'Earned Profit' vs 'Dividends Paid': A second look
Quote:
Originally Posted by
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.
-------------------------
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
Capitalised Dividend Valuation (FY2023 perspective) Pt1: Data
The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed. While this was the case in FY2019 and FY2020, I have had to make adjustments to the free cashflow of the company, and hence money available for dividends in FY2021, FY2022 and FY2023. Post 182 provides detail on what these assumptions are. Dividends are considered in the financial year they are paid.
Per Share Dividends |
Div Q1 |
Div Q2 |
Div Q3 |
Div Q4 |
Depn. Tax Adjustment (1) |
Annual Total |
FY2019 |
1.880c |
1.865c |
1.865c |
1.935c |
N/A |
7.545c |
FY2020 |
1.935c |
1.900 |
1.900c |
1.900c |
N/A |
7.635c |
FY2021 |
1.900c |
1.900 |
1.900c |
1.900c |
(0.715c) |
6.885c |
FY2022 |
1.900c |
1.975c |
1.975c |
1.975c |
(0.740c) |
7.085c |
FY2023 |
1.975c |
1.975c |
1.975c |
1.975c |
(0.693c) |
7.207c |
Five Year Total |
|
|
|
|
|
36.375c |
Notes
1/ 'Depreciation Adjustment' adds the incremental taxation element of 'structural building depreciation'. This 'structural building depreciation' is extra money over and above earnings as measured by NPAT that would previously have been part of what is sometimes described as 'cash earnings'.
If structural building depreciation is no longer allowed, this increases profits and hence the tax take, in comparison with the real situation of tax deductability over FY2021, FY2022 and FY2023 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 182. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.
FY2021: $6.650m - $4.018m = $2.632m. $2.632m/368.135m = 0.715cps
FY2022: $7.858m - $5.133m = $2.725m. $2.725m/368.135m = 0.740cps
FY2023: $8.122m - $5.574m = $2.548m. $2.548m/367.503m = 0.693cps
I am a newbie looking at these property PIEs. I think this is the right way to adjust the 'cash earnings' as they apply to dividends calculations, but I am prepared to be corrected. My Take: The 'helicopter view' of the cashflow, is that the only extra cash taken out of this money system by changing the depreciation rules goes to the government. So this means there is still some 'depreciation money' in the system that can be added to cashflow and be paid out in addition to net profit after tax earnings, even with the depreciation tax law changes. This means that dividends can still perpetually continue to be higher than NPAT. Just less so than before.
SNOOPY
Capitalised Dividend Valuation (FY2023 perspective) Pt2: Calculation
Total modelled average net dividends over five years: 36.375c / 5 = 7.271c
As I write this the IPL010 and IPL020 bonds are trading around on the secondary market at the 7.0% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2023 capitalised valuation for IPL to get my required rate of return works out as:
(7.271c/0.72)/0.075 = $1.35
I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:
(7.271c/0.72)/0.065 = $1.55
We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.55 x 1.075 = $1.67
An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of IPL shares to $1.55 x 1.18 = $1.83
All of these valuations are well above current market prices of $1.20. Possibly contributing to this is a five year pattern of dividend decline, continuing into FY2024. Can Investore 'strong arm' any more money out of head tenant Woolworths? Or will the declining dividend trend continue? Hmmmmm......
SNOOPY
Supermarkets still not sold!
Quote:
Originally Posted by
Snoopy
I have just seen this comment in HYR2024 on p13
-----------------------------
4 Investment properties classified as held for sale
During the current period, the Board approved disposing the three properties located at 51 Arthur Street, Blenheim; Corner Putaitai Street & Main Road, Nelson; and 66-76 Studholme Street, Morrinsville. Upon the change in intention from holding the investment properties to disposing of them, Investore reclassified the properties from investment properties to investment properties classified as held for sale at a value of $26.5 million. An associated right-of-use asset of $0.6 million for the ground leases at 66-76 Studholme Street, Morrinsville ($0.1 million), and 51 Arthur Street, Blenheim ($0.5 million), were also reclassified from investment properties to investment properties classified as held for sale.
Management has assessed the value of 66-76 Studholme Street, Morrinsville, to be $6.5 million as at 30 September 2023 after considering recent comparable market evidence. The investment properties at 51 Arthur Street, Blenheim, and Corner Putaitai Street & Main Road, Nelson, were independently valued as at 30 September 2023 using the same respective valuer used for the 31 March 2023 valuations.
-------------------------------
So three properties classified for sale on the books at $26.5m. Take away the Morrinsville property part of that at $.6.5m. That means the Blenheim and Stoke supermarkets are on the Investore books at $20m combined, say $10m each at their 30-09-2023 very recent valuation date. If I am anywhere near right about that, then that Blenheim supermarket is currently yielding 6.9% x (12.05/10)= 8.3% on its book value. That sounds like a great investment to me. I would be wanting a very good price for that if I was Investore. Maybe they should give the Kaiapoi property the 'quick flick', so they can keep the one in Blenheim?
But I guess booking a real profit on a Blenheim sale will signal what great investors Investore (or Stride) really are?
The Countdown supermarkets at 12 Putaitai Street in Stoke Nelson (2021 RV $12.3m) and 51 Arthur Street Blenheim (2023 RV $12.05m) first went out to tender in September 2022. Here we are 18 months down the track and neither property has sold. If they are still on the books at a combined value of $20m, I wonder if the 'Oneroof' recorded market values are realistic? Maybe Investore are secretly hoping these two supermarkets do not sell? An absence of market transactions is a good excuse not to write the 'official' valuation of a property down.
SNOOPY
Capitalised Dividend Valuation (FY2025 perspective) forecast Pt1: data
The HY2024 report, published on 16th November 2023 provided updated dividend guidance on dividends that unit holders might expect, going right through to the end of FY2025. It was not spelled out specifically whether these dividend projections take into account the expected loss of the ability to offset 'structural building depreciation' against profits from FY2025 going forwards. But since this has been well signalled as forming part of the new coalition government's tax reform package, my expectation is that this has been taken account of in the new lower projected dividend rates for Investore unit holders going forwards.
The following table has been compiled under the assumption that 'structural depreciation for buildings' was not allowed in FY2021, FY2022, FY2023 and FY2024. Post 182 provides detail on what these assumptions are. Dividends are considered in the financial year they are paid.
Per Share Dividends |
Div Q1 |
Div Q2 |
Div Q3 |
Div Q4 |
Depn. Tax Adjustment (1) |
Annual Total |
FY2021 |
1.900c |
1.900 |
1.900c |
1.900c |
(0.715c) |
6.885c |
FY2022 |
1.900c |
1.975c |
1.975c |
1.975c |
(0.740c) |
7.085c |
FY2023 |
1.975c |
1.975c |
1.975c |
1.975c |
(0.693c) |
7.207c |
FY2024 |
1.975c |
1.975c |
1.625c |
1.625c |
(0.693c) |
6.500c |
FY2025 |
1.625c |
1.625c |
1.625c |
1.625c |
|
6.500c |
Five Year Total |
|
|
|
|
|
34.177c |
Notes
1/ 'Depreciation Adjustment' adds the incremental taxation element of 'structural building depreciation'. This 'structural building depreciation' is extra money over and above earnings as measured by NPAT that would previously have been part of what is sometimes described as 'cash earnings'.
If structural building depreciation is no longer allowed, this increases profits and hence the tax take, in comparison with the real situation of tax deductability over FY2021, FY2022 and FY2023 being allowed over those years. The tax paid under each scenario (tax deductability 'allowed' or 'not allowed') may be found in post 182. And the incremental tax paid under the alternative 'no building structure depreciation allowed' scenario, may be calculated as follows.
FY2021: $6.650m - $4.018m = $2.632m. $2.632m/368.135m = 0.715cps
FY2022: $7.858m - $5.133m = $2.725m. $2.725m/368.135m = 0.740cps
FY2023: $8.122m - $5.574m = $2.548m. $2.548m/367.503m = 0.693cps
FY2024: = 0.693c (estimate, based on FY2023 figure)
I am a newbie looking at these property PIEs. I think this is the right way to adjust the 'cash earnings' as they apply to dividends calculations, but I am prepared to be corrected. My Take: The 'helicopter view' of the cashflow, is that the only extra cash taken out of this money system by changing the depreciation rules goes to the government. So this means there is still some 'depreciation money' in the system that can be added to cashflow and be paid out in addition to net profit after tax earnings, even with the depreciation tax law changes. This means that dividends can still perpetually continue to be higher than NPAT. Just less so than before.
SNOOPY
Capitalised Dividend Valuation (FY2025 perspective) forecast Pt2: calculation
Total modelled average net dividends over five years: 34.177c / 5 = 6.835c
As I write this the IPL010 and IPL020 bonds are trading around on the secondary market at the 7.0% level. For equity risk I require a gross level of return greater than that : 7.5%. This means my FY2023 capitalised valuation for IPL to get my required rate of return works out as:
(6.835c/0.72)/0.075 = $1.27
I could 'look through' current high interest rates, in anticipation of interest rates being a percentage lower in a year's time. That would change my capitalised valuation to:
(6.835c/0.72)/0.065 = $1.46
We can add a multiplicative PIE fudge factor' onto shareholder returns from the point of view of a marginal 33% income tax rate payer. This is: (1-0.28)/(1-0.33) = 1.075. This increases 'fair value; to $1.46 x 1.075 = $1.57
An alternative multiplicative PIE fudge factor' on shareholder returns from the point of view of a marginal 39% income tax rate payer can be calculated. This is: (1-0.28)/(1-0.39) = 1.18 This increases 'fair value' of IPL shares to $1.46 x 1.18 = $1.72
All of these valuations are well above current market prices of $1.20. However there still remains the prospect of a capital raising to appease the banking syndicates banking covenants, and the said banks do not appear to be in the mood to extend the debt headroom ceiling for this company. This, the announced dividends cut, and no progress with asset sales are three of reasons why I think the market price for IPL shares remains subdued.
SNOOPY
discl: do not hold
Rise in Investor Property values since company foundation (HY2024 perspective)
Quote:
Originally Posted by
kiwikeith
Long term property investors would argue that the long run attractiveness of investing in property is that not only do you get the net rent but over time property values rise with inflation.
I think it is worthwhile laying out exactly what changes in property re(de)valuations have occurred since Investore was formed
HY2024 |
($82.712m) |
FY2023 |
($185.246m) |
FY2022 |
$91.593m |
FY2021 |
$139.287m |
FY2020 |
$7.716m |
FY2019 |
$17.206m |
FY2018 |
$23,135m |
FY2017 |
$13.720m |
2HY2016 |
($0.801m) |
Total 'R'= |
+$23.888m |
This total revaluation occurred over a period of eight years.
Over 8 years, that works out at an 8 year annual compounding rate 'r' of:
($596.711m - $23.888m)(1+r)^8 = $596.711m
=> $572.823m (1+r)^8 = $596.711m
=> (1+r)^8 = 1.0417
=> r=1.0051, or 0.5% per annum.
Given it looks like we are headed for a further write down at full year, I come to the fairly disappointing view that over the business cycle (indicative interest rates were in 3.3% September 2016 and 5.9% in September 2024) I am forecasting zero capital gain for the entire existence of Investore. Compare that to what happened to residential house prices over the period and it is a very sobering long term picture at Investore. And all this over a time period of rapidly rising construction costs too! 'No capital gain at all' is not a phrase you want to hear from what ostensibly is one of NZ's leading property investment prospects. Costs rise with inflation to be sure . But whether completed big box values rise with inflation, it seems, is a separate question.
SNOOPY
A 'interest'ing funding take? Bank on it!
The following quote relates to FY2023
Quote:
Originally Posted by
Snoopy
Investments make a positive contribution to a company when the return from the investment exceeds the cost of holding them. Investore has multiple sources of funding which include fixed rate bonds and some bank financing. We can get some idea of the cost of funding by dividing the interest paid during the year, by an estimate of the average funds drawn down over that year. To estimate that average draw-down balance, I take a 'triangulated average' of the the borrowed funds balances declared at reporting dates. These are the borrowings owed at the start of the financial year, the borrowings owed at the end of the financial year, and the borrowing balance at the interim reporting date in the middle.
Borrowed Funds Average Estimate = ($351.530m+$387.576m+$385.037m)/3= $374.704m
The finance expense for the year was $16.287m
This gives an indicative average interest rate of: $16.287m/$374.704m = 4.35%. If 4.35% seems low, remember IPL030 bonds carry a coupon rate of 4%, the IPL020 bonds are on a coupon rate of 2.4% (both with 2027 maturing dates) and even the IPL010 bonds that mature in April 2024 are only at a coupon rate of 4.4%. Nevertheless with refunding these $100m worth IPL010 bonds, rolling over at a higher rate in April 2024, borrowing costs should tick higher.
I did the above overall funding take on Investore mid last year. I think we are all aware that Investore have been fairly canny with their bond market funding, keeping a lid on overall borrowing costs. But what about the bank element of the funding, taken alone? The interest rate level the banking professionals charge Investore, can give shareholders an idea of how well the bankers consider Investore, as a business, is bring managed. In the table below I have taken the bank financing bill for the year and spread it across a 'three point triangulated estimate' of the average annual loan balance. For any given year the 'three points' I refer to are:
i// The end of the financial year.
ii/ The end of the previous financial year.
iii/ The half year mid point between i/ and ii/
Calculated this way, the 'average annual loan balance' will be inaccurate if there is a sudden significant increase or decrease in loan balance close to a reference date. However, these numbers are as accurate as I can get with the publicly released information from the respective Annual and Interim reports.
Annual Bank Interest Charged: Multi Year Picture
|
Annual bank interest charged {A} |
Bank Loan Balance SOFY |
Bank Loan Balance MOFY |
Bank Loan Balance EOFY |
Bank Loan Balance Average {B} |
Borrowing Interest Rate {A}/{B} |
FY2019 |
$10.106m |
$307.400m |
$213.000m |
$218.530m |
$246.310m |
4.10% |
FY2020 |
$8.670m |
$218.530m |
$204.700m |
$138.400m |
$187.210m |
4.63% |
FY2021 |
$8.150m |
$138.400m |
$55.000m |
$55.000m |
$82.800m |
9.84% |
FY2022 |
$4.990m |
$55.000m |
$119.200m |
$5.000m |
$59.733m |
8.35% |
FY2023 |
$3.887m |
$5.000m |
$40.600m |
$37.600m |
$27.733m |
14.02% |
The above table is interesting in that it tracks the company financing from SOFY2019 (EOFY2018) where the company was entirely bank funded, right up to EOFY2023 where the company became almost entirely bond funded, using the IPL010, IPL020 and IPL030 corporate bonds set up over that time. In fact by EOFY2022 the bank funding at balance date was a meagre $5m drawn, albeit banking facilities available were $125m. By EOFY2023 the bank funding draw down had reached $37.600m, under the same $125m debt ceiling. But look at what happened to the bank funded interest rate. It had ballooned out to a staggering 14.02%! Granted that $37.600m amounts to only $37.600m/$385.037m=9.76% of all borrowings. But isn't a banking syndicate charging the company a staggering 14.02% really saying 'we do not want your business!'. This is a huge turnaround from five years previously when the bank lending rate was a nearly ten percentage points lower (just 4.10%, albeit in a lower interest rate climate), and the banks were prepared to fund the whole company. What in the eyes of the bankers has gone so wrong? It has to be related to those banking covenants (refer post 177).
Working from the HY2024 balance sheet figures, on current debt levels, the asset value of the company must not dip below:
$410.324m / 0.525 = $781.569m
$1,014.731m were the assets on the books at balance date. Headroom (maximum write-down available) is:
$1,014.731m - $781.569m = $233.162m
But the banks won't let it get 'down to the wire' like that. More writedowns to come by the full year date of 31-03-2024? A couple of months left to sell some assets? But don't sell them for too low a price, or you might trigger a revaluation downwards for the remaining property portfolio. Crikey this could be tight! And the share price is down 3.4% yesterday to $1.12 in a market that rose 1%. On 18th April 2024 the first of those bonds reverts back to bank funding. Maybe those bankers demanding a 14% risk premium interest rate are pricing their debt fairly? Would a cash issue at $1 per share placate them?
SNOOPY
discl: not a holder of the shares nor the bonds