Report Card: Trans Tasman's: brave face hides ageing buildings

Friday 4th May 2001

Who'd own downtown commercial property? Once upon a time, it was a prime and profitable asset class. These days, investors have to deal with low inflation, declining property values and business drift from the CBD to cheaper and parking-hassle-free suburbs.

Trans Tasman Properties puts on a brave face in its latest annual report but there are plenty of negative comments scattered throughout the document.

"The board believes New Zealand property values will remain under pressure for some time yet" is one. "The capital value of commercial buildings is continuing to ease" is another, while saying a lack of liquidity in the sector "further affects investment yields" hardly engenders confidence.

A declining property market means Trans Tasman's bottom line has been negative for at least the past two years and possibly longer (the report doesn't show the customary five-year table of performance).

Even on a two-year comparison, the trend is not good. Operating revenue fell 7.5% to $102.3 million and gross profit by 19% to $38.2 million. Its net loss rose 65% to $9.1 million after property write-downs of $32.6 million, or 2.6% of the value of its investment properties at its 1999 balance date.

The statements of financial performance point out that the loss of value is "unrealised" but readers will take little comfort in that given the company's realised losses were much worse.

Last year, Trans Tasman sold nine properties in New Zealand for $31.5 million against a book value of $37.6 million. This is a precipitous decline of 16%.

These are described in the directors' report as non-core properties, so one must assume they were exceptionally unattractive buildings that had to be sold at a significant loss, rather than an indication that the market value of other Trans Tasman properties is substantially below book value.

The decline in revenue is attributed to the expiry of leases that carried above-market rentals. Therefore, investors cannot expect this trend to be reversed in a hurry. Despite the lower income, Trans Tasman's operating costs have risen slightly. One significant increase came in property operating expenses, up 35% to $11.5 million. More information about this would have been nice.

One concern is the rapid aging of many of its New Zealand properties. When demand for commercial space is low (the report cites CBD vacancy rates of 14.1% in Auckland and 9.3% in Wellington) older buildings find it harder to attract or retain tenants.

The company notes that most of its properties were built in the late 1980s and it is trying to deal with this by constructing new buildings to raise the overall standard of its portfolio.

However, a proposed office tower in Auckland's Shortland St did not proceed because "the company could not guarantee a satisfactory level of pre-tenant interest."

A company with ageing stock that is unable to build new ones is far from an appealing investment.

The report shows the relative performance of its New Zealand and Australian portfolios. These are roughly equal in size but the returns are not. The New Zealand portfolio showed an income of $57 million on assets of $641 million, a return of 8.8%. However, the Australian portfolio had an income of $31 million on $677 million in assets, a return of just 4.5%. These returns were similar in 1999 as well so short-term influences can be discounted.

In summary, Trans Tasman's report indicates it has aging buildings that are losing value and would be difficult to sell because of an "illiquid market." Despite good cash flows, it can't pay dividends because of property writeoffs. No wonder the company is offering to swap minority shareholdings for convertible notes that at least pay a decent yield.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report; www.mcewen.co.nz, davidm@mcewen.co.nz

Comments from our readers

No comments yet