Writedowns cool off Capital Properties' return to profitability

Friday 14th September 2001

Shares in a property company whose tenants were mostly government departments must have seemed safe as houses to many investors.

That has not been the experience with Capital Properties New Zealand, however, whose share price of 86c this week is well down on its 1998 offer price of $1.07, despite substantial growth in 1999 when it took over Shortland Properties.

In its latest annual report, Capital Properties shows a modest return to profitability with a net surplus of $0.6 million in the year to March compared with a $6.6 million loss last year. Revenue was up substantially to $53.4 million from $37.4 million.

The company would be more profitable but for the writedowns it has to make on the value of its properties. Its operating surplus before tax is identical in both years at $16 million.

Net property revaluations saw $12.9 million wiped off the bottom line this year and $19.7 million last year.

In some cases valuations have been hurt because of low tenancy levels. The Shortland Centre Tower II in Auckland remains 30% unleased despite some new tenants and, of four floors in the Oracle Building it had hoped to lease, three remain empty.

Five buildings were responsible for $17.4 million in writeoffs, while the rest of the company's portfolio appreciated by $4.5 million.

Meanwhile, earnings growth looks to be constrained by excess capacity in the market and "over-renting", where tenants are locked into above market rentals that are bound to fall when due for renewal.

Capital Properties says 12.1% of its portfolio, representing $4.7 million in income, is over-rented. It brought this down from last year's 16.5% by selling City Tower in Wellington.

A major new tower block in Auckland, not owned by Capital, is also cited as a problem.

"Not only does this building add a considerable amount of new office space to an already oversupplied market, it has in effect limited any potential for growth in market rentals for several years to come," it warns.

Sensibly, the company does not predict an end to property writedowns.

"We cannot make predictions about future movements in property values as these are influenced by a range of factors including market rental rates and the level of over-renting, interest rates and sales of similar properties in the market.

"We remain convinced that property values are likely to fluctuate in a narrow band over the medium to long term reflecting relative inflation levels and interest rates," it says.

One nice feature of the report is the inclusion of property market reviews by its building valuers.

These contain details of CBD tenancy rates, rental trends and which areas have "general tenant appeal."

In the notes to the accounts, one item that stands out is the increase in interest costs. General costs have risen from $6.1 million to $10.7 million while interest on capital notes jumped from $3.3 million to $10.5 million. No clear explanation for this is given.

Also of note, not least for its absence from the front of the report, is a disclosure that the company failed to meet an earnings per share forecast made at the time it took over Shortland Properties in December 1999.

The end result was 11.9c compared with a forecast 12.7c. This is allowed to pass without comment.

Another item, segment information, offers no numbers on the basis that the company operates in one industry and in one country. That may be so but elsewhere in the report the Auckland and Wellington markets are clearly treated as separate.

There seems little reason that numbers relating to these markets should be treated differently. Investors appear to have lost patience with the company, judging by the decline in shareholder numbers from 24,239 last year to 19,135.

However, this still makes it one of the more widely held companies on the share market.

Shareholders should expect a bit more in the way of communication from Capital Properties than the Spartan and sparse report it has provided.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz Email: davidm@mcewen.co.nz

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