KPG - Kiwi Property Group

[snapiti]

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;

opportunities you say, they have mentioned the same thing in many annual reports over the last 20 years.....interesting to note on this day 20 years ago the SP was trading 25% higher than it is today. 
Crickey my dad sold his commercail building last year for 3.5 times what he paid for it 22 years ago.
Of course KPG might have increased their dividend with all these opportunities over the last 20 years, but wait the yearly dividends are actually less than 20 years ago, I think I was still paying under $10 for a dozen beer 20 years ago

[Buzz]

opportunities you say, they have mentioned the same thing in many annual reports over the last 20 years.....interesting to note on this day 20 years ago the SP was trading 25% higher than it is today.

Yes, since the high SP $1.69 Sept 2019, and then the 2020 Covid crash, the SP has certainly struggled. Over those 20 years (or my data goes back to 22Dec 2014) it's a pitiful 2.66% p.a. total return after real paid out dividends, and unrealised capital losses. An investor that wasn't too worried about unrealised capital losses would have received $5,256 6.03% p.a. dividends on a $10,000 investment.

It's like buying an ATM machine that spits out money every 3 months ad infinitum, so it makes no sense to be worrying about what you'd sell the ATM machine for at any given point in time, as doing so would stop the machine spitting out money.

[snapiti]

Yes, since the high SP $1.69 Sept 2019, and then the 2020 Covid crash, the SP has certainly struggled. Over those 20 years (or my data goes back to 22Dec 2014) it's a pitiful 2.66% p.a. total return after real paid out dividends, and unrealised capital losses. An investor that wasn't too worried about unrealised capital losses would have received $5,256 6.03% p.a. dividends on a $10,000 investment.

It's like buying an ATM machine that spits out money every 3 months ad infinitum, so it makes no sense to be worrying about what you'd sell the ATM machine for at any given point in time, as doing so would stop the machine spitting out money.

interesting.... call me somewhat cynical but purchasing an asset that eat's your capital yet spits out cash leaving you with real return less than inflation seems counterintuitive to why invest capital in the first place 

[Buzz]

interesting.... call me somewhat cynical but purchasing an asset that eat's your capital yet spits out cash leaving you with real return less than inflation seems counterintuitive to why invest capital in the first place 

It takes a shift in mindset, that's for sure.

If you don't realise those capital gains, or losses, and have no intention to do so ... ever ... and see the SP lows as another opportunity to buy more of your ATM spitting out money (increasing your dividend yield), while avoiding trading fees and the potential for the IRD to question and tax your capital gains (or admittedly deductions on capital losses), then it's just a machine that churns out money every quarter, ad infinitum.

The price of the ATM is irrelevant at any given point in time. Long term investment, truely long term with no intention to ever sell, in ATM's that reliably and consistently spit out money, isn't about what the ATM costs to buy or sell at any point in time. Maybe if you're not happy with the reliability or consistency to spit out money, then for sure, sell and buy a different ATM.

Conjoining unrealised capital gains or losses to realised dividends, at any point in time, skews your investment 'paper' returns to whatever the market thinks your ATM is worth at that point in time. It doesn't affect at all what your ATM actually spits out.

[Basil]

I would have no issue whatsoever with your analogy with the ATM machine if it kept spitting out the same amount of money over and over again.  Case in point the 9.5 cps they used to pay in 2000 should now be over 16 cps per annum if it had of kept pace with inflation. (Google Reserve Bank inflation calculator and have a play around with that)

[snapiti]

I would have no issue whatsoever with your analogy with the ATM machine if it kept spitting out the same amount of money over and over again.  Case in point the 9.5 cps they used to pay in 2000 should now be over 16 cps per annum if it had of kept pace with inflation. (Google Reserve Bank inflation calculator and have a play around with that)

totally agree and of course not forgetting this ATM gobbles up some of the after tax cash flow to maintain itself in working order albeit still slowly deteriorating.

[Fiordland Moose]

It takes a shift in mindset, that's for sure.

If you don't realise those capital gains, or losses, and have no intention to do so ... ever ... and see the SP lows as another opportunity to buy more of your ATM spitting out money (increasing your dividend yield), while avoiding trading fees and the potential for the IRD to question and tax your capital gains (or admittedly deductions on capital losses), then it's just a machine that churns out money every quarter, ad infinitum.

The price of the ATM is irrelevant at any given point in time. Long term investment, truely long term with no intention to ever sell, in ATM's that reliably and consistently spit out money, isn't about what the ATM costs to buy or sell at any point in time. Maybe if you're not happy with the reliability or consistency to spit out money, then for sure, sell and buy a different ATM.

Conjoining unrealised capital gains or losses to realised dividends, at any point in time, skews your investment 'paper' returns to whatever the market thinks your ATM is worth at that point in time. It doesn't affect at all what your ATM actually spits out.

Always enjoy your posts, Buzz, here and elsewhere. But playing devil's advocate for a minute, that same rationale could have been used 10-15-20 years ago (take your pick) on the Warehouse (by way of quick example), or other similar companies who regularly spit out dividends, but have a poor track record of growing total shareholder returns and growing dividends enough to offset the depreciation in capital value. Framed in that view, it's worth testing the argument.

I think the best analogy you are speaking to is to pair that philosophy to a term deposit or hold to maturity bond. Sure, the interest rate and fair market value of the bond might fluctuate in between subscribing for the bond and any eventual realisation, but if you were happy with the coupon at that point of time, so be it and fair enough. But in that analogy, your total cumulative returns are always north of zero.

But that said on the equity risk component, while the intention may be to hold the investment for the long term/forever, and simply accept the dividend without giving regard to the long term dynamics of the capital value, in my view misses many things. While the dominant purpose of your investment may have been dividend income, its not inconceivable you may want/need to sell it to fund something in the future (healthcare, a child/grandchild's education, unforeseen expenses in retirement, etc), so a rational person in my view would want the capital value to be at least protected (so that the cumulative total shareholder returns including dividends are always positive - otherwise what's the point??) in that event. Or simply with just a view to leaving a bigger pile to your decedents.

That second consideration may not be the dominant purpose of one's investment but its still worthy of plenty of consideration.

While investing for that long dividend profile (stability, consistency and/or growth) and hopefully at least protecting ones capital value (so that total shareholder returns remain positive with cumulative net cash dividends offsetting any depreciation in capital value) there is the question of if there is a higher and better use of that capital, fulfilling the needs of consistency and growing dividends and protecting/growing capital value. No one likes to take a capital loss on the chin, but if in the grand scheme of things say that investment continues to dwindle in capital value, or things come right in the medium term, is that outweighed by what one could achieve by placing that capital elsewhere? Framed a different way - when things go sour, one could think about holding an investment at a particular spot price as investing into that business for the first time, and how that yield and capital protection/growth profile compares to alternative invests that you could have invested into had you divested the asset. Taking into account fees, and assuming the investor stays on the correct side of the ledger with the IRD, is there harm in divesting an investment that will produce X% returns and rolling that into an investment that will produce x + 1 returns?

I hear you on the transaction fees. A meaningful consideration for a momentum trader (particularly in NZ where fees are high), a big deal for a day trader, but  meaningful for an investor? An aside, I used to get hung up on FIF. Then many years ago I started investing into US equities/indices and I can say the additional drag of FIF has been happily worth it.

And to some extent I hear you on the risk of being classed as a trader/on revenue account. I'm a bit of a bed wetter when it comes to tax risk but I also don't accept once you buy something producing an income stream that means you are wedded to it in perpetuity (based on a large swath of tax advice and case law of which won't be giving any form of advice).

I know that's not  necessarily the point you have laboured in your posts and its more the mindset that one should adopt when investing into yielding companies with the potential for capital volatility and I think it's an excellent thought.

Anyway it's a worthy discussion. and a bit of devils advocate thought from me...I tend to be quite conservative but do find it useful to test these ideas from time to time.

I also thought Basil's analysis was very good. I'm not a holder of any LPT stocks but gave for an interesting read none the less.

edit: lots of typos. fixed.

[BlackPeter]

opportunities you say, they have mentioned the same thing in many annual reports over the last 20 years.....interesting to note on this day 20 years ago the SP was trading 25% higher than it is today. 
Crickey my dad sold his commercail building last year for 3.5 times what he paid for it 22 years ago.
Of course KPG might have increased their dividend with all these opportunities over the last 20 years, but wait the yearly dividends are actually less than 20 years ago, I think I was still paying under $10 for a dozen beer 20 years ago

Hi snaps ... I don't think we disagree, we just talk about different things.

You are commenting on KPG's past performance. While you don't correlate their SP with the Interestrates of the day - I agree, that their performance over the past decades was not stellar (but there are different shades of grey ; Just talking your two decades comparison of the SP: Interest rates (mortgage) in 2003 have been around 4% ... today they are higher, which is a quite logical explanation why the SP today is lower (higher interest rates cause lower property prices).

I was highlighting some future opportunities - and risks.

And of course, the fact that they did depending on some arbitrary dates either shrink or at least not grow their shareholders capital (though always paying good dividends) is not flash. I am just saying, it is no evidence either that things will stay that way.

They do own some interesting land in Drury (with plenty of potential to increase in value) ... and their build to rent strategy as well as their colocation strategy (work, live, shop, entertain) may or may not get right.

Anyway - KPG is not an important enough part of my portfolio to spill too much heartblood (or invest too much analytical effort). I just noticed that we (and that's not pointing to you, its just the nature of these discussion forums) tend in many threads to slip fast into some GroupThink habit where we often take the last 2 pages of posts as consensus and reinforce their message without further diligence.

Similar to reinforcing the words of the priest in church or the chant of the mullah in the mosque without thinking. There might be a place for that in any religion (actually, this is the heart of any religion, but this is a different theme) - but ... its meant to silence any discussion instead of enabling it.

[Sideshow Bob]

Given their history and record over the years, the best thing they could do would sell all the properties and wind it all up. Currently trading at a 43% discount to NTA.

That will happen......right??   

[snapiti]

Hi snaps ... I don't think we disagree, we just talk about different things.

You are commenting on KPG's past performance. While you don't correlate their SP with the Interestrates of the day - I agree, that their performance over the past decades was not stellar (but there are different shades of grey ; Just talking your two decades comparison of the SP: Interest rates (mortgage) in 2003 have been around 4% ... today they are higher, which is a quite logical explanation why the SP today is lower (higher interest rates cause lower property prices).

I was highlighting some future opportunities - and risks.

And of course, the fact that they did depending on some arbitrary dates either shrink or at least not grow their shareholders capital (though always paying good dividends) is not flash. I am just saying, it is no evidence either that things will stay that way.

They do own some interesting land in Drury (with plenty of potential to increase in value) ... and their build to rent strategy as well as their colocation strategy (work, live, shop, entertain) may or may not get right.

Anyway - KPG is not an important enough part of my portfolio to spill too much heartblood (or invest too much analytical effort). I just noticed that we (and that's not pointing to you, its just the nature of these discussion forums) tend in many threads to slip fast into some GroupThink habit where we often take the last 2 pages of posts as consensus and reinforce their message without further diligence.

Similar to reinforcing the words of the priest in church or the chant of the mullah in the mosque without thinking. There might be a place for that in any religion (actually, this is the heart of any religion, but this is a different theme) - but ... its meant to silence any discussion instead of enabling it.

Hi snaps ... I don't think we disagree, we just talk about different things.

You are commenting on KPG's past performance. While you don't correlate their SP with the Interestrates of the day - I agree, that their performance over the past decades was not stellar (but there are different shades of grey ; Just talking your two decades comparison of the SP: Interest rates (mortgage) in 2003 have been around 4% ... today they are higher, which is a quite logical explanation why the SP today is lower (higher interest rates cause lower property prices).

I was highlighting some future opportunities - and risks.

And of course, the fact that they did depending on some arbitrary dates either shrink or at least not grow their shareholders capital (though always paying good dividends) is not flash. I am just saying, it is no evidence either that things will stay that way.

They do own some interesting land in Drury (with plenty of potential to increase in value) ... and their build to rent strategy as well as their colocation strategy (work, live, shop, entertain) may or may not get right.

Anyway - KPG is not an important enough part of my portfolio to spill too much heartblood (or invest too much analytical effort). I just noticed that we (and that's not pointing to you, its just the nature of these discussion forums) tend in many threads to slip fast into some GroupThink habit where we often take the last 2 pages of posts as consensus and reinforce their message without further diligence.

Similar to reinforcing the words of the priest in church or the chant of the mullah in the mosque without thinking. There might be a place for that in any religion (actually, this is the heart of any religion, but this is a different theme) - but ... its meant to silence any discussion instead of enabling it.

you have a slightly twisted mind.....I like it

[snapiti]

I have a suspicion, given the underlying performance of commercial property and rents over the last decade that KPG meaningful underperformance has a lot to do with far too many snouts in the trough

[winner (n)]

I have a suspicion, given the underlying performance of commercial property and rents over the last decade that KPG meaningful underperformance has a lot to do with far too many snouts in the trough

Tend to agree with you there snaps .......along with questioning whether management is up to it

You'd have to think there's a huge execution risk as well .....can they deliver on new strategic direction that is beautifully outlined in glossy presentations ...that's questionabl

[snapiti]

there was nothing wrong with the last 10 year plan/strategy which had lots of tailwinds, plenty of demand, rising commercial property values rising rents and favorable servicing costs (interest rates), KPG failings come down to poor execution and to many snouts in the trough, if you can't perform and execute in the good times

[Basil]

Pretty sure I recall many years ago at great cost they "internalized" the management of KPG rather than paying an external manager.  This was supposed to result in significant benefits to the company.
Questions presenting.
Where have those benefits gone?
Why have dividends shrunken so badly in recent years compared to the 9.5 cps they paid 23 years ago and this against a backdrop in recent years of once in a lifetime low interest rates / funding costs and recently favorable tax treatment of depreciation?
Why should we believe their current developments will deliver growth in eps to shareholders when nothing they have done in the past has?
Are management even up to executing the Drury development given their lack of any track record of delivering eps growth in the past?

Sadly I see many parallels with OCA here.  Management extolling all the virtues of all the wonderful new facilities they have built for other stakeholders and how other stakeholders are benefiting so much from this and how wonderful all their ESG initiatives are.  Look how much our assets have grown in the last XYZ years, aren't we doing a fabulous job with our growth...and all the while eps languishes and shareholders gain nothing, in fact go backwards in real eps and dps inflation adjusted terms.

It's impossible to make any case for holding this beyond the yield argument.  But holding for great yield is one thing and thankfully in that respect this differentiates itself very well from OCA,, but at what cost in the medium to long-term looking ahead?...that's the biggest question.

[winner (n)]

I'd hazard a guess that even the, most loyal of proponents must be getting a bit peeved at where the share price is heading ....and probably starting to realise management is the problem.