Fair value gains attributable to the Trust’s property portfolio contributed $106.3 million, on a look-through basis, to this year’s profit. The gain reflects the quality of the assets, rising market rentals and buoyant investment market conditions.
The current strength in investor demand is reflected in the firming of the portfolio capitalisation rate over the last 12 months, from 6.5% to 6.2%.
The 4.0% uplift in the value of the Trust’s property portfolio follows the 5.4% or $114.7 million, increase achieved last year. Although still substantial the lower portfolio revaluation is one of the main variances with last year’s profit before tax of $220.5 million.
Adjusting for these fair value gains and other cash and non-cash items provides the reconciliation between statutory profit and operating earnings.
Sustained customer demand, driven by low vacancy rates and continued economic growth, is being reflected in positive leasing results and new development commitments.
Ongoing asset sales are providing the funding capacity to progress this development activity.
The disposal of the Millennium Centre office assets in 2017 is the main contributor to the 3.1% reduction in net property income this year, to $130.1 million. The lost income from the sale was greater than the positive contribution from completed developments over the last 12 months.
When GMT’s proportionate share of the Wynyard Precinct joint venture is included however, net property income increased from $147.2 million to $148.5 million. The full year contribution of the Datacom building and the acquisition of Bayleys House added revenue.
While revenue was largely unchanged on a look-through basis, and administrative expenses were consistent with the previous year, net interest costs have increased in both GMT and its Wynyard Precinct joint venture. A lower level of capitalised borrowing costs in GMT and the recent acquisitions within the joint venture contributed to the higher cost.
As a result, operating earnings before tax have reduced 2.1% to $119.1 million. On a weighted average unit basis, this equates to 9.25 cents per unit. Full year cash distributions paid to Unitholders have been maintained at 6.65 cents per unit, which represents 95.1% of GMT’s cash earnings.
Focusing the Trust’s investment strategy in the Auckland industrial sector has refined the business and positioned it for sustainable long-term growth. The progression of the development programme and further asset sales have continued to improve the quality of the portfolio while strengthening GMT’s balance sheet position.
Seven development projects were announced during the year, requiring $118.5 million of additional investment. Asset disposals, including the conditional sale of Central Park Corporate Centre, totalled $243.9 million. Asset sales yet to complete are classified as investment property contracted for sale in the financial statements.
Adjusting for all contracted sales at 31 March 2018, the Trust had a loan to value ratio (LVR) of just 25.6%. Including the Trust’s 51% interest in the Wynyard Precinct joint venture, look-through gearing is 25.0%.
The sale of the Wynyard Precinct joint venture, contracted after the year end, reduces GMT’s proforma 31 March 2018 gearing to less than 20%. The proforma LVR represents around one third of the total borrowings permitted under the Trust’s debt covenants. The strong balance sheet position provides substantial funding capacity for future development and investment opportunities while also providing significant headroom should asset values fall.
While the fair value movements from GMT’s portfolio revaluation are excluded from operating earnings, they are the main drivers of the 6.5% increase in net tangible asset backing to 138.9 cents per unit (on a fully diluted basis).
Cash earnings is a non-GAAP measure that assesses free cash flow, on a per unit basis, after adjusting for certain items.
The table below shows how the Trust’s cash earnings are calculated and how this compares to the distributions it pays. It is a sustainable level with distributions representing 95.1% of underlying cash earnings in 2018.
The Manager currently uses the base management fee it earns to subscribe for new units in the Trust. It is required to do so for a period of five years, ending 31 March 2019. Adding back the base management fee in 2018 would reduce cash earnings by $8.3 million or around 0.6 cents per unit.
A total tax expense of $13.2 million results in an after-tax profit of $194.0 million, a reduction of 9.3% from the $213.8 million recorded in 2017.
The low tax expense of $6.7 million last year was the result of a deferred tax release following a reduction in the provision relating to tax depreciation.
After tax operating earnings, which removes the impact of deferred tax, reflects an effective tax rate of 14.7%.
GMT Bond Issuer Limited
There were two further issues of Goodman+Bonds during the year, each of $100 million.
- GMB040 were 7 year bonds issued in May 2017 with an interest rate of 4.54%
- GMB050 were 5.5 year bonds issued in March 2018 with an interest rate of 4.0%.
The proceeds replaced existing bank borrowings, extending the tenor and diversity of the Trust’s debt facilities. The Trust now has 68% of its debt drawn from non-bank sources and these facilities had a weighted average term of 4.5 years at 31 March 2018.
During the year, GMT Bond Issuer Limited received $15.3 million of interest income and incurred $15.3 million of interest expense. The 36.6% increase on the previous year reflects the impact of the GMB040 and GMB050 bond issues during the year.
Standard & Poor’s has maintained the credit rating of all Goodman+Bonds at BBB+. This is one notch higher than the Trust’s investment grade issuer rating of BBB.