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Pearl Properties H1 to June 2016 weighed down by property portfolio impairments



Pearl Properties revenue in the six months to June 2016 declined by 2.41% to $4.16 mln from $4.26 mln same period last year as the property sector remained depressed due to weakening aggregate demand, increasingly affecting the ability of tenants to service their lease obligations.

Managing Director Francis Nyambiri told analysts that persistent illiquidity and deflationary pressures adversely affected the performance of the property portfolio as tenants felt the macro-economic pressures.

“As a result, this led to  increasing defaults, declining occupancy levels, increasing evictions and voluntary space surrenders in the market,” he said.

The worst affected sectors remained the CBD office sector and the industrial sector. While demand for CBD retail remained strong, tenants are increasingly asking for downward rent reviews to remain in operation.

During the period, rental income dropped 4.96% to $4.03 mln compared to $4.22 mln the same period prior year. Administration expenses at $1.19 mln declined 10% as cost reduction initiatives were implemented.

A director’s valuation of the property portfolio as at 30 June 2016 led to a $3.7 mln drop in the value of the portfolio to $131.51 mln. According to Nyambiri, the impairment was driven by rising voids that have added pressure on rentals, increasing tenant defaults and an illiquid property sales market. The portfolio comprised 57 properties in Zimbabwe.

Financial Controller Ruvimbo Chimedza noted that property expenses went down 32% to $410 869 from $605 294.  Finance costs declined 25% to $174 123. However due to the fair value loss, the group experienced a loss for the period of $1.19 mln versus a profit of $1.58 mln in the previous 6 months. Chimedza said a further valuation will be conducted by year end. No interim dividend was declared.

Turning to the consolidated statement of financial position, total assets were $141 mln declining from $144 mln as at 31 December 2015, largely due to the impairment of the investment properties. The shareholders equity stood at $124 mln.

In terms of the cashflow, cash generated from operations was $2.56 mln increasing from $2.14 mln whilst financing activities chewed $1.3 mln. Cash and cash equivalents at the end of the period stood at $2.38 mln from $1.32 mln as at 30 June 2015.

In the operational review, GM Developments Christopher Manyowa said that occupancy levels came off to 71.85% from 78.54% in the prior year with vacations spread across the property portfolio.

The office park sector at just above 80% occupancies gained during the period whilst other sectors experience a decline in occupancies. CBD Office had the lowest occupancies at just above 40%.

The average rent per square meter was at $7.02 a decline from $7.28 in June 2015.Only the Industrial and CBD offices gained  5% and 3% respectively to $3.57 and $9.66 in that order.

On property developments, Manyowa noted that the group has completed the Feasibility Study of the S.V. Muzenda Bus Interchange as well as the geotechnical and topographical Surveys. He said fundraising is ongoing but investor appetite has reduced as a result of uncertainties in the economy especially on the bond notes.

On the George Square Mews, Manyowa said at least 16 units were completed for leasing and only 3 units were sold.

Going forward, management will focus on managing occupancy levels, ensuring sustainability of rentals and managing tenant defaults as well as cost management. The group is planning on achieving an operating profit for the year of $3.1 mln.

Consolidated Income Statement

Our Thoughts……

The country’s economic environment is one characterized by limited GDP growth rates, company closures and a liquidity crisis. At sector level the property market is characterized by declining occupancy levels, increased tenant evictions and space surrenders. Under such circumstances, one would expect property companies to struggle given that the demand for their products is derived demand.

It is against this background that we view Pearl Properties’ results in a positive manner. Over the past six months revenue for Pearl Properties, was little changed indicating the quality of assets and tenants the Group has. Striking out negative fair value adjustments in the numbers the company had
a net profit of $2.2 million for the half year versus $1.9 million for the comparative period.

There is however evident pressure on rentals, occupancies, and cash collections and these are the areas we expect management to be taking action on. In terms of rentals we commend management for keeping occupancies and by extension rentals steady. However, there are chances that what is happening in the CBD might not be reversed, so we would welcome more plans and strategies to diversify and
grow income streams going forward.

Another area where management can improve earnings is that of cost management. It is pleasing that management is already working on reducing its costs base with property expenses, administrative expenses and finance costs all coming down. More of the same is welcome.

The major worry for the business though is that continued decline in occupancies will put a negative dent on rental yields and as a result force more negative revaluations on investment properties.


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