Over 50% of this year’s profit has been as a result of fair value gains attributable to the investment portfolio. The $114.7 million gain following independent valuations reflects market rental growth and a further strengthening in investor demand for high quality industrial property. The 5.4% uplift in the value of the Trust’s property portfolio, follows the record 6.7%, or $145.8 million increase achieved in the previous financial year. The lower revaluation gain this year is the principal difference with the $247.9 million profit before tax in 2016. Adjusting for these fair value gains and other cash and non-cash items provides the reconciliation between statutory profit and operating earnings.
A positive operating environment is continuing to facilitate an active investment approach for GMT. A development led growth strategy and selective acquisitions, funded through asset sales, are refining the portfolio and delivering strong gains for the Trust. The timing of transactions in 2017 means that the increased revenue from completed developments and earlier acquisitions has been largely offset by asset sales with net rental income increasing 0.3%, to $134.2 million. When GMT’s proportionate share of the Wynyard Precinct joint venture is included, net rental income increased 2.9% from $143.1 million to $147.2 million. The strong growth reflecting the full year income contribution of the Fonterra Centre, purchased in February 2016.
Administrative expenses have increased $0.3 million to $2.9 million as a result of increased valuation fees while net interest costs have reduced from $20.5 million to $18.0 million. The main contributor to the reduction in borrowing costs is a lower effective interest rate of 5.0%. The lower net interest cost also reflects a greater level of interest income received as a result of the development funding arrangement with Fletcher Building. The loan, to finance the construction of the Datacom building, has subsequently been repaid following the acquisition of the completed office development by the Wynyard Precinct joint venture in May 2017. The combination of greater revenue and lower interest costs are the main contributors to the 4.0% increase this year in operating earnings before tax to $121.7 million. On a weighted average unit basis, this equates to 9.51 cents per unit, consistent with earlier guidance. Full year cash distributions paid to Unitholders have been maintained at 6.65 cents per unit, which represents around 94% of GMT’s cash earnings.
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. With distributions fully cash covered in 2017, it has been an improving trend that reflects the positive progress made toward a more sustainable distribution policy.
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 2017 would reduce cash earnings by $7.7 million or around 0.6 cents per unit.
A total tax expense of $6.7 million this year results in an after tax profit of $213.8 million, a reduction of 8.3% from the $233.1 million achieved in the previous financial year. The total tax expense is significantly below the $14.8 million recorded in 2016 and is largely the result of a deferred tax release following a reduction in the provision relating to tax depreciation. The reduced provision is attributable to the sale of certain investment properties. After tax operating earnings, which removes the impact of deferred tax, reflects an effective tax rate of 12.9%.
A sustainable business strategy, with asset sales funding new investment and development initiatives, is improving the quality of GMT’s property portfolio and strengthening its balance sheet. Eight new development projects, with a total cost of $97.0 million, were announced during the year and four assets were sold for a total of $278.8 million. The Trust also conditionally acquired The Concourse industrial facility, in the Auckland suburb of Henderson, for $18.9 million. Settlement is expected to occur in the first half of FY18. The active investment market that is facilitating a successful sales programme is also contributing to strengthening asset values. While the fair value movements from GMT’s portfolio revaluation are excluded from operating earnings, they are the main drivers of the 8.3% increase in net tangible asset backing to 130.4 cents per unit (on a fully diluted basis). With borrowings of $681.8 million and total property assets of $2.3 billion, the Trust had a loan to value ratio (LVR) of just 29.3% at 31 March 2017. When the Trust’s interests in the Wynyard Precinct joint venture are proportionately consolidated its look through gearing is 30.6%. It is a conservative level of debt, well below the 50% maximum allowed under the Trust’s debt covenants. The strong balance sheet position provides substantial capacity for future investment and development opportunities. We also believe it is appropriate to be at the lower end of the target gearing range at this point in the cycle.
GMT Bond Issuer Limited
GMT Bond Issuer Limited has made three issues of Goodman+Bonds, with the GMB020 and GMB030 bonds still to mature. During the year, GMT Bond Issuer Limited received $11.2 million of interest income and incurred $11.2 million of interest expense. The 11.8% decrease on the previous year reflects the maturity of the $150 million GMB010 bonds in the previous year and the full year impact of the $100 million GMB030 bond issue. Standard & Poor’s have maintained the credit rating of all Goodman+Bonds at BBB+.