Fundamentals good says Thakral's Hudson

A CRISIS of confidence is how Thakral's John Hudson summed up FY08. If you look around, Hudson says market fundamentals are still good.

Thakral yesterday reported a profit before tax and property valuations of $29.4 million for the year ended June 30 – up 7% from the previous year. The group’s profit after tax and valuations was down 57% from $63.5 million in FY07 to $27.3 million due primarily to falls the difference in valuations which was -$2.07 million this year compared to the previous gain of $35.82 million.

However that valuation only includes Thakral’s retail and office assets and excludes hotels – which is unfortunate for the hotel property investor because its hotel asset revaluations jumped $78.2 million. As a result equity increased by $105.5 million. The increase builds on the $175 million uplift reported in 2007, taking the increase over the last two years to $253.2 million.

During the period, net tangible asset backing per stapled security increased from $1.29 to $1.40 an increase of 8.5%. Gearing stood at 40%.

Thakral’s revenue rose 41% during the period, up from $276 million to $390 million.

The group has declared a final distribution of 4.25 cents per stapled security taking the total distribution per stapled security to 7 cents – inline with the previous year.

Results announcement for the year ended June 30 2008

“It is pleasing to note that underlying profit before depreciation was $49.3 million, while the net increase in the value of our properties was $76 million. Overall, after depreciation and changes in asset values, this gave a combined result of $105.5 million on net assets at the start of the year of $755 million. This represents a return on opening equity of 14%,” he added.

The profit of the hotel division was $63.1 million, up $2.6 million and whilst occupancy for the year was down from 80% in 2007 to 76%, average room rate increased from $163 to $178.

Hotel profits excluding gaming, increased by 8.5% despite two larger hotels, Hilton on the Park, Melbourne and Sofitel Brisbane, under-going refurbishments. As at June 30, the group’s hotels resulted have been revalued at $915 million.

Hudson said market conditions were buoyant with high occupancy in most markets.

“More recently, we have seen a softening in demand. Notwithstanding this, with high occupancy in Thakral’s three key markets of Melbourne, Sydney and Brisbane coupled with the lack of any significant new supply either under construction or planned, we expect improved profits from our hotels next year and over the medium term,” he added.

Thakral’s retail and commercial division delivered $20.3 million, up 8% compared to $18.8 million – driven by strong increases at Wynyard, reflecting the tight leasing conditions in Sydney’s CBD, and at Australia on Collins which continues to benefit from its strategic location in Collins Street, Melbourne.

Hudson said this division represents 20% of divisional profit and continues to enjoy generally low vacancy rates. The portfolio was revalued upwards of $4 million to $295 million.

Included in this division are five apartment buildings, located in Osaka, Japan acquired in September 2007. They contributed $1.4 million to the profit of this division and replaced $1.5 million earned from 120 Sussex Street Sydney which was sold by Thakral in July 2007. The apartments are 84% leased and fully funded by 5 year Japanese Yen Debt Facilities. After interest the properties contributed $880,000 to Group profit. At June 30, the value of these properties was assessed to have fallen by $4 million. In addition, set up and acquisition costs of $2 million were written off in the year’s results.

Accordingly, the net effect of property revaluations from retail and commercial was a write down of $2.1 million which has been taken to account in the profit for the year.

Meanwhile the property development division contributed $23.6 million up significantly on the previous year’s result of $10.7 million.

Profits from development vary considerably based on when projects complete. In the year, two major projects were completed: Alchemy on Lavender Bay, Sydney and Trilogy Cairns, whereas in the prior year only one major project completed, Ultra on the Gold Coast.

Hudson said the current environment for residential property development is difficult.

“While these conditions remain, we are unlikely to undertake any significant new residential projects and will be using the time to position ourselves to take advantage of market conditions as they improve.

“We expect the profit from development activities to be below the current year in the near term,” he added.

Hudson said residential sales are not as quick as they were a year ago but he added premium products such as Alchemy on Lavender Bay, eight apartments out of 20 were presold since the completion in November 2007, in the space of eight months a further 10 have sold and only two remain unsold. Prices started at $3.5 million.

As at June 30, investment in development projects was $204 million representing 14% of total assets.

Hudson said whilst no market whether it be premium residential, residential or commercial – is immune to a downturn, but he believes the constant flow of bad news is eroding confidence.

“There is a crisis of confidence in the market right now… We are not as positive as we were three months ago.

“But market fundamentals in Australia are still good … we have seen yield expansions but our retail and commercial division is very much leased.

“And in residential we are waiting for housing to catch up… over the last few years the sector has been under building around 20,000 to 30,000 homes per annum,” he concluded.

Thakral shares closed 0.005 cent lower at 77 cents.

Australian Property Journal