Urbus must add flesh to bones

By BRENT SHEATHER

Urbus Properties, an unlisted, publicly owned company made up of former Waltus partnerships, has announced a 20 per cent rise in earnings for the March year.

Chairman Denis Thom said "a growth by acquisition of 75 per cent in the size of the property portfolio to $394.5 million and an increase of 20 per cent in our operating after-tax profit positions the company well for the proposed main board listing on the NZSE in June".

Apart from the usual backslapping, the press release was light on detail: no earnings per share comparison, no profit and loss account, and no balance sheet.

Even Urbus' statement that profits rose by 20 per cent was meaningless because the equity base and assets of the company had increased.

One of the keys to valuing a company is its earnings per share so if earnings increase but the number of shares on issue also increases, earnings per share can be stable or decrease.

With a listing imminent, the directors should note that the stock market does not appreciate information vacuums and generally prices offenders at a material discount to net asset value. Urbus is trading at a 14 per cent discount to net asset value.

In more civilised societies such as the United States, listed property companies report quarterly, usually two to three weeks after period end, and disclose earnings per share and dividend per share details with comparison to the prior period. Many also give guidance on current and forecast profitability.

In last year's Urbus annual report, Thom assured shareholders that the directors would focus on future earnings per share and said they had determined that Urbus would be a growth stock.

This sounds encouraging and is particularly significant because various listed property stocks like Kiwi Income Property Trust and Property for Industry have been criticised for expanding assets - a good deal for the fund manager - at the expense of earnings per share and dividends per share, variables of vital interest to shareholders.

Despite the noble sentiments of last year's annual report, the Urbus press release neglects to mention what growth in earnings per share was actually achieved. It instead trumpets a 20 per cent growth in profits.

This absence of information is disappointing as earnings per share determines such things as share price and dividends and is all the more surprising given that Urbus is apparently a growth stock. Shareholders will no doubt hope that growth refers to earnings per share and dividends rather than just assets under management.

According to Urbus director Shayne Hodge, shareholders will not receive this year's annual report and Urbus accounts until early July, so there is no obligation to make them public until then.

Fortunately the 2002 annual report has been released and this shows earnings per share of 10.55c, thus the 10.48c recorded in 2003 represents close enough to zero growth - quite a different picture to that painted by the good chairman, who, given his optimistic description of the result, may well have been a stockbroker in a previous life.

Despite this breakthrough on earnings per share growth, the underlying profitability of Urbus is still not all that clear. The way Urbus calculates its earnings per share is a little different: earnings per share typically reflects the earnings of the company accruing to common shareholders after the deduction of expenses, including interest payable to banks and dividends payable to preferred shareholders.

Urbus' capital structure last year was made up of 81 million shares and about 50 million convertible notes. The significance of the 50 million convertible notes is that they get paid out first in the event of lower profitability and attract interest at rates of between 10 per cent and 14 per cent, with some maturing in 2010.

Urbus calculates its earnings per share by dividing its profit by the total number of ordinary shares and convertible notes on issue.

But ordinary shareholders would no doubt be interested to know what proportion of the cash earnings was available for dividend after preferred shareholders had been paid out.

The fixed nature of the convertible share payments and the fact that ordinary share dividends are subordinate to these coupons effectively gears up the ordinary shares.

If Urbus' profits increase ordinary shareholders will do very well; if profits decline markedly ordinary shareholders will suffer a proportionally greater loss in dividend. Shareholders in the ill-fated Waltus KPMG partnership will appreciate the impact gearing can have on a property asset.

Because the convertible notes rank for dividends before shareholders, and in several cases are paid a much higher dividend, what secondary market there is in these things prices them higher than the ordinary shares.

What information there was in the press release looked positive - the fund is now much more exposed to the less problematic industrial and retail sectors, weighted average lease term is five years and the percentage of over-rented property is down to 3.8 per cent.

Gearing, however, remains relatively high at 43 per cent and this is using a net asset value of 93c. No details were given of interest cover or occupancy.

Urbus apparently will listing in NZ next month. Last sales of the ordinary shares in the existing secondary market have been around 80c, a 14 per cent discount to this year's net asset value of 93c.

By comparison, leading listed funds such as Kiwi Income Property Trust and Property for Industry trade at premiums. Why the difference? Recent performance could be a factor: in the 12 months ended March 31, Kiwi Income and Property for Industry generated total returns of 19.1 per cent and 11.6 per cent for shareholders, and the overall NZSE Property index was up 11.5 per cent.

But Urbus shares fell from 81c in March last year to 72c in March this year, a return after 9c of dividends were paid, of zero.

With a full listing due in next month - presumably accompanied by an information memorandum - Urbus shareholders will no doubt be interested to see more details of how the company they swapped for their partnership interests is doing and whether chairman Thom's optimism is soundly based.

* Brent Sheather is a Whakatane financial adviser.