Argosy Property Ltd chief executive Peter Mence warned yesterday that commercial property’s yield-firming cycle was coming to an end.
Mr Mence told shareholders at Argosy’s annual meeting that increasing construction costs, solid net absorption of vacant space and a decrease in developers were all factors which would benefit the environment for rental growth.
On the outlook, he said: “We are still faced with globally uncertain times. However, the economy, and thus the property market, in New Zealand remains solid with good economic growth expected to continue.
“There is potential for rental growth to be stronger than recent years. The improved quality of our diversified portfolio will allow us to make the most of the current market conditions. We will remain focused on addressing near-term expiries within the portfolio and ensuring that the tenant retention rate remains high and the fundamentals of the portfolio remain strong.”
Investment strategy amended
Argosy has amended its investment strategy, raising its industrial property target and lowering the office target range to take tighter conditions at the top of the property cycle into account.
“We have extended the permitted range of core properties to between 75-90% of the portfolio by value (increased from 75-85%). Our investment policy has also changed, with an amendment to the sector band parameters. Our industrial target will increase to 40-50% of the total portfolio by value (previously 35-45%) and office will reduce to 30-40% (previously 35-45%). Retail remains unchanged at 15-25%.”
The company paid 6.1c/share in dividends for the year just finished and expects to pay 6.2c/share for the 2018 financial year. It announced a 1.55c/share first-quarter dividend yesterday, with imputation credits of 0.366464c/share attached.
New measure coming in for dividends
Argosy will also move, “over the medium term”, to an amended dividend policy, based on adjusted funds from operations (AFFO) earnings. Company chair Mike Smith said the board expected, based on current projections, that the cash dividend would be at least maintained over the transition period.
US property entities have long expressed their earnings in funds from operations. Argosy told shareholders at its investor roadshow in May and at yesterday’s annual meeting, that the adjusted version is “an alternative performance measure used to assist investors in assessing the company’s underlying performance and to determine income available for distribution”.
What’s not clear from its presentations is how dividends will change, or why, beyond following guidelines from the Property Council of Australia for disclosing the measure, which didn’t jump out at my face from its website.
According to Investopedia, adjusted funds from operations is a more precise measure of residual cashflow available to shareholders than plain funds from operations, and therefore a better “base number” for estimating value – for example, applying a multiple or discounting a future stream of funds. Secondly, because it’s true residual cashflow, it is a better predictor of the entity’s future capacity to pay dividends.
Investopedia says AFFO doesn’t have a uniform definition, but the most important adjustment made to calculate it is the subtraction of capital expenditures.
Link: Investopedia on AFFO
Attribution: Annual meeting, company release, Investopedia.