Why are public listed property companies reporting big losses?

Understanding the financial reports of property companies

The Background

The recent headline "$4.5 billion landlord Goodman Property Trust records $564.9m bottom-line loss" caught my eye. How could a long-established company with a gilt-edge portfolio and an excellent management team report such a loss?

To understand why companies like Goodman Property Trust and other listed property companies are reporting big losses, we need to look back to the late 1970s-1980s. 

In those days, corporate raiders like Ron Brierley would spend hours and hours going over balance sheets of public listed companies to identify undervalued assets. They would then buy all the shares in the company, 'asset strip' it by selling off the assets at their true market value and make huge profits. Despite many shareholders, often mum-and-dad investors, missing out on millions, this practice was legal at the time. Over the years, laws and regulations were introduced to put a stop to this practice. 

Accounting Practices Today

Now, property companies listed on our stock exchange must ensure their properties are always shown in the balance sheet at 'fair value.' To meet this requirement, properties are valued annually, and sometimes mid-year if property values are moving quickly in either direction.

Any difference in value is reported in the profit and loss statement. An increase in value should result in an increase in profit, and vice versa. If the drop in value is significant, the result can be a loss rather than a smaller profit.

Conclusion

When I read the report, it became clear Goodman Property Trust's bottom-line loss of $564.9 million was due to $478.4 million in property devaluations and a $290 million internalisation deal. (a complex financial arrangement).

They commented the fall in value of the portfolio was due to higher interest rates impacting yields. They further mentioned net property income had grown to more than $200 million, with rent reviews and new leasing contributing to a growth of 6.5 percent.

If we decided to get our properties valued once a year, we would all have seen a drop in value, in the last 12 months and an unrealised loss. But none of us do this. We know from year-to-year, properties go up and down in value. Over a period of time, the net result is a rise in value – one of the reasons we invest in real estate.

It is clear to me the regulations and laws imposed on public listed property companies make their business performance and balance sheets very transparent, which is a significant benefit when investing in listed property companies.