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