UPDC: High operating cost hurts earnings

As the real estate industry continues to contend with operational challenges, the harsh business environment has also impacted negatively on earnings of UACN Property Development Company Plc. Chris Ugwu writes

 

 

D

espite the current economic headwinds, the real estate development sector in Nigeria has been confronted with more challenges that have impeded the attainment of its policy objective of acting as a catalyst for the development and provision of affordable housing in the country.

 

 

Some of the challenges include delay in accessing NHF funds/dearth of long term funds. Besides, most of the PMBs continue to find it difficult to provide the required bank guarantee to access NHF.

 

 

Due to lack of understanding of the nature of business of PMBs by the public, it had been difficult for the PMBs to mobilise deposits to finance their housing projects, which are usually long term in nature. The public prefer to open savings/current accounts with deposit money banks (DMBs) rather than with PMBs, whose operations are considered to be too complicated.

 

 

The Land Use Act is another major challenge, which has made the process of perfecting title to landed property burdensome, slow and costly. This has affected negatively the foreclosure procedures on the properties pledged as collateral.

 

 

The high foreign exchange content of imported building materials such as cement, tiles and ceramic wares, among others, has also made housing non-affordable for the average and low income earners, which has affected the profit margin of the mortgage companies.

 

 

However, while it is accepted generally that the overall economic and business climate is a mixed bag due to mounting economic challenges, UACN Property Development Company Plc like its competitors is not insulated. The company remains susceptible to the challenges facing the mortgage business in Nigeria.

 

 

Due to crisis in the nation’s economy, the company has maintained a loss position significant number of times despite predictions by experts that the real estate firms would begin to weather the storm following improvement in micro economy. This also reflected on the share price, which closed last Friday at 99 kobo from N1.66 per share reported in March 2019, hence a drop of 67 kobo or 40.4 per cent.

 

 

Financials

 

According to the company in a statement, UPDC posted revenue of N2.3 billion (same as Group due to reclassification of UPDC Hotels Limited as held for sale) as against 2017 revenue of N3.9 billion (same as Group). Loss before taxation (LBT) for the Group was N15.2 billion as against N3.1 billion in 2017.

 

 

“Losses for the year were largely on account of non-cash mark to market losses on our portfolio of assets, as well as, losses on sale of assets below carrying value.

 

 

“The company was successful in reducing overall levels of interest bearing debt from N19.2 billion as at December 2017 to N18.5 billion as at December 2018. Lower debt levels together with obtaining borrowing on more favourable terms resulted in a decline in Finance Cost from N5.5 billion in 2017 to N4.8 billion in 2018,” the company noted.

 

 

Its unaudited first quarter results for the period ended March 31, 2019 showed that  revenue declined by -14.11 per cent to N507.74 million from N591 million in the previous quarter.

 

 

Loss before tax grew by 29.81per cent to N967.72 million from N745.468 million while loss after tax grew by 14.05 per cent to N1.02 billion from N899.616 million

 

 

 

 

Net Assets also declined by 5.7 per cent to N17.02 billion from N18.05 billion as at 31st December, 2018.

 

 

The unaudited second quarter results for the period ended June 30, 2019 revealed that revenue grew by +24.32 per cent to N1.49 billion from N1.20 billion in the previous quarter. Loss before tax stood at N779.56 million from N1.525 billion. Loss after tax stood at N933 million from N1.833 billion. Net Assets also declined by 7.1 per cent to N16.76 billion from N18.05 billon as at 31st December, 2018.

 

 

For the third quarter ended 2019, the property company reported a loss after tax of N14.651 billion from N4.760 billion in 2018. Loss before tax stood at N14.385 billion from N4.529 billion in 2018 while operating loss was N385.862 million from N490.986 billion in 2018.

 

 

UACN Property Development Company reported a loss after tax of N16.257 billion for the financial year ended 31, December 2019 as against a loss of N15.057 billion posted in 2018.

 

 

Loss before tax stood at N16.520 billion in 2019 compared to a loss of N9.214 billion in 2018. Operating loss was N1.782 billion from N3.145 billion in 2018. Revenue dropped by 7.64 per cent  from N2.303 billion to N2.127 billion in 2019 while cost of sales stood at  N2.951 billion from N3.165 billion in 2018.

 

 

Operational challenges

 

 

The company had last year at an AGM said: “The National Bureau of Statistics’ GDP report has showed a further shrinking in the real estate sector. The real estate sector in Nigeria has now been in the negative territory for at least 12 consecutive quarters.

 

 

“Although Nigeria started recovering from recession in Q2 of 2017, the sector is still lagging behind in economic performance. The real estate sector has continued to contract in 2018. Growth in this sector has been hampered by high borrowing costs, defaults in payment of rent service charge, low demand for properties, and reduced construction activities.”

 

Plan for recapitalisation

 

 

The Boards of Directors of UAC of Nigeria Plc (UAC) and (UPDC), recently jointly announced plans to carry out some strategic initiatives involving a recapitalisation and restructuring of UPDC.

 

 

These initiatives are subject to the review and approval of the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), and shareholders of both companies.

 

 

As part of UPDC’s initiatives, it commenced operations as a department and subsequently a division within UAC focused on managing UAC’s real estate holdings. In 1997, UPDC was incorporated as a public limited liability company and certain assets held by UAC were transferred to UPDC via a scheme of arrangement: UPDC’s shares were listed on The NSE on 19 November 1998.

 

 

Over the years, UPDC grew to become one of Nigeria’s leading indigenous real estate companies, engaged in a broad range of activities including property development for sale and lease, facilities management, hospitality and retail. UPDC has built a long-standing track record, having completed multiple landmark residential and commercial developments.

 

 

UPDC’s recent expansion coincided with the recession that impacted Nigeria in 2016 affecting overall economic activity. The real estate sector was particularly affected with significant declines in asset values and rental rates. Nigeria’s broader economy emerged from recession in Q4 2017; however, the real estate sector has continued to struggle, with declining investment values, reduced demand for assets, and high vacancy rates. UPDC has been negatively impacted by the extended decline in the Nigerian real estate sector recording losses annually since 2016. In addition, the Company struggles with high levels of debt, which combined with declining revenues and profitability have resulted in cashflow challenges to meet its obligations. UPDC’s underperformance has resulted in a decline in equity value and restricted the Company’s ability to pay dividends.

 

 

The board and management at UPDC have focused on developing strategies to stabilize UPDC’s capital structure and unlock value for shareholders. Two significant strategic initiatives are currently proposed, a recapitalization and a concurrent restructuring.

 

 

The recapitalisation involves an equity capital raise of N15.96 billion by way of a rights issue to repay its short-term debt obligations. For UPDC to attain sustainability, the focus is on reducing outstanding debt to a level at which it is serviceable from recurring cash flows. This will require a significant cash injection which is to be raised through the Rights Issue.

 

 

Post the Rights Issue, UPDC’s only interest-bearing obligation will be its long-term bond with total outstanding balance of N4.3 billion.

 

 

Looking ahead

 

 

Nigerian real estate sector is expected to grow at 2.65 per cent in 2020, Northcourt, a real estate investment solutions company, has said in a report released recently.

 

 

Economic factors such as the low, but improving purchasing power, demand for indirect commercial real estate, improved construction activities, adoption of technology in construction, and real estate management, are some of the factors highlighted by the real estate firm to shape the industry growth.

 

 

“The Nigerian real estate industry as a whole is stabilising and it has the potential to fully stabilise and report growth in 2020, and this is because it is recovering from the effect of the recession,” Ayo Ibaru, COO /Director of Northcourt, said.

 

 

Despite exiting 12 consecutive quarters of recession in the first quarter of 2019, Nigerian real estate was hit by slow economic growth, lack of liquidity and dampened purchasing power and thus ended the year on a negative but stabilising mode.

 

 

Nigeria’s economic growth of 2.28 perc ent eluded the real estate sector which contracted by 2.31 percent in the third quarter of 2019. Although lower than the growth reported in the first quarter of 2019, the third-quarter performance was the highest in six months.

 

 

Speaking about the subsectors in Nigeria’s property market where opportunities lie for industry players in 2020, Tayo Odunsi, the CEO of Northcourt cited smaller housing units under residential, focus on family entertainment features for hospitality while for office, improved occupancy rates coupled with increased migration of tenants to new Grade A office buildings would be an area to focus for good returns.

 

 

Last line

 

With the current housing deficit in the country, it is pertinent that government accedes to clamour from operators to overhaul the housing finance system, especially strict financing laws and weak banking structures that have led to volatile markets and made investors reluctant to do business in such trying market conditions.

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