Real Estate Investor Magazine South Africa September 2013 | Page 52

LISTED

BY IAN ANDERSON

Reading Listed Results

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Become fluent in finance jargon

or ma ny investor s, inter pret ing a company’s financial accounts can be a daunting challenge. In the listed property sector, the task appears no less daunting, given the number of accounting standards that create a great deal of noise, but shed little light on the financial well-being of the company. In reality, the analysis of a listed property company’s financials is actually quite simple because the business model is easy to understand. Listed property companies all own, buy, sell, develop and redevelop properties (the assets). Some companies will have investments in other listed property companies, which would also form part of the asset base. The assets are the source of all revenue, either in the form of rental income, the recovery of operating expenses from tenants or from distributions if they have investments in other listed property companies.

The company will also incur administrative expenses, like staff salaries and the expenses associated with being a listed entity. Those companies with internalised management str uct u res can control for increases in administrative expenses, while external management arrangements are based on a set percentage of company enterprise value (the value of the company’s issued share capital on the JSE Limited plus the value of the company’s debt) and are influenced by changes in the share price and the issued share capital. The f inal signif icant line in the income statement of most listed property companies is net finance costs – the difference between interest earned on cash holdings and the interest paid on borrowings. The typical listed property company in South Africa has borrowings equal to 30% of the value of the assets, typically referred to as gearing or the loan-to-value ratio.

items) to distributable income. The balance sheet is also fairly simple to understand, dominated on the assets side by the property portfolio and investments in other listed property companies, funded through a combination of equity and debt capital. Occasionally, there will be slightly more confusing balance sheet entries, usually as a result of Black Economic Empowerment (BEE) transactions entered into and where loans or financial assistance has been provided to the BEE par tners. The deferred ta x liabilities raised on the sale of properties will be removed from balance sheets due to the introduction of Real Estate Investment Trust (REIT) legislation which exempts REITs from capital gains tax. All South Africa’s property loan stock companies are expected to apply for and be granted REIT status by the JSE Limited.

Listed property companies will incur expenses Apart from financial metrics, listed property relating to the production of revenue, including Most income statements w il l have an compa n ie s w i l l a lso d isc lose prop er t y maintenance of the properties, commissions element of noise that does not impact on portfolio metrics, which may include a lease paid to brokers, municipal rates and utilities the distributions payable or the cash f lows expiry profile, average rentals per property (some of which will be recovered from tenants). produced by the company. These typically type, geographic spread, average cost per These expenses are lumped together on a single include an adjustment for straight-lining s quare metre by property type, as well as an line in the income statement as in-depth analysis of leasing activity operating expenses. The ratio of TYPICAL INCOME STATEMENT (EXCLUDING NOISE) in the period under review. xxx xxx operating expenses to revenue will Revenue - contractual rental - tenant recoveries xxx xxx vary from company to company Over the past decade, disclosure Less: Operating expenses (xxx xxx) and is dependent on factors such by South Africa’s listed property Add: Distributable income from listed property investments xxx xxx as the mix of properties within the companies has improved dramatically Less: Administrative expenses (xxx xxx) portfolio. The difference between Less: Net finance income (excluding linked debenture interest) (xxx xxx) and our companies rank among the revenue and operating expenses is Distributable income world’s best in terms of transparency. xxx xxx referred to as net operating income This makes the job of forecasting (NOI) and reflects the performance of future distribution growth far simpler the property portfolio. The level of NOI growth, rental revenue and fair value adjustments on and is one of the reasons why analysts covering after adjusting for property acquisitions and the property portfolio, as well as on derivative the listed property sector are never far off the dispositions, gives analysts a clear indication of instruments used to hedge out interest rate risk. mark with their forecasts. the quality of the property portfolio, as well as Most companies will provide a reconciliation RESOURCES the effectiveness of company management. of accounting profits (including the non-cash Grindrod Asset Management
50 September 2013 SA Real Estate Investor www.reimag.co.za