KPG - Kiwi Property Group

[Shareguy]

As Basil has pointed out there is a risk to the divi going forward. I think with the capital needed to fund all the planned developments that a lower dividend makes sense. Why did the Aurora sale fall over I wonder? The transaction price represents a 13.5% discount to the asset's March 2023 valuation according to KPG.

So what's the share worth currently? Current price $.86. Craigs have a target price before the latest depreciation changes of $.88. Basil says  "that KPG eps reduces 0.24 cps, suppose you could say fair value reduced about 2.4 cps."


Disc Not a holder

[Basil]

Just to be clear, net profit after tax reduces by 0.86 cps due to having to pay that amount of extra tax due to the pending disallowance of the right to claim depreciation. (My 2 minute back of the envelope calculation last week was rushed and is incorrect). If we use a PE of 10 the fair value per share reduces 8.6 cps, (11.3 cps for ARG).  A lot of that price reduction has already happened and is fully justified in my opinion.

As others have noted they have a big development book ahead of them.
Selling a prime asset with a Govt tenant at a 13.5% discount to valuation, (before transaction costs) when interest rates are close to a peak makes no sense to me unless you are really desperate for the funds.  Who says for sure the developments they are going to build using that money are going to give better returns than that ?  I am very skeptical and would prefer they keep it and slow their development program down accordingly. 

How many times have we seen this movie before.  Highly paid executives with little or no skin in the game overanxious to make their mark with acquiring shiny new things (like a Magpie) that stroke their ego with scant regard for how it impacts what really matters to shareholders, earnings per share and in this case dividends per share. 

I'm not the only one who is skeptical and reducing their stake.  http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/KPG/417652/402247.pdf

[winner (n)]

Kpg share price must be getting close to an all time low

Can't be just that depreciation chatter ....punters really falling out of love with it seems

And the presos are so full of fantastic times in the future

[snapiti]

KPG going to have it's earnings trimmed, no brainer market is going to trim the SP as well given it's a proven no growth stock and a pure divi play.
   

[snapiti]

I wonder if the markets are also concerned about the retail space demand going forward.
I work for a very large retailer and we are seeing a 25% yoy fall in revenue, bit of a margin squeeze going on as well. Now given retail prices are well up on 12 months ago I would suggest that 25% decline in revenue is more like 35%.
4 season's stores in receivership today as well.

[BlackPeter]

KPG going to have it's earnings trimmed, no brainer market is going to trim the SP as well given it's a proven no growth stock and a pure divi play.
   

Actually - not everything people spread over the internet is true ... even if it feels like consensus in the rabbit hole - Oops - did I say that?

Anyway - I do see for KPG some significant opportunities (related to their holding in Drury, but as well to their new strategy of build to rent), but I see as well some significant risks (related to an "opportunity" to perform the build to rent strategy in a bad way).

On top of that - long time SP trends make for a stock with such high reliance in interest rates only sense if you normalise the stock price with the respective interest rate.

What I try to say - no matter what their past was, I think the game is changing and there are significant opportunities for them to improve in the mid term future and some (I think smaller) risks for them to deteriorate ... Which one it will be, who knows?

Discl: holding a small parcel;

[Basil]

Kpg share price must be getting close to an all time low

Can't be just that depreciation chatter ....punters really falling out of love with it seems

And the presos are so full of fantastic times in the future

Low last year was 82 cents. 
A few things have happened since then and none of them good.
1. We're now officially in a recession and blind Freddy can tell you retail is doing it extremely tough this year.  As others have noted that's sure to lead to more store closures.
2. 10 year Govt stock rate is now significantly higher than last year, (circa 1% more) and as this is a bond proxy, (anyone thinking there is any long-term capital growth here is delusional), so that affects the share price.
3. Last but not certainly least, the pending tax change will reduce after tax eps by 15%, (0.86 cps).
In addition, they have just gone ex divvy so where's fair value now?

Throughout this thread I have often expressed my reservations about whether their new strategy will reap benefits.  I am deeply skeptical they can grow dividends in the future because their long-term track record makes a profound statement they can't, and looking forward there's simply no logic selling assets like they did last year on a 12% yield to fund build to rent on a 5% yield.

I think realistically in the current environment, the best shareholders can hope for is the current dividend level being maintained.  That's looks a LOT more challenging after the 15% hit to after tax eps with the pending depreciation tax change which is why I have substantially reduced my stake.

[Poet]

Correct me if I'm wrong but it seems to me that the cash flow to most investors won't change much
If the company pays more tax because depreciation not deductible then it will pass more imputation credits with the dividend and hence the recipient of the dividend will pay less tax.
And since kpg pays out a large proportion of profit as dividend, the overall cash flow and effective overall tax (ie shareholder tax paid plus company tax paid) should be about the same.
Which also means that the government claimed extra tax probably isn't accurate either

[Basil]

Its a PIE.

[Poet]

Its a PIE.

Hmmm, it's a bit more complicated than that isn't it?

The internet says

'A PIE distribution may contain both a fully imputed component and an excluded (unimputed) distribution component'

KPG is a listed PIE which is somewhat different to an unlisted PIE.

KPG doesn't fully impute its PIE dividends so there is a portion of those dividends that are taxable in the shareholder hands. Hence an increased tax paid by KPG directly, leads to a reduced tax to most of the investors. Net effect is more or less neutral, not the armageddon that you imply above.

[Basil]

You're incorrect with your tax interpretation and use of the adjective "Armageddon" is well beneath your usual high standard of well-considered posts.

Firstly, on the PIE thing, All PIE distributions are able to be excluded from shareholders tax returns.  People on a tax rate lower than 28% can optionally elect to include the imputed part of the distribution if they wish to.

KPG have said the current years dividend of 5.7 is within their target range of 90-100% of AFFO eps, (do some homework on what is meant from AFFO earnings from their presentations if you need to).  If we assume it's at the midpoint, 95% of AFFO eps then their current year AFFO eps is only 5.7 / 0.95 = 6 cps, well down on FY23...I guess that's what happens when you sell assets earning a 12% yield and throw the capital into BTR apartments currently earning nothing.

AFFO eps is after tax so when they pay an extra 0.86 cps in tax in FY25 with the depreciation change that reduces to only 5.14 cps in FY25 plus or minus changes to income that would otherwise occur.  You would hope BTR will start generating something in FY25 so maybe they can maintain the 5.7 cps distributions or maybe not given all their other development plans.  Not Armageddon but for those investing for yield, who like me, think all the talk of growth and development over the last 25 years has been nothing but a load of hot air, (recall the share price was higher 23 years ago in 2000 and distributions were 9.5 cps back then), then the prospect of distributions dropping is something to think hard about especially in light of inflation currently running at 6%.

I think when you zoom out and look at the big picture there's also a tale of serious caution to be told.  $1 of assets in 2000 according to the Reserve Bank inflation calculator "housing index" should now be worth $4.81, not 85 cents.  9.5 cps distributions in 2000 with general inflation should now be 16.83 cps, not 5.7 cps.

The mind boggles to think about how many times over the last 23 years the directors have talked about growth in all their reports over the years.  KPG has been a really, really terrible investment long term.  Just as well it's all going to magically come right going forward eh....well that's what they tell us...but they have been saying that for a very long time.

Like I have said on regular occasions throughout this thread, I was only ever in it for the yield and had no illusions about any prospect of capital growth,  Now the yield is under threat I have taken steps to proactively manage the risk to my portfolio and reduce the risk by reallocating capital into companies with far better prospects of dividend growth in the years ahead.  I think that's what a sensible prudent investor does but each to their own and if you think there's enormous prospects for gains and dividends here then good luck.  It wouldn't surprise me to see the share price with a 7 handle at some stage.
Disc, now less than 1% portfolio position.

[snapiti]

I think you will find beagle is correct.....I sought professional advice over the benefits of investing in PIE funds earlier this year due to my earnings and tax position....this advice supports what beagle is saying

[Basil]

All financial institutions are now required to report income and when you go into the My IR system of the IRD website to do your tax return, interest and dividend information is already summarized and pre-populated in your tax return.  Makes doing tax returns for individual investors a lot easier these days.
None of my PIE dividends from KPG, ARG, BRM, KFL or MLN have ever shown up in there and none for any of my clients for any of their PIE's either.  Seem this more than 101 times now.
Here's what Kingfish have to say about it https://kingfish.co.nz/investor-centre/faqs/  Click on what does a PIE mean.
Extract "Natural person Shareholders or Trustees do not have to include dividend income from Kingfish in their tax return (although they can elect to include such dividends, which may be a benefit if the taxpayer is on a marginal tax rate that is lower than 28% and wants to claim imputation credits attached at the higher rate of 28%)."

[Poet]

All financial institutions are now required to report income and when you go into the My IR system of the IRD website to do your tax return, interest and dividend information is already summarized and pre-populated in your tax return.  Makes doing tax returns for individual investors a lot easier these days.
None of my PIE dividends from KPG, ARG, BRM, KFL or MLN have ever shown up in there and none for any of my clients for any of their PIE's either.  Seem this more than 101 times now.
Here's what Kingfish have to say about it https://kingfish.co.nz/investor-centre/faqs/  Click on what does a PIE mean.
Extract "Natural person Shareholders or Trustees do not have to include dividend income from Kingfish in their tax return (although they can elect to include such dividends, which may be a benefit if the taxpayer is on a marginal tax rate that is lower than 28% and wants to claim imputation credits attached at the higher rate of 28%)."

I stand corrected, you are right, no tax payable on PIE income, either imputed or unimputed.

[snapiti]

You're incorrect with your tax interpretation and use of the adjective "Armageddon" is well beneath your usual high standard of well-considered posts.

Firstly, on the PIE thing, All PIE distributions are able to be excluded from shareholders tax returns.  People on a tax rate lower than 28% can optionally elect to include the imputed part of the distribution if they wish to.

KPG have said the current years dividend of 5.7 is within their target range of 90-100% of AFFO eps, (do some homework on what is meant from AFFO earnings from their presentations if you need to).  If we assume it's at the midpoint, 95% of AFFO eps then their current year AFFO eps is only 5.7 / 0.95 = 6 cps, well down on FY23...I guess that's what happens when you sell assets earning a 12% yield and throw the capital into BTR apartments currently earning nothing.

AFFO eps is after tax so when they pay an extra 0.86 cps in tax in FY25 with the depreciation change that reduces to only 5.14 cps in FY25 plus or minus changes to income that would otherwise occur.  You would hope BTR will start generating something in FY25 so maybe they can maintain the 5.7 cps distributions or maybe not given all their other development plans.  Not Armageddon but for those investing for yield, who like me, think all the talk of growth and development over the last 25 years has been nothing but a load of hot air, (recall the share price was higher 23 years ago in 2000 and distributions were 9.5 cps back then), then the prospect of distributions dropping is something to think hard about especially in light of inflation currently running at 6%.

I think when you zoom out and look at the big picture there's also a tale of serious caution to be told.  $1 of assets in 2000 according to the Reserve Bank inflation calculator "housing index" should now be worth $4.81, not 85 cents.  9.5 cps distributions in 2000 with general inflation should now be 16.83 cps, not 5.7 cps.

The mind boggles to think about how many times over the last 23 years the directors have talked about growth in all their reports over the years.  KPG has been a really, really terrible investment long term.  Just as well it's all going to magically come right going forward eh....well that's what they tell us...but they have been saying that for a very long time.

Like I have said on regular occasions throughout this thread, I was only ever in it for the yield and had no illusions about any prospect of capital growth,  Now the yield is under threat I have taken steps to proactively manage the risk to my portfolio and reduce the risk by reallocating capital into companies with far better prospects of dividend growth in the years ahead.  I think that's what a sensible prudent investor does but each to their own and if you think there's enormous prospects for gains and dividends here then good luck.  It wouldn't surprise me to see the share price with a 7 handle at some stage.
Disc, now less than 1% portfolio position.

you raise another interesting point about how inflation effects divi's over the long term.....something broken about the KPG model as over the last 10 years commercial property had increased significantly along side commercial rents yet KPG is earning less and had a decreasing SP