IFT - Infratil

[Ferg]

Wellington airport:

Net operating profit before tax $20m
Less tax expense $49m
Net operating loss after tax ($29m)

Included in the $49m tax expense is $44m of deferred tax losses due to the change in building depreciation rules. Note A5 says : "Deferred tax impact from reversal of depreciation on buildings". Deferred tax is non cash.

Source: https://www.wellingtonairport.co.nz/...eport_FY24.pdf

[ronaldson]

Wellington airport:

Net operating profit before tax $20m
Less tax expense $49m
Net operating loss after tax ($29m)

Included in the $49m tax expense is $44m of deferred tax losses due to the change in building depreciation rules. Note A5 says : "Deferred tax impact from reversal of depreciation on buildings". Deferred tax is non cash.

Source: https://www.wellingtonairport.co.nz/...eport_FY24.pdf

I tried to understand this because it seemed a rather large sum to bring to account due to the change in depreciation rules for non residential structures, and I hold a lot of ARG who will be similarly affected.

Can anyone reduce this circumstance to something so basic even I can comprehend how it works?

[Ferg]

I tried to understand this because it seemed a rather large sum to bring to account due to the change in depreciation rules for non residential structures, and I hold a lot of ARG who will be similarly affected.

Can anyone reduce this circumstance to something so basic even I can comprehend how it works?

I will give it a go but I apologise in advance for technical terms.

The income tax expense in the P&L for any given year is made of current tax expense (aka tax payable in cash) plus or minus deferred tax expense (which is non cash).

The current tax expense matches what is returned to the IRD every year per the income tax return. This is normal. This is what most small and medium sized businesses have - just current tax and no deferred tax.

Whereas deferred tax expense is an accounting construct that measures the tax effect of just timing differences between the tax return and what is showing in the accounts (note this is timing differences only, not permanent differences such as non-deductible expenditure). Using a different depreciation rate on assets for tax purposes versus that used for accounting purposes is an example of a timing difference where the company ends up with 2 different depreciation values. This is normal for Corporates to adopt such a practice - because they may want to depreciate an asset over a different time period to what the IRD allow for tax return purposes.

{Note that if you hold the asset to the death then all the depreciation differences will eventually reverse to zero. Hence it is a timing difference between tax years. The company has a higher or lower taxable profit in earlier years relative to accounting profit, that then reverses in later years. And this is where changes to the building depreciation deductibility rates impact the airport given the reversals can now not happen.}

So back to Wellington Airport. They reversed a deferred tax asset of $44m which resulted in an increase in their tax expense in the P&L of $44m. Assuming a 28% tax rate, this tells me the company had $157m of timing differences related to building depreciation accumulated over many years. In other words, the airport had been running accounting depreciation at a higher rate than the income tax returns (possibly due to unrealised revaluations perhaps?) and they were expecting this to reverse in years to come. However, given the Government changed the tax legislation this 'asset' cannot now be crystallised or reversed naturally in future which meant they had to write it off......hence the extra $44m tax cost which is a one-off correction.

Hopefully that makes sense....?

[Toddy]

I know that IFT love the cashflows and leverage that the Airport gives them.

But if there is one asset that does not fit their portfolio strategy now, it's Wellington Airport.

Hopefully they can package the business up and sell it on in the near future.

[Snoopy]

I tried to understand this because it seemed a rather large sum to bring to account due to the change in depreciation rules for non residential structures, and I hold a lot of ARG who will be similarly affected.

Can anyone reduce this circumstance to something so basic even I can comprehend how it works?

Good explanation from Ferg. If you aren't familiar with the technical terms it is worth reading two or three times to let the whole explanation sink in. The thing that threw me a few years ago when looking into this accelerated depreciation effect myself was that it seemed very odd that a company could arrogantly disregard the Inland Revenue depreciation rules and set their own depreciation schedule. A sort of two fingered 'we know better' salute to the IRD (for public reporting purposes at least)! But I guess depreciation rules are formulated on a 'one size fits all' basis. And if your company is a 'different fit', those IRD sanctioned depreciation rules will give a false view of profits.

Ronaldson, you should be aware that the removal of 'building depreciation' as a tax deduction in the future applies only to the structural elements of buildings. Depreciation on other parts of the building like lifts, air conditioning systems, floor coverings, curtains and blinds, built in office furniture and non structural partitions are still allowable deduction items. This means that using Wellington Airport as an example of what to expect from the effect of the revised depreciation rules on Argosy may not pan out, as the type of buildings at at airport may not be analogous to the office tower and big box mix found within the Argosy property portfolio.

SNOOPY

[Bjauck]

Taxable Income for NZ Inland Revenue purposes may not necessarily be regarded as income as is generally understood or even as far as other tax authorities are concerned

[LaserEyeKiwi]

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[ronaldson]

Thank you Ferg et al on this forum for your comments.

I am not a holder of IFT, but ARG reports on 22 May so I will look to closely follow the impact of again removing depreciation on the structural elements of non-residential buildings as a deductable expense, and the consequence on the Deferred Tax provision as shown in ARG's most recent Financial Statements (said in the note to the IFT statements to be a "non cash" adjustment).

[LaserEyeKiwi]

I know that IFT love the cashflows and leverage that the Airport gives them.

But if there is one asset that does not fit their portfolio strategy now, it's Wellington Airport.

Hopefully they can package the business up and sell it on in the near future.

Will be interesting to see what happens with it as the other shareholder, Wellington City Council, is debating whether to exit its shareholding. Whether or not if infratil wishes to remain as owner, or dispose of it, it will be beneficial either way if they had 100% ownership.

On a related note, there is actually an interesting small threat to the monopolies currently enjoyed by New Zealand’s airports in the form of a new high speed transport alternative that may eat into some of the regional domestic market for NZ airports within a couple of years. If the business model of this new company linked to below actually holds up, it would mean Airports like Auckland & Wellington would increasingly be focused on long distance & high capacity routes, whereas regional routes that are linked by open water would have much better economics using these new aircraft that don’t have to pay any landing fees at an airport.

https://www.oceanflyer.co.nz/news-monte

NZ is a pretty good launch market for this product - most of our population live in coastal cities. Auckland to Tauranga would be a good route, as would Wellington to Picton, Nelson & Christchurch.

I wonder if port companies might end up with new revenue streams.

[kiora]

What we alread knew?
"Data centre investments: real or hype (and the 14 key insights all investors need to be aware of)"

https://www.livewiremarkets.com/wire...rm=READ%20MORE
"Demand has arrived.

Global leasing activity has surged, achieving record-breaking levels in each of the last four quarters. Remarkably, more megawatts have been leased in this twelve month period than in the preceding three and a half years."

"The size of the generative AI market is set to grow exponentially, with revenues forecast to grow almost 20-fold to US$1.3trillion by 2032. Generative AI requires a tremendous amount of power relative to non-AI use, particularly in the training phase. Growth in the global AI market is certain to create ample demand for additional data centre capacity."
"Supply is responding. Capacity under construction in the US has surged to just over 3,000MW at the end of 2023. However over 80% of current construction is already pre-leased, compared to ~50% in prior years. This significantly decreases the risk of oversupply.

With development profits of 40%+ and stabilised net operating income (NOI) yields of 9%+, developments are proving to be lucrative which may suggest supply will accelerate from here (posing future investment risk). However, difficulty sourcing power and procuring generators and transformers are adding multi-year delays to the development timeline. "
"The chart shows the annual 15-year forecast peak power load forecast of Dominion Energy, who is the energy provider for North Virginia and surrounds. Notably, there is a substantial increase in future peak loads forecasted since the 2022 report. Utility providers in the US such as Dominion, have been taken by surprise by the rapid growth of data centre power demands, which has led to years of underinvestment in power generation and transmission infrastructure. There are upwards of seven year wait times for additional power, for development projects in cities such as Los Angeles.

Demand > supply = falling vacancies and surging rents…though not every market is benefiting"