When a company doesn’t tell you in the first line of its results announcement that it’s made a huge profit, it’s all too common to have to hunt for the score. Argosy Property Ltd didn’t mention the profit fall all the way through a long release on its performance on Wednesday, but I’ve tracked down the figures in the annual report and done some percentages (most of which were also not in the release, presentation or report).
In short: Income was steady, pretax profit fell 9.2%, after-tax profit fell 5.2%, earnings/share fell 6.2%.
Argosy has reasons for some complicated figures, especially the effect of the November 2016 Kaikoura earthquake on NZ Post House in Wellington, where reinstatement of 3 floors continues and insurance claims are still being worked through.
The company is also repositioning itself according to its view of the commercial & industrial property cycles, continuing to dispose of what it sees as non-core assets, but seeing less opportunity to acquire well.
Key financial & portfolio stats:
- Net property income $101.0 million ($100.8 million)
- Pretax profit down 9.2% to $109.3 million ($120.4 million)
- Net profit after tax down 5.2% to $98.2 million ($103.6 million)
- Total assets up 5.9% to $1.545 billion ($1.459 billion)
- Debt:total-assets ratio 35.9% (36.3%)
- Total equity up 5.9% to $926.9 million ($875.2 million)
- Financial year total shareholder return of 9.8%, outperforming the sector by 2.8%
- Basic & diluted earnings/share down 6.2% to 11.9c (12.69c)
- Net tangible assets/share up 5.5% to $1.12 ($1.06)
- Net distributable income/share up 1.1% to 6.62c (6.55c)
- Cash dividend/share 6.2c (6.1c)
- A final quarter dividend of 1.55c/share with imputation credits of 0.3744c attached, up 1.6%, has been declared for the March quarter
- Dividend guidance 6.25c/share for 2019 financial year
- Annualised rent review increase of 3.0%
- Occupancy at 98.8% (98.6%) and a 6.1-year weighted average lease term
- Portfolio revaluation gain 3.2% on book value, $47.3 million ($42.3 million)
- Completion of $48.8 million of developments, including $33.8 million of green developments
Argosy chief executive Peter Mence said strong leasing & rent review activity underpinned a strong overall performance.
Chair Mike Smith said the management team had resolved key lease expiries & vacancies: “They have also repositioned the portfolio sensibly, with the combination of completed developments, revaluations & selected divestments resulting in a modest reduction in exposure to the retail sector. Over the next 12-18 months we will continue to divest non-core assets in an attractive vendors’ market. Generally, after this period, we expect that Argosy will be positioned towards the lower end of our retail band and at the higher end of our industrial band.”
Argosy’s board has amended the debt:total assets ratio target band to 30-40% from the previous target of 35-40%. Mr Smith said: “As we continue to divest non-core assets to take advantage of strong investor demand, the proceeds will be used to continue our tenant-led development programme and/or reduce gearing.
“As we begin the 2019 financial year there is greater political visibility over the near term and we continue to be optimistic around potential opportunities for Argosy. Our diversified investment approach brings strength & balance to our business.
“The increase reflects our wish for shareholders to share in the continued strong results but also allows us to maintain our momentum towards an adjusted funds from operations (AFFO)-based dividend policy in the medium term.”
Mr Mence said reinstatement works were progressing well at the quake-damaged NZ Post House in Wellington. Work on levels 10-12 should be completed this financial year, and he expected strong demand for them. The other floors remain leased to NZ Post.
The company has included this interim works programme’s $41 million cost to complete as a capital deduction in the valuation for 7 Waterloo Quay and is working on a large insurance claim. It also has business interruption insurance and has received $11.8 million plus gst in progress payments.
An independent portfolio revaluation resulted in a full-year gain of $47.3 million, a 3.2% gain on the year-end book value – industrial up 6.5% ($39 million), office 1.0% ($5.6 million), retail 0.9% ($2.7 million). Adjusting the annual revaluation result for NZ Post House, the increase above book value would have been 4.5% ($61.6 million).
On current market value, Argosy’s portfolio has a passing yield of 6.88% and a 6.98% yield on market rental. The portfolio is 1.3% under-rented, excluding market rentals on vacant space.
The company completed 51 lease transactions on 150,000m² of net lettable area – 23 new leases, 20 renewals & 8 extensions.
The company completed 88 rent reviews on $48.5 million of existing rental income. It achieved 6.1% rental growth, or 3.0% on an annualised basis on all rents reviewed. The office portfolio accounted for 50% of the total rental uplift due to a large market review, industrial 29%, retail 21%.
50% (by income) of all rents reviewed were market reviews, 27% fixed reviews and 23% CPI or CPI+.
Acquisitions & value-add developments
Mr Mence said the market remained tight: “This, coupled with a surplus of capital & scarcity of quality real estate, means few opportunities have emerged during the period to make acquisitions which would add value. Despite this, we have continued to progress our development pipeline with 4 projects totalling $48.8 million now completed.”
The company is aiming for a 4 Green Star industrial built rating for its Highgate (Mighty Ape) development and 5 Green Star office built rating for 82 Wyndham St in the Auckland cbd. Its 143 Lambton Quay & 15 Stout St buildings in Wellington are both 5 Green Star.
Divestment of non-core assets
Argosy completed the sale of Tunnel Grove, Wellington, for $2.8 million and the unconditional agreement to sell Wagener Place in Auckland for $31 million. This transaction will settle in July. These transactions follow the sale of Pandora Rd in Napier in the first half for $7.7 million.
Mr Mence said: “The Wagener Place sale was an opportunity to reduce Argosy’s retail exposure in an area where there will be increasing competition.”
At year end, Argosy has categorised about 7% ($110 million) of the portfolio as non-core. Argosy will continue its divestment programme over the next 12-18 months to take advantage of current market conditions.
On the value of green building, Mr Mence said: “Last year we established our environmental, social & governance framework to recognise the importance sustainable business practices have on the environment & long-term value creation for shareholders. Our environmental policy reflects our ambition to create vibrant & sustainable workplaces for our tenants and Argosy believes green buildings have potential to provide both environmental & business benefits.”
Mr Smith said the board considered the New Zealand property market to be near its cyclical peak, making it hard to acquire property: “We believe ongoing strength in the sector will provide opportunities to divest non-core assets at attractive prices and either reduce gearing or reinvest the proceeds into tenant-led development opportunities. We will continue to focus on our existing portfolio of value-add properties to create long-term value for shareholders and increase the quality & sustainability of our earnings.
“Argosy continued to deliver excellent results over the back half of 2018, but there is more work to do through the 2019 financial year & beyond. Argosy achieved excellent leasing success & rent review growth across the portfolio. As a result, the year-end portfolio metrics are in excellent shape. Reinforced by their Green Star ratings, a number of redevelopment projects were completed which increased our portfolio quality and will contribute towards sustainable earnings over time. We will continue to look at sustainability, given the environmental & business benefits that are likely to accrue.”
Attribution: Company release & annual report.