Listed Property Trusts

[Snoopy]

Looks like your calculations are based on an assumption that reported depreciation adjustment is purely for non-residential buildings.

Yes that is what I have assumed

Which is far from reality. If we compare depreciation adjustments for KPG between FY20 ($8.046mil) and FY21 ($14.232mil) when it was reintroduced then we can estimate that non-residential buildings depreciation is only about 45% of all depreciation. So, even if depreciation for non-residential buildings will be removed total depreciation still going to be around $7.5mil.

Interesting observation xp04. I am not intimately familiar with KPG, other than to know it has undergone a lot of property portfolio reorganization, prior to emerging as a property developer with a goal of owning property where people can live, work and shop within the same greater complex. Some of that 'bumped up depreciation effect' in FY2021 may have been brought about by accelerating depreciation on assets that were about to be sold. TBH I find the accounting for depreciation in these property entities incredibly opaque. And because of the KPG portfolio restructuring, understanding depreciation at KPG is at the top end of the opacity scale.

I actually thought depreciation on all residential buildings was done away with as a tax deduction some years ago. I also thought that KPG's first foray into 'build to rent' was to be at Sylvia park, that has yet top be tenanted. IOW they didn't have any residential tenanted buildings in FY2020 and FY2021. If that is true, it would mean the 'depreciation tax effect' of $8.046m over FY2020 was for something other than buildings. I am happy to be re-educated by someone who follows KPG more closely than I do if I am wrong about this.

SNOOPY

[LaserEyeKiwi]

Yes that is what I have assumed



Interesting observation xp04. I am not intimately familiar with KPG, other than to know it has undergone a lot of property portfolio reorganization, prior to emerging as a property developer with a goal of owning property where people can live, work and shop within the same greater complex. Some of that 'bumped up depreciation effect' in FY2021 may have been brought about by accelerating depreciation on assets that were about to be sold. TBH I find the accounting for depreciation in these property entities incredibly opaque. And because of the KPG portfolio restructuring, understanding depreciation at KPG is at the top end of the opacity scale.

I actually thought depreciation on all residential buildings was done away with as a tax deduction some years ago. I also thought that KPG's first foray into 'build to rent' was to be at Sylvia park, that has yet top be tenanted. IOW they didn't have any residential tenanted buildings in FY2020 and FY2021. If that is true, it would mean the 'depreciation tax effect' of $8.046m over FY2020 was for something other than buildings. I am happy to be re-educated by someone who follows KPG more closely than I do if I am wrong about this.

SNOOPY

If I recall correctly commercial building depreciation was only re-introduced in 2020 as a covid recovery mechanism, prior to that it was eliminated by National a decade earlier (so all through the 2010s the commercial property did not have this deduction available).

[LaserEyeKiwi]

Occasionally I venture to that 'other discussion place' for NZ shares, even though I seem to be blocked from posting there. Some ridiculous baron has even boasted about blocking me. Not sure how this happened. I think it has something to do with him discovering my IP address then logging on using a VPN mimicking my IP number. In spite of his technical prowess, I had regarded the baron as a fool up to now - until I read something of his posted on the KPG thread 'over there' the other day. It seems he actually said something sensible on the effect of the looming removal of 'depreciation deduction' on the after tax earnings on NZ's property sector. I never expected that from a fossilized fighter pilot!

Anyway it got me thinking, and I decided to tabulate this effect across the 'property sector top eight'. Here are my results, as pulled from the most recent annual reports.

The table below represents what would have happened if the abolition of commercial building depreciation adjustment (cancellation) announced as National Party finance policy on 30th August 2023 had been in place over the last calendar year.

	Depreciation Adjustment (A)	Units on Issue (last balance date) (B)	Projected eps reduction (A)/(B) or (C)	dps (D)	Potential Dividend Reduction (C)/(D)	Unit Price 28-08-2023 (E)	Unit Price 01-09-2023 (F)	Share Price Drop ((F)-(E))/(E)
Goodman Property Trust (GMT)	$10.4m	1,403.3m	0.719cps	5.9cps	-12.2%	$2.20	$2.16	-1.82%
Vital Healthcare (VHP)	$?m (2)	661.01m	?cps	9.752cps	Not Available	$2.225	$2.24	+0.68%
Property for Industry (PFI)	$5.834m	502.05m	1.16cps	8.4cps	-13.8%	$2.32	$2.29-$0.0195(1)	-2.13%
Precinct Properties (PCT)	$14.0m	1,585.9m	0.883c	6.7cps	-13.2%	$1.26	$1.21	-3.97%
Argosy Properties (ARG)	$9.597m	846.72m	1.13cps	6.657cps	-17.0%	$1.20	$1.17	-2.50%
Investore (IPL)	$4.264m	367.50m	1.16cps	7.9cps	-14.7%	$1.34	$1.26	-5.97%
Stride (SPG)	$6.872m	661.01m	1.04cps	8cps	-13.0%	$1.46	$1.39-$0.02(1)	-6.16%
Kiwi Property Group (KPG)	$13.539m	1,571.2m	0.862cps	5.7cps	-15.1%	$0.91	$0.88	-3.30%

Notes

1/ Adjustments to the 1st September 2023 share prices for PFI and SPG reflect these shares going ex-dividend over the comparative period between 28/08/2023 and 01/09/2023. PFI went ex a 1.95c dividend at the end of trading on 28th August, payable on 7th September. SPG went ex a 2.00c dividend at the end of trading on 30th August, payable on 18th September. This means that both of these shares lost the accessibility of the underlying shares' 'dividend rights' for their respective shareholders. This loss is reflected in the respective 1st September share price valuation(s) by subtracting the 'dividend(s) lost' from the share price(s) on that date.

2/ Depreciation issues with 'Vital Healthcare Properties' I have expanded upon here:
https://www.sharetrader.co.nz/showth...=1#post1020495

SNOOPY

Thanks for this. Did you account for the fact that these companies pay out dividends at different ratios of net cashflow? Eg, some of these companies will likely be able to maintain dividends, or falls may be smaller than indicated, even with the net income falling due to the depreciation being removed.

Eg some companies pay out less than 90% as dividends, and could boost that to 95-100% of underlying cashflow.

[Baa_Baa]

It's a bit confounding that there is so much discussion about something that appears to be so simple, from an investment point of view. There are no REIT's that are suitable for a portfolio allocation based on capital gains (SP gains). They are all money making machines that pay out attractive dividends, cash returns or reinvested, and all of them have sustained performance in that regard.

A long term income oriented investor would only be concerned about the SP when it is low enough to get some, or get some more, to bolster their income (gross dividend). If they're smart it will be a company that bolsters their net dividend as well, by careful tax management.

These are not, none of them, capital value investment plays. They are pure income investment plays and nothing more or less. Imo.

[Snoopy]

Thanks for this. Did you account for the fact that these companies pay out dividends at different ratios of net cashflow? Eg, some of these companies will likely be able to maintain dividends, or falls may be smaller than indicated, even with the net income falling due to the depreciation being removed.

Eg some companies pay out less than 90% as dividends, and could boost that to 95-100% of underlying cashflow.

Good point. No I did not allow for that. You will notice that I labelled the changed depreciation effect as a 'potential dividend reduction'. This was on the assumption that most of these property trusts pay out as much as they reasonably can as dividends. So any reduction in earnings would likely be reflected as a reduction in dividend payments. But you are quite correct to point out that if there was a buffer between earnings and dividend payments, a property company might elect to keep the dividend payments constant and reduce retained earnings.

SNOOPY

[LaserEyeKiwi]

It's a bit confounding that there is so much discussion about something that appears to be so simple, from an investment point of view. There are no REIT's that are suitable for a portfolio allocation based on capital gains (SP gains). They are all money making machines that pay out attractive dividends, cash returns or reinvested, and all of them have sustained performance in that regard.

A long term income oriented investor would only be concerned about the SP when it is low enough to get some, or get some more, to bolster their income (gross dividend). If they're smart it will be a company that bolsters their net dividend as well, by careful tax management.

These are not, none of them, capital value investment plays. They are pure income investment plays and nothing more or less. Imo.

NZ listed property stocks rise and fall roughly in concert with the interest rate cycle. If one has patience it is fair chance to get in at a probable low point and sell at the opposite peak of the cycle when valuations are significantly higher. There is your capital value investment play, and you get good divi yields in the interim.

[winner69]

BaaBaa me ‘ol mate …love your ATM description of how REITs work …..spitting out cash on a regular basis

However it seems that the amount being spat out regularly hasn’t changed much in recent years although the insides of the ATM seems to getting full to overloading (significantly larger asset base to generate cash for dividends )

That doesn’t seem right

[BlackPeter]

BaaBaa me ‘ol mate …love your ATM description of how REITs work …..spitting out cash on a regular basis

However it seems that the amount being spat out regularly hasn’t changed much in recent years although the insides of the ATM seems to getting full to overloading (significantly larger asset base to generate cash for dividends )

That doesn’t seem right

I guess there is a reason they call them pseudo bonds. If you buy a bond and cash in the interest rate every year, you don't expect the principal to grow either, don't you?

Either you take less dividends and higher risks and hope for capital gains (or fear the losses) - or you don't.

Can't eat your cake and have it, too.

[LaserEyeKiwi]

Good point. No I did not allow for that. You will notice that I labelled the changed depreciation effect as a 'potential dividend reduction'. This was on the assumption that most of these property trusts pay out as much as they reasonably can as dividends. So any reduction in earnings would likely be reflected as a reduction in dividend payments. But you are quite correct to point out that if there was a buffer between earnings and dividend payments, a property company might elect to keep the dividend payments constant and reduce retained earnings.

SNOOPY

Also when considering those companies that have Dividend Reinvestment Plans with high shareholder uptake, they likely have ample scope to maintain dividend (if they choose). Technically projecting 100% payout ratios of FFO, but of course paying out much less in reality as people accept shares instead of cash.

Those DRPs of course lead to some dilution, capital raises by stealth, but fairly common.

[Snoopy]

Also when considering those companies that have Dividend Reinvestment Plans with high shareholder uptake, they likely have ample scope to maintain dividend (if they choose). Technically projecting 100% payout ratios of FFO, but of course paying out much less in reality as people accept shares instead of cash.

Those DRPs of course lead to some dilution, capital raises by stealth, but fairly common.

Yes another good point. The problem with DRPs is that by issuing more shares, and saving some immediate cashflow out, the company is reducing the earnings per share for future tax periods 'ad infinitum'. IOW they are kicking the 'cashflow balance can' 'down the road'.

This kind of behaviour is particularly egregious in the case of Investore that on 11/07/2022 commenced a share buyback that was paused om 08-09-2022 after shares had been bought back within the $1.65 to $1.75 price band. Yet on 28th June 2023, Investore announced a 'dividend reinvestment plan' for a share that went ex-dividend on 6th September 2023, with shares issued based on a 5 day weighted average share price of all trades after going ex-dividend. That DRP share price looks to be $1.26, and maybe lower if a discount applies. This is a terrible result for shareholders not in the DRP as the board has 'bought existing shares high' and is 'selling new shares low', destroying shareholder capital at a time the company needs it and diluting the value of the existing shareholder base forever going forwards.

For a 'no to low growth company', as most of these collective property ownership PIEs are, I would say DRPs are bad news for unit holders over the long term.

SNOOPY