Headroom (maximum write-down available) is:
$1,014.731m - $781.569m = $233.162m

But the banks won't let it get 'down to the wire' like that. More writedowns to come by the full year date of 31-03-2024? A couple of months left to sell some assets? But don't sell them for too low a price, or you might trigger a revaluation downwards for the remaining property portfolio. Crikey this could be tight! And the share price is down 3.4% yesterday to $1.12 in a market that rose 1%. On 18th April 2024 the first of those bonds reverts back to bank funding. Maybe those bankers demanding a 14% risk premium interest rate are pricing their debt fairly? Would a cash issue at $1 per share placate them?

SNOOPY

discl: not a holder of the shares nor the bonds

[Snoopy]

In the table below I have taken the bank financing bill for the year and spread it across a 'three point triangulated estimate' of the average annual loan balance. For any given year the 'three points' I refer to are:

i// The end of the financial year.
ii/ The end of the previous financial year.
iii/ The half year mid point between i/ and ii/

Calculated this way, the 'average annual loan balance' will be inaccurate if there is a sudden significant increase or decrease in loan balance close to a reference date. However, these numbers are as accurate as I can get with the publicly released information from the respective Annual and Interim reports.

Annual Bank Interest Charged: Multi Year Picture

	Annual bank interest charged {A}	Bank Loan Balance SOFY	Bank Loan Balance MOFY	Bank Loan Balance EOFY	Bank Loan Balance Average {B}	Borrowing Interest Rate {A}/{B}
FY2023	$3.887m	$5.000m	$40.600m	$37.600m	$27.733m	14.02%

I am really shocked at the interest demands the banks have placed on IPL. So much so that I am wondering if that 14.02% is some kind of calculation aberration. So as a double check, I am looking at the interest rate charged in the half year after that (HY2024).

	Semi-Annual bank interest charged {A}	Bank Loan Balance SOFY	Bank Loan Balance MOFY	Bank Loan Balance EOFY	Bank Loan Balance Average {B}	Borrowing Interest Rate 2{A}/{B}
HY2024	$2.570m	$37.600m	$50.300	N/A	$43.950m	5.85%

One thing that has changed in those six months is bank facility F being bumped up from an undrawn $5m to a fully drawn $40m. There is also a brand new bank facility G undrawn to $65m. Could it be the cost of setting up these new facilities were incurred in the previous six months, hence pushing up the 'interest ' charge in the prior period? Another factor in the prior period was that the average bank balance over the year was very low in historical terms. Add even a modest additional fixed charge to a low interest rate bill and all of a sudden, the percentage 'interest' charge blows out. This is my explanation of what might have happened.

I am pleased to say that 5.85% sounds a lot more reasonable that 14.02%, even if it is significantly higher than the 4.4% being paid on the $100m of maturing IPL010 bonds. The annual interest bill on that loan will rise from $4.4m to an indicative $5.85m, a rise of $1.85m which will not be welcome to unit holders that have nevertheless had it very good for a long time, courtesy of those locked in low rate IPL bonds. The big question mark is what happens to funding rates when the rest of those IPL low rate bonds mature in 2027?

SNOOPY