KPG - Kiwi Property Group

[Red Baron]

Ze visdom (below)

Nevertheless, dealing with what's right in front of us now as I have some ARG and KPG I calculate the following effect of removal of the right to claim depreciation.
KPG eps reduces 0.24 cps, suppose you could say fair value reduced about 2.4 cps capitalising that at a PE of 10.
ARG eps reduces 0.32 cps, fair value reduced 3.2 cps.

This assumes they don't recover any of this from tenants over time through increased rent.

Ze calculated effect on 'annual earnings per share' vrom removing depreciation (depreciation and number of shares on issue from respective 2023 Annual Reports)

KPG: (0.28)x $13,539,000/ 1,571,171,548 = 0.24cps

ARG: (0.28) $9,597,000/ 846,723,985 = 0.32cps

RB

[Waltzing]

It almost a capital gains tax charged per annum.

Just called a tax Loop hole... right... now National hasnt got anyone that understands the basics of accounting..

Shes a lawyer right?  Perhaps ACT should now be considered the only party that is PRO business after all.

What is next on the chopping block to get elected..

[Basil]

Yeah you'd think with Chris Luzon's background he would understand that planes wear out and aircraft hangers and other buildings do too. I guess it shows what a terrible state N.Z. Inc's books are in that they have to resort to "creative" measures like this.  Cancelling depreciation on a building under the guise they are closing a loophole is no different to the spin we got out of "Spindy". 

[Red Baron]

Ze calculated effect on 'annual earnings per share' vrom removing depreciation (depreciation and number of shares on issue from  2023 Annual Report)

KPG: (0.28)x $13,539,000/ 1,571,171,548 = 0.24cps

RB

It ztrikes me that the $13,539,000 figure listed as 'depreciation', under the zection 2.3 'Tax Expense' in the Annual Report, eez actually already an 'adjustment for depreciation', as it appears under the sub-header 'Adjusted for'.   This vould imply the full depreciation annual expense, assuming a tax rate of 28%, eez:

$13,539,000/0.28 = $48,353,571

That in turn means the Nat/Lab 'tax grab' disallowing depreciation applied to the FY2023 rezult, vould have reduced 2023 profit by:
$13,539,000/ 1,571,171,548 = 0.86cps

It also meanz the ongoing effect of such a policy, using a PE of 10, vould nominally reduce the value of each KPG share by 8.6c, not 2.4c as advocated by Bazil.

Thoughtz?

RB

[arekaywhy]

Heh, "Spindy"

Yeah a civilisation in decline will faff about with how they tax the proles and find new and cleverer ways to make sure people are paying the correct tax to the 5th decimal place...

Truely strong societies don't worry about that, rather, they will look at how we can make more stuff to sell

[Waltzing]

Yes well said...

it smacks of the french revolution... stoked by forces that want to take Utu ...

Cant imagine Chris L will find the property CEO's back slapping him on this one...

[snapiti]

It ztrikes me that the $13,539,000 figure listed as 'depreciation', under the zection 2.3 'Tax Expense' in the Annual Report, eez actually already an 'adjustment for depreciation', as it appears under the sub-header 'Adjusted for'.   This vould imply the full depreciation annual expense, assuming a tax rate of 28%, eez:

$13,539,000/0.28 = $48,353,571

That in turn means the Nat/Lab 'tax grab' disallowing depreciation applied to the FY2023 rezult, vould have reduced 2023 profit by:
$13,539,000/ 1,571,171,548 = 0.86cps

It also meanz the ongoing effect of such a policy, using a PE of 10, vould nominally reduce the value of each KPG share by 8.6c, not 2.4c as advocated by Bazil.

Thoughtz?

RB

I think you are right.......Beagle is normally accurate with his posts.
Reality is this just a capital gains tax on commercial property investments dressed up.
Unfortunately it appears it will be implemented whether National or Labour get in.
Hate to say it but given the sort of people who generally own commercial property investments one could also consider it a wealth tax as well.
Expect a rerate lower to KPG shares......82cps on the cards

[Soolaimon]

I think you are right.......Beagle is normally accurate with his posts.
Reality is this just a capital gains tax on commercial property investments dressed up.
Unfortunately it appears it will be implemented whether National or Labour get in.
Hate to say it but given the sort of people who generally own commercial property investments one could also consider it a wealth tax as well.
Expect a rerate lower to KPG shares......82cps on the cards

As you say, both parties will implement it but maybe Act will reign in National to some degree so gives me a reason to party vote Act for a change

[Basil]

Managed to squeeze in a proper review of this into my hectic schedule today.  Disappointed my effort last week with a quick 2-minute back on an envelope review is incorrect and sad to say I can confirm Red Barron's calculations are correct.

Haven't got as far as fully assessing whether the 0.86 cps cash impact will impact KPG's ability to pay 5.7 cps in divvy's in FY25.  On one hand it was only 77% of FY23 AFFO (adjusted funds from operations), eps last year but on the other hand they state their 5.7 cps in forecast FY24 distributions is within 90-100% range of AFFO eps in FY24?  Not sure why AFFO earnings are forecast to drop so much in FY24 and whether they can grow a little in FY25 or not?  Need to look into that deeper when I have more time.  Some doubt divvy is maintainable in FY25 with KPG is where I got to today.

Preliminary calculations on ARG show cash flow affected by a more material 1.13 cps and there appears to be material risk to their ability to continue 6.65 cps dividends in FY25 and beyond.

Looking further out, both companies are enjoying some tailwinds from previous funding locked in at much lower rates, (corporate bonds), than what's prevailing today and accordingly there would appear to be medium term risk to dividend distributions in respect of funding costs normalizing in due course.

This suggests to me the best-case scenario and sadly that appears less likely in ARG's case, is dividends to remain the same in the foreseeable future.  I rebalanced my portfolio holdings on these two today on the basis that this isn't really a satisfactory forward-looking scenario with inflation running where it is, notwithstanding its likely to reduce a little from here in the medium term.

It's really annoying that neither of the main political parties want to accept depreciation is a legitimate business expense recognising that buildings do wear out over time.

Please note both the above companies are PIE's (portfolio investment entities) so for most taxpayers the amount of tax they pay does not change their tax situation as all distributions are tax free in shareholders hands, other than those earning under $48,000 who may get a small advantage from the higher level of imputation credits they can optionally select to include in their income tax returns.  Tax payment do however affect the cash flow of the companies which potentially impacts their ability to make dividends payments.

Is it a form of wealth tax?  Not really in my view, but it is putting a headwind on the sector that's not really fair and reasonable.  An interesting parallel can be drawn with the deliberate underfunding of the healthcare sector so retirement companies are unfairly taxed in the form of having to run their villages at a loss to cover the underfunding of residents in care.  You could make the case the entire property sector, including residential property with the lack of depreciation, is being subjected to anti-capitalist headwinds / costs in lieu of some other form of tax like capital gains tax.  Pretty distasteful stuff hence me reducing my allocation to this sector....end of rant from VERY grumpy Beagle.

[snapiti]

given the 10 year price performance has been a capital loss of 25% I think it is fair to say most/all investors hold KPG for it's divi yield.
Given the tax changes indicated and the likely effect on the after tax profits therefore divi yield I suspect the new normal will be about 80cps.
I doubt ACT will be the saving grace.
KPG trading x dividend tomorrow, given the political will is to win over the middle class and not put a capital gains tax in place I think we are stuck with the removal of depreciation and KPG sher's (me included) will see a lower SP.     

[Basil]

given the 10 year price performance has been a capital loss of 25% I think it is fair to say most/all investors hold KPG for it's divi yield.
Given the tax changes indicated and the likely effect on the after tax profits therefore divi yield I suspect the new normal will be about 80cps.
I doubt ACT will be the saving grace.
KPG trading x dividend tomorrow, given the political will is to win over the middle class and not put a capital gains tax in place I think we are stuck with the removal of depreciation and KPG sher's (me included) will see a lower SP.     

Cheer up mate.  It could be worse.  If you had of owned ARG as well like me, you have had to swallow 2 dirty big dead rats instead of one.  Sometimes in a slightly depressing moment I like to reflect on others less fortunate than myself, for example someone diversified enough to have half a dozen or so property companies and they've had to swallow 6 big dead rats.  Difficult to come to terms with the National party doing this to us when this is the usual sort of misinformed misinformation and garbage Spindy used to serve us up.  I thought National was better than that.  Maybe I should vote ACT ?

[Buzz]

I guess if you own KPG you do so for the sustainable dividends, any company paying out this % is unlikely to enjoy much SP capital growth, but you knew that already. So apart from what you already own and what you paid for it, you'd maybe see the current SP as a good opportunity to load up some more of those oversized dividend gains.

Having owned KPG for a while now, my net position is well covered by dividend returns and the SP has become largely irrelevant as I don't own it to sell it at a higher capital price, unless it gets stupidly overpriced which looks very unlikely given it's history.

Let's face it, the recent announcement of depreciation not being claimable against expenses is just a return to the recent status quo (assuming the right get voted in). It will have a minor effect on returns to shareholders. I repeat, anyone who buys something like this with some aspiration for a capital SP gain is misguided, it's just not one of those kinds of companies. And medium longer term, it will pay you back your entire capital investment, and the rest is cream on top.

Recalibrating ones thinking to long term earners bought at the best you can get capital price, without consideration for ever selling a solid reliable earner, is a far cry from momentum trading capital SP gains and takes a while to get your head around, in my experience.

Once locked in though, the day to day capital SP has become quite unimportant, except for getting a few more from time to time when the market hates it. Now might be the time to get a few more, or soon.

[snapiti]

I guess if you own KPG you do so for the sustainable dividends, any company paying out this % is unlikely to enjoy much SP capital growth, but you knew that already. So apart from what you already own and what you paid for it, you'd maybe see the current SP as a good opportunity to load up some more of those oversized dividend gains.

Having owned KPG for a while now, my net position is well covered by dividend returns and the SP has become largely irrelevant as I don't own it to sell it at a higher capital price, unless it gets stupidly overpriced which looks very unlikely given it's history.

Let's face it, the recent announcement of depreciation not being claimable against expenses is just a return to the recent status quo (assuming the right get voted in). It will have a minor effect on returns to shareholders. I repeat, anyone who buys something like this with some aspiration for a capital SP gain is misguided, it's just not one of those kinds of companies. And medium longer term, it will pay you back your entire capital investment, and the rest is cream on top.

Recalibrating ones thinking to long term earners bought at the best you can get capital price, without consideration for ever selling a solid reliable earner, is a far cry from momentum trading capital SP gains and takes a while to get your head around, in my experience.

Once locked in though, the day to day capital SP has become quite unimportant, except for getting a few more from time to time when the market hates it. Now might be the time to get a few more, or soon.

not sure I completely understand or agree with your post, no cream on top with these real returns......if you bought 10 years ago you would have lost 25% of your capital.......that's equiv to about 1/3 of the dividend making total annualized average returns for the 10 year period of about 3.5% net. In the mean time inflation has eroded your measley gains to nothing.
But it gets way worse for anyone purchasing between 5 to 8 years ago......they have lost 40% of their capital and after divi's have a paper loss.
I think it is not much better if you purchased 2 years ago after a capital loss of 20% you still have a paper loss.
I can see the new tax rules  help further the loses.
Fair to says most investors purchasing in the last decade would have been much better off with money in term deposits

[Basil]

Yeap, you'd have to have had extremely fortunate timing to pull any decent returns out of KPG.  Just as well it's all going to be different going forward....or so the directors tell us.

I get it that the tax free PIE yield is good, 5.7 / 87 cents is 6.5% tax free and nearly 10% gross for those of us on a 33% tax rate but is it sustainable going forward with 0.86 cps extra tax to pay per annum and higher funding costs coming down the track?  That's the really hard question.  There is no question about capital gains or not, frankly if you're chasing those then this is definitely the wrong stock to own.

[snapiti]

Yeap, you'd have to have had extremely fortunate timing to pull any decent returns out of KPG.  Just as well it's all going to be different going forward....or so the directors tell us.

I get it that the tax free PIE yield is good, 5.7 / 87 cents is 6.5% tax free and nearly 10% gross for those of us on a 33% tax rate but is it sustainable going forward with 0.86 cps extra tax to pay per annum and higher funding costs coming down the track?  That's the really hard question.  There is no question about capital gains or not, frankly if you're chasing those then this is definitely the wrong stock to own.

agree totally, by higher funding costs you mean higher interest rates? not to mention the development money they will need going forward, I for one are going to be factoring in a lower divi....suspect the market will too, hope you had alcohol with those rats you ate mate.