VHP Vital Healthcare

[Snoopy]

Fund Manager, Aaron Hockly, says that Vital is part way through a process of further upgrading and enhancing its property portfolio, in-line with announcements made over FY23.

“This is primarily through the sale of non-core assets and the reinvestment of sales proceeds into developing new healthcare facilities in key healthcare precincts with strong sustainability characteristics. These enhancements are expected to support future earnings growth for Unit Holders.” says Hockly.

I am investigating how the mooted change in depreciation deductibility might affect earnings of VHP going forwards. So far I am not having much luck. There is no quantification of how depreciation affects the FY2023 or FY2022 annual results that I can find. Of course much of the VHP portfolio is in Australia. Income from that source is beyond the reach of any future New Zealand National or Labour lead governments 'denial of depreciation' rights.

p82 of AR2023 has this to say about tax rates:
"The Group is subject to New Zealand tax on assessable income, including assessable Foreign Investment Fund ("FIF") income attributed from its Australian subsidiaries (applying either the Fair Dividend Rate ("FDR") method or the attributable FIF method), at a rate of 28%. Its Australian subsidiaries are subject to Australian withholding tax on assessable income at a rate of 10% for interest income or 15% for 'fund payment' amounts as they are Australian Managed Investment Trusts (MIT), for which a New Zealand tax credit is generally available."

I was a little surprised to see mention of FIF income treatment in relation to the Australian property portfolio. This would indicate that the Australian property portfolio does not have a franking credit account, a situation that I find odd. Perhaps the Australian MIT structure that holds VHP's Australian assets has something to do with this. Anyone know?

In any event, a change in depreciation deductibility for income tax purposes would only affect the NZ property holdings. As of EOFY2023,(AR2023 p81) these earnings only represented:

$949.378m / $3,288.356m =28.9% of all managed property assets

It is interesting that in AR2023, the word 'depreciation' is only printed twice, with both of those mentions being in the same sentence on p84:
"Deferred tax on depreciation: Deferred tax is provided for in respect of New Zealand properties for the depreciation expected to be recovered on the sale of investment property."

This got me thinking. If there is no depreciation allowed on NZ commercial buildings, does that mean there will be no 'depreciation recovered' tax to pay on the selling down of parts of the NZ portfolio in the future? I imagine that any depreciation claimed under older income tax rules might still be recovered and taxed under a depreciation regime in NZ that no longer allows commercial building depreciation as a legitimate expense. Anyone know?

SNOOPY

[Snoopy]

The current historical gross dividend yield for VHP, based on a share price of $2.31, is 4.949%. Now imagine what that dividend yield would drop to if the share price rose to its NTA. Actually no imagination is necessary. The answer is: $2.31/$3.17 x 4.949% = 3.606%.

I wrote the above on 20th June 2023. I am fairly sure I pulled that gross yield figure off the NZX website, back on the day. Yet so complex are some of those dividend statements from VHP, I wondered if the NZX algorithm got the yield right? I will do my calculation 'looking backwards' from 20-06-2023 to get an historical dividend rate. Let's see if I get the same answer:

Ex-Dividend date	Total Cash Distribution {A}	Tax exempt Distribution {B}	Taxed Cash Distribution {A}-{B} or {C}	Imputation Credits @28% (if fully imputed) OR PIE recognised {C}/0.72-{C} or {D}	Actual Imputation credits {D}x{E}	Imputation Rate {E}	Gross Dividend {B}+{C}+{D}
07-06-2023	$0.02437500	$0.00568231	$0.01869269	$0.00726938	$0.00216861	29.8321%	$0.03164444
08-03-2023	$0.02437500	$0.01158482	$0.01279018	$0.00497396	$0.00101499	20.4060%	$0.02948960
30-11-2022	$0.02437500	$0.01197639	$0.01239861	$0.00482168	$0.00095379	19.7813%	$0.02919668
07-09-2022	$0.02437500	$0.02437500	$0.00000000	$0.00000000	$0.00000000	0%	$0.02437500
Total							$0.11470572

To calculate the gross yield based on a share price of $2.31: 11.470572 / 231 = 4.966%

With $NZ2.5b of properties on Australia and $NZ1b of properties in NZ, a 1/(1+2.5) = 28.6% imputation rate is what you might expect if the NZ and Australian property portfolios were equally profitable. That makes the imputation rates declared look 'believable' (because no NZ imputation credits would be earned in Australia), except for the September quarter result where no imputation credits at all were earned. I took a look forwards and Vital pulled exactly the same trick in September 2023. Why these two fourth quarter derived earnings offer no imputation credits I have no idea. Some kind of wrap up accounting calculation perhaps? But if that were generally true, then the same thing would apply to the September 2021 dividend as well, - which it doesn't. Go back another year and it is the September 2020 and December 2020 dividend that both pay no imputation credits. Maybe it's a problem too difficult for a dog to solve? I think I will go and lick up the supper dish instead....yum!

I still don't understand why no matter what percentage of imputation credits were actually paid, a PIE unit-holder can get the benefit as if tax was paid at a rate of 28%. But there you go.

SNOOPY

[Snoopy]

Is VHP a PIE?

In light of my post 172, I wonder if it is worth revisiting this question?

I know what a pie is. It has a pastry encased cavity which holds the ingredients and a pastry top to seal it off. But what about a potato top pie? There is more pastry in the lower half of the pie than in the pastry seal on top. So it still looks like a pie, and can pass as a pie. But what about if that lower bit was the potato section and there was a fitted pastry lid to seal it? Would that still be a pie? It would look like a pie. But it wouldn't really taste like a pie. And that is where VHP sits in my view. The bulk of the PIE case is Australian spud, but with a layer of 'NZ pastry' taking the publicity limelight (VHP is NZX listed after all) and sealing the top. It doesn't taste like a PIE because of the only partially (1/3) tasty dividends spun out, while the other 2/3 of the taste comes from a less fulsome Aussie flavour. So is VHP really a PIE? I would say NO.

SNOOPY