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Aug 29, 2007:
An issue coming strongly to the fore at the moment is the question of whether it's correct for listed property companies to distribute their unsustainable capital or development profits to unit holders, who are often unaware of the status quo, in order to bolster a specific set of distributions.
This very issue came up at Growthpoint Properties' media function held on 22 August 2007.
It used this forum to announce its distribution of 93,1 cents per linked unit (cplu) for its financial year ended 30 June 2007. The results showed a 14,5% increase on the distribution of 81,3cplu achieved by the fund in its 2006 results.
The company attributed its double-digit growth in distributions to sustainable earnings derived from property net rental income and investment income.
Growthpoint CEO Norbert Sasse pointed out that Growthpoint does not distribute capital or development profits to its unit holders.
"This is practice with some of the other listed property companies," he said.
"To go back, there are more and more mixed use developments as a result of traffic congestion and other factors.
"Developments are effectively conceptualised as mixed use developments. Listed property companies then sell the residential components of these developments in order to bolster distributions.
"We don't play that game at all. We believe it is the wrong motivation driving developments. We have seen this phenomenon in Paramount Towers, which was conceptualised as a mixed use development.
"And what must also be remembered is that the days of selling out a residential component in a weekend are long gone. So the guys going down that route could be caught.
"I'm not saying it's wrong to pay out capital profits, but I'm saying it's unsustainable, i.e. the profit is not sustainable in the long run. And this needs to be understood when valuing an income stream, that it is a once-off profit out of the residential stream.
"No one says with distributions that so much is derived from rent and so much from capital profits.
"So if you're supposed to be an investment vehicle and you become a trading vehicle that sells the core asset that is generating rental, you can get caught. So you have to decide if you're an egg or a goose salesman. The question is how to deal with sales and avoid becoming a taxable trader.
"People should also keep in mind that it's been a bull market but that we are already seeing a slight shift in the market.
"So to go back, rental income is sustainable in terms of five-year leases. We think our distribution performance is a good performance in light of the fact that we do not pay out capital profits and development profits." - Kara Michaels
