STR - Stride Property [ex DNZ Property]

[fungus pudding]

No useless comments from fungus then.Thanks for your useful sharing, not.

I posted my comment pointing out that posting garbage links like resticted sites is no help to anyone, so I added the unrestricted version to the comment I made.

[Snoopy]

SPG, as the ticker reads now, is a share that hasn't found much love from the forum. You can tell that because the ticker in the thread title has not been updated since the company changed it in July 2016, nearly six years ago!

It has a chequered history, some shareholders being 'in' from the early days when the share traded as Dominion properties. Then it was an aggregation of under-capitalised individual property syndicates set up by the former 'Money Managers' investment advisor chain, then headed by Doug Somers-Edgar. Reading back in this thread, it appears some of those syndicates were combined on what some individual unitholders saw as less than equitable terms. Long standing shareholders then saw their capital diluted, as wholesale NZ market capital providers rode in with their 'new capital' to recapitalise the company and save the day. Shareholder returns were further hit when they were advised to buy out an onerous property management contract set up by Somers-Edgar and his senior managers at the time.

I remember reading a slightly satirical book on how to deal with situations like this titled, "Don't Get Mad, Get Even." I have pilloried the previous management contract that had to be disentangled to 'save' Stride in the past. But Stride appears to be going down the same route itself, by setting themselves up as 'onerous property managers'. Who says you can't learn from history ;-P?

This new direction of Stride, is why it has split itself up into SPL (the property owning company) and SIML, (the property management company). It was necessary to do this to maintain the PIE status of SPL, even if from an investor perspective SPL and SIML are 'stapled' together as SPG, an entity that can't be uncoupled from a shareholder perspective.

Stride has created four property owning sub-units for operational purposes:

1/ 'Investore', which holds big box retailers as an asset class, the majority of which are Countdown supermarkets. This business unit is technically independent, as it has its own sharemarket listing. Stride has sold down their own direct holding to 18.8%.
2/ 'Industre', a joint venture with JPMAM (JP Morgan Asset Managers) representing various large overseas institutions. Stride's holding of 52% is forecast to reduce to 25% as partner JPMAM provides all the capital for property acquisitions to develop the business going forwards. Industre consists of a portfolio of industrial buildings. There is currently no mechanism for the general public to be able to invest in Industre directly.
3/ 'Fabric', which owns office buildings. An IPO for Fabric was proposed in September 2021, but was pulled from the market, Stride citing 'market conditions' as the reason. Stride intends to maintain some ownership in Fabric when the float eventually gets away.
4/ 'Diversified' which is a shopping centre owning unit comprising Queensgate (Lower Hutt), Chartwell (Hamilton), Remarkables Park (Queenstown) and a 50% interest in the Johnsonville Shopping Centre (Wellington). I am not sure of the history of this one, as Stride owns what seems like a miniscule 2.1% of that entity, although SPL do own the other 50% of the Johnsonville Shopping Centre that 'Diversified' does not own outright. I am not aware of any way the public can get a direct holding in 'Diversified'.

Stride (SIML) appears to be able to derive 'leasing fees' and 'long term management fees' (based on a percentage of the value of assets under management) from these entities, and - at the beginning when setting them up - an 'establishment acquisition fee' as well!

SIML does look like a very attractive business model. SIML is capital light in itself, but able to enjoy large fees from the assets of others. What is more, the fees are collectible regardless of the underlying performance of the business units. Business unit owners might describe those fees as 'onerous'. But as a potential Stride shareholder, I would describe them as 'financially savvy', 'astutely targetted' and 'greedy'. Well maybe not that last adjective, although I think I read 'greed is good' somewhere?

SNOOPY

[Snoopy]

Stride (SIML) appears to be able to derive 'leasing fees' and 'long term management fees' (based on a percentage of the value of assets under management) from these entities, and - at the beginning when setting them up - an 'establishment acquisition fee' as well!

SMIL does look like a very attractive business model. SIML is capital light in itself, but able to enjoy large fees from the assets of others. What is more, the fees are collectible regardless of the underlying performance of the business units.

From the Chairman's Annual Meeting Address:
"One of the focus areas for Stride in FY2021 and going into FY2022 has been growing our investment management business, which is one of our key objectives. Our total assets under management have grown to $3.4billion when including acquisitions and developments in progress."

and the CEO chimed in later:
"A key aspect of Strides business is that Stride retains a shareholding in each of its managed products, with a targeted weighting of between 20-25%, although this number can vary from time to time. This ensures alignment between Stride and each of its managed products, and is an important aspect of Stride's strategy."

As the 'fee gravy train' rolls along, I thought it might be interesting to look at what is inside the individual 'fee wagons'. Information in the following table is taken from Section 8.4, AR2021.

SIML Investment Property Fees (FY 2021)	Diversified	Investore	Industre	Total	Total %ge
Salary & Wages Recovery	$2.377m	$0.0m	$0.0m	$2.377m	10.3%
Acquisition Fee	$0.0m	$0.0m	$1.886m	$1.886m	8.2%
Asset Management Fee	$2.597m	$4.965m	$0.687m	$8.249m	35.7%
Performance Fee	$0.0m	$2.076m	$0.636m	$2.712m	11.7%
Building Management Fee	$1.543m	$0.428m	$0.056m	$2.027m	8.8%
Project Management Fee	$2.076m	$0.096m	$1.023m	$3.195m	13.8%
Maintenance Fee	$0.0m	$0.040m	$0.013m	$0.053m	0.2%
Disposal Fee	$0.0m	$0.0m	$0.0m	$0.0m	0%
Leasing Fee	$1.384m	$0.449m	$0.194m	$2.027m	8.8%
Accounting Fee	$0.175m	$0.250m	$0.0m	$0.425m	1.8%
Capital Raising Fee	$0.0m	$0.089m	$0.0m	$0.089m	0.4%
Licensing Fee	$0.070m	$0.0m	$0.0m	$0.070m	0.3%
Grand Fee Total	$10.222m	$8.393m	$4.495m	$23.110m	100%

SIML Investment Property Valuations (Over FY2021)	Diversified	Investore	Industre	Total
Total Assets Under Management: Including Outside Interests (EOFY2021) {A}	$466m	$1,038m	$610m	$2,114m
Investment Assets Under Management: SPL %ge holding (EOFY2021) {B}	2%	18.8%	56.3%	Not Meaningful
Investment Assets Under Management: SPL Interest (EOFY2021) {A}x{B}	$9m	$195m	$344m	$508m
Total Assets Under Management: Including Outside Interests (EOFY2020) {C}	$414m	$895m	$398m	$1,707m
Investment Assets Under Management: SPL %ge holding (EOFY2020) {D}	2%	18.8%	68.3%	Not Meaningful
Investment Assets Under Management: SPL Interest (EOFY2020){C}x{D}	$8m	$168m	$272m	$448m
Average Total Assets Under Management: Including Outside Interests (Over FY2021)	$440m	$966.5m	$504m	$1,910.5m
Total Fees as a %ge of Assets Under Management: Including Outside Interests (Over FY2021)	2.32%	0.868%	0.892%	1.21%

Notes

1/ For valuation of 'SPL' investment assets @31-03-2021, including external interests, see AR2021 p38
2/ For valuation of 'SPL' investment assets @31-03-2020, including external interests, see AR2020 p23

Those fees don't sound that high. But I know from my work on the 'Listed Property Trust' thread that an annual fee of only 0.5% of property value has the potential to reduce dividend yield by about 20%.

SNOOPY

[Snoopy]

The beauty of buying a PIE, which most of the NZ property companies are, is that all of the tax work is done for you. Just bank your dividend and spend it! I have to admit the concept of 'don't think and spend ' has a certain ring of attraction for many people. Things aren't quite so simple at Stride though. Stride found itself earning a fair whack of earnings from management fees rather than property ownership. This is a 'no no' when you are 'cooking up a property PIE' apparently. So Stride found a pragmatic solution.

1/ Split off the management fee owning section of the company into a separate entity for tax purposes and call it 'Stride Investment Management Limited'. This is not a PIE and, as a result, I presume shareholders do have to declare their SIML dividends in their tax return (I would be interested if a Stride shareholder can confirm this).
2/ Regroup the rest of the business, the direct property owning bit, under the name 'Stride Property Limited', which can continue as a PIE
3/ Combine SMIL and SPL into a new 'stapled' entity and call it Stride Property Group (SPG).

This way SPG owners retain the benefits of PIE (no paperwork needed for SPL) and they only get a half headache from adding SMIL dividends to their tax return. Good stuff.

But looking over the dividends paid over FY2021, and working out the actual imputation rates, I found something interesting.

Dividend date	30-06-2020	04-09-2020	14-12-2020	09-03-2021
SPL Dividend Amount	0.320c	1.928c	1.903c	1.727c
SPL Imputation Amount	0.124c	0.266c	0.334c	0.35c
SPL Imputation Percentage	28%	12.1%	14.9%	16.9%
SMIL Dividend Amount	2.158c	0.550c	0.575c	0.750c
SMIL Imputation Amount	0.839c	0.214c	0.224c	0.292c
SMIL Imputation Percentage	28%	28%	28%	28%

The SMIL part of the business is behaving as it should, paying tax at the company rate of 28%. The SPL part of the business starts off doing the same (first dividend). But look at what has happened to the imputation rates for the second, third and fourth dividends (figures highlighted in bold), To remind everyone, a 'fully imputed' dividend is imputed at the rate of 28%. The second third and fourth dividends of the SPL business are not anything like fully imputed. The SPL part of the business is the PIE that 'no-one needs to think about'. But this table is showing that perhaps some thought is required.

It looks like the PIE investors in SPL are getting credit for paying tax at 28%, when in fact the tax paid for the second, third and fourth dividends has been taken off at a much lesser rate. This (underpaying tax deducted at source) happened to me once on a fixed interest investment. The IRD got in touch with me and said that I had to declare that PIE income on my tax return so that I could fix the tax error. I am fascinated to know if SPG shareholders over FY2021 got asked to do the same thing. Are there any SPG shareholders out there that can comment?

SNOOPY

[Snoopy]

Looking over the dividends paid over FY2021, and working out the actual imputation rates, I found something interesting.

Dividend date	30-06-2020	04-09-2020	14-12-2020	09-03-2021
SPL Dividend Amount	0.320c	1.928c	1.903c	1.727c
SPL Imputation Amount	0.124c	0.266c	0.334c	0.35c
SPL Imputation Percentage	28%	12.1%	14.9%	16.9%
SMIL Dividend Amount	2.158c	0.550c	0.575c	0.750c
SMIL Imputation Amount	0.839c	0.214c	0.224c	0.292c
SMIL Imputation Percentage	28%	28%	28%	28%

The SMIL part of the business is behaving as it should, paying tax at the company rate of 28%. The SPL part of the business starts off doing the same (first dividend). But look at what has happened to the imputation rates for the second, third and fourth dividends (figures highlighted in bold), To remind everyone, a 'fully imputed' dividend is imputed at the rate of 28%. The second third and fourth dividends of the SPL business are not anything like fully imputed.

The SPL part of the business is the PIE that 'no-one needs to think about'. But this table is showing that perhaps some thought is required.

It looks like the PIE investors in SPL are getting credit for paying tax at 28%, when in fact the tax paid for the second, third and fourth dividends has been taken off at a much lesser rate.

I am fascinated to know if SPG shareholders over FY2021 got asked to declare that PIE income on their tax return to fix the tax error. Are there any SPG shareholders out there that can comment?

I got hold of my tax accountant today to clear up this PIE tax at less than 28%, potentially causing a supplementary tax bill for a Stride Property unit holder. The reply was that the lower PIE tax is probably representative of some income, most likely a revaluation of property, being not subject to income tax. Thus there is no requirement for a shareholder to top up their tax paid in a supplementary way, as there is no capital gain tax on a property revaluation to be paid by individual unit holders either. For the PIE working tax status, that means all tax is paid within the PIE structure, with no supplementary paperwork to be filled out by the unit-holder (as is normal with a PIE).

I had another look at the Stride income statement for FY2021 and noticed there was $38.759m in net change in fair value of investment properties thrown into the profit calculation. So I guess my accountant's advice rings true.

SNOOPY

[CD_CHCH]

Hi Snoopy,

I hold a few of these. On the PIE dividend statement there are 2 line items: Fully Imputed Dividend & Excluded Income.

Looking at the Fully Imputed Dividend it shows a Gross Dividend amount and NZ Imputation Credit which has been applied at 28% but if you take the combined total of Fully Imputed Dividend & Excluded Income it makes it appear as if tax has been deducted at the incorrect rate.

I'd never really thought about what each line item meant but seeing what your accountant says it makes sense now.

[Aaron]

Hey Snoopy

I think a Listed PIE like the listed property companies/trusts create imputation credits when they pay income tax. The imputation credits have to be attached to the dividends at 28% but only if there are imputation credits available to attach. Once the imputation credits have been used up the rest is an excluded amount that has no imputation credits attached.

An investor can choose to include the imputed dividend or exclude it from their tax returns depending on their level of income. If your taxable income is over $48,000 there is no reason to include the income in your tax return.

I guess where they are paying out more than their taxable profit you get the excluded dividend. Good old capital from nowhere, like the power companies and there might be more as they can depreciate commercial buildings again for tax purposes lowering their taxable income.

[Bev73]

Hey Snoopy

I think a Listed PIE like the listed property companies/trusts create imputation credits when they pay income tax. The imputation credits have to be attached to the dividends at 28% but only if there are imputation credits available to attach. Once the imputation credits have been used up the rest is an excluded amount that has no imputation credits attached.

An investor can choose to include the imputed dividend or exclude it from their tax returns depending on their level of income. If your taxable income is over $48,000 there is no reason to include the income in your tax return.

I guess where they are paying out more than their taxable profit you get the excluded dividend. Good old capital from nowhere, like the power companies and there might be more as they can depreciate commercial buildings again for tax purposes lowering their taxable income.

As I understand it, and apply it, where income without PIE is $48,000 or less, then PIE income can take the income total to $69,999 before the tax rate increases above 17.5%.
This allows for a tax refund on the 28% imputation credit.

[Aaron]

As I understand it, and apply it, where income without PIE is $48,000 or less, then PIE income can take the income total to $69,999 before the tax rate increases above 17.5%.
This allows for a tax refund on the 28% imputation credit.

I could be wrong but my understanding is that personal tax rates are 10.5% to $14,000. 17.5% $14k to $48,000 and 30% $48,001 to $70,000.

If your income is above $48,000 then every dollar of income above $48,000 is taxed at 30% or more. Portfolio Listed Entities(PLE) can only attach imputation credits up to 28% of the dividend. I am unsure how it could be beneficial to declare PLE dividends if your income is over $48,000 including PLE dividends, as your tax rate is 30% and the imputation credits are 28% you would need to (unnecessarily) pay the 2% difference.

I would be interested to know how you apply it.

[777]

I could be wrong but my understanding is that personal tax rates are 10.5% to $14,000. 17.5% $14k to $48,000 and 30% $48,001 to $70,000.

If your income is above $48,000 then every dollar of income above $48,000 is taxed at 30% or more. Portfolio Listed Entities(PLE) can only attach imputation credits up to 28% of the dividend. I am unsure how it could be beneficial to declare PLE dividends if your income is over $48,000 including PLE dividends, as your tax rate is 30% and the imputation credits are 28% you would need to (unnecessarily) pay the 2% difference.

I would be interested to know how you apply it.

Correct Aaron.