Investa Office Fund (ASX: IOF) released its half year results today. Here are the highlights:
- Revenue was down 8% to $98 million
- Profit was down 32.5% to $151 million
- Net tangible assets per unit were up 3.3% to $4.95
- Funds from operations (FFO) were up 1.8% to $93 million
- The Fund achieved a 12 month return on equity of 14.8% and a 12 month unlevered portfolio total return of 12.9%
So should investors worry about the 32.5% decline in profit?
The first thing to note would be that the profit is lower because the Fund had a lower investment property revaluation / fair value gain. This is because only 23% of the Fund's properties were revalued during the period in accordance with its valuation policy.
When you strip out the impact of property revaluations, amortisation and other accounting adjustments and just focus on the funds from operations, this has been fairly consistent from the previous period at $93 million.
So on the face of it, that profit decline is a red herring.
What I did find interesting though, was the capitalisation rates on the properties owned by IOF.
IOF's investment properties are primarily investment grade office buildings across the major Australian capitals.
Most of its properties are based in Sydney and Melbourne were property prices have boomed and the cap rates are now at an average of 5.74%.
Compare that with IOF's smaller investment exposure in Brisbane & Perth which have cap rates of around 7%. Another comparison could be Abacus Property Group (ASX: ABP) which has a greater mix of Brisbane and Adelaide properties and an office portfolio with an average cap rate of 6.69%.
That to me suggests that IOF's portfolio might not return strong fair value gains as it has done in the past and despite it owning premium properties, it might be a riskier bet given it's a more concentrated portfolio.
Looking ahead, management have maintained their FY 2018 guidance of 2% net property income growth and a full year distribution forecast of 20.3 cents per unit, a yield of 4.7% on the current share price.
