Argosy says time to sell with market near peak as FY earnings edge higher on flat rents

Argosy Property lifted annual earnings 2.1 percent on flat rental income. Photo: Getty Images

Argosy Property lifted annual earnings 2.1 percent on flat rental income and said it will cut its retail exposure over the next 18 months, with real estate selling at "attractive prices" and the market near a cyclical peak.

Distributable income, which strips out movements in the property portfolio, increased to $54.6 million, or 6.62 cents per share, in the 12 months ended March 31, from $53.5 million, or 6.55 cents, a year earlier, the Auckland-based company said in a statement. Net property income was flat at $101 million, while net profit fell 5.1 percent to $98.2 million due largely to a gain on interest rate derivatives. The property investor's 61 properties were valued at $1.51 billion as at March 31, including a $47.3 million revaluation gain, and up from $1.44 billion a year earlier.

Argosy has placed greater emphasis on industrial property in recent years, with the company's 36 sites accounting for 42 percent of the portfolio's value. Those properties were the only part of the portfolio to post an increase in income during the year, with a 7.1 percent gain to $39.4 million. The company said it expects industrial properties to make a greater proportion of the portfolio while it sells non-core assets amounting to 7 percent of its investment properties, and anticipates that programme will reduce its exposure to retail, with eight properties currently on its books.

"The board considers the New Zealand property market to be near its cyclical peak which makes it hard to acquire property," Argosy said. "We believe ongoing strength in the sector will provide opportunities to divest non-core assets at attractive prices and either reduce gearing or reinvest the proceeds into tenant led development opportunities."

Argosy completed four developments in the year, two of which were industrial sites, including the $24.7 million Highgate Business Park project in Auckland. The firm said it's looking at sustainability initiatives to lift the environmental ratings of its buildings after several projects were completed in the year.

The property investor's weighted average lease term extended to 6.1 years from 5.6 years as at March 31, 2017, while the occupancy rate improved marginally to 98.8 percent.

The board declared a final quarterly dividend of 1.55 cents per share, payable on June 27 with a record date of June 13. That takes the annual return to 6.2 cents per share, up from 6.1 cents a year earlier. The board forecast annual returns totalling 6.25 cents per share for the 2019 financial year.

Argosy's directors plan to link the company's dividend policy to the sector's new favoured earnings measure, adjusted funds from operations in the medium-term. AFFO differs from distributable income by excluding capital spending on tenant incentives and lease costs, maintenance and associated tax recoveries.

The shares rose 1.5 percent to $1.035, having declined 6 percent so far this year.