Report Card

Thursday 12th April 2001

The essence of a good annual report is its ability to leave readers feeling they understand the company it represents.

This is a difficult task because of a widespread management reluctance to reveal information, the volume of data needed to communicate a detailed picture of the business and the competing priorities of a report. These priorities include meeting regulatory standards, delivering appropriate content to different stakeholder groups and serving as a marketing tool.

Property For Industry has just produced a report that explains the company well. Although a spare, unflashy document, it presents a large amount of information concisely. This includes details of corporate strategy, the expiry dates of its leases, the location and type of its properties, the names of its tenants and how much they pay in rent. After reading all this, investors should be left with few unanswered questions.

One page uses a series of tables and graphs, with no explanatory text, to clearly identify how much of its income is reliant on various major tenants, how rents will be set at their next review, the breakdown of buildings by value range, rentals by industry type and how its properties fall into industry classes. This is a model I would like to see all businesses imitate.

Less appealing is the company's definition of terms relating to its financial performance and position.

The headline on chairman Allan Lockie's report reads "2000 has been a year of growth for PFI." The report also states that the company's manager, AMP Henderson Global Investors, earned its first bonus during the December quarter for achieving "total shareholders' returns" of more than 10%.

The term growth may apply to the company's asset base, which has grown by the net addition of four properties in the year to December. However, it doesn't apply to the value of those properties, which has shrunk by $5.4 million after revaluations. It doesn't apply to net profit, either before after the revaluations, or to shareholders' funds.

"Total shareholders' returns" appears to refer to dividends plus share price appreciation. However, PFI also uses and quotes the economic value added (EVA) approach and this has been consistently negative since the company was formed. Last year, the company's gross profit minus cost of capital was negative 3.8%, more than double the wealth destruction of the previous year. Looking at shareholders' returns from this perspective, a bonus to the manager hardly seems appropriate.

Another issue is the pace at which the company is piling on debt. In 1999, net debt represented 26.8% of shareholders' funds. Last year, it more than doubled to 57.1%.

A more commonly used figure, liabilities to total assets, has risen from 23% to 38.1%.

General manager Peter Alexander refers to debt in his report but uses the measurement of "gross debt to investment property." This rose from 21% in 1999 to 35%. His comment that the sale of a property in late December "ensures that debt levels are maintained below 35%" suggests it is a level he is comfortable with. This borrowing cap is referred to elsewhere in the report as reflecting a "financially disciplined approach" but offers no explanation as to significance of that figure, how it was arrived at and the constraints, voluntary or otherwise, that stop the company exceeding that level.

Notwithstanding these caveats, PFI's report succeeds in delivering a result that investors always seek but rarely find. There is comfort that the company has fully opened itself up for scrutiny and there are likely to be few surprises in the coming year.

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

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