Big Shopping Centers published its second quarter report. One line in it stands apart from anything we have seen this season, and it is worth understanding before looking at the rest.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 714.7 | |
| Gross profit | 524.8 | 73.4% |
| Operating profit | 853.8 | 119.5% |
| Pre-tax profit | 516.0 | 72.2% |
| Net profit | 428.4 | 59.9% |
| Attributable to shareholders | 366.3 | |
| Non-controlling interests | 62.1 | |
| Basic earnings per share | NIS 14.47 | |
| Total assets | 45,174 | |
| Equity | 15,614 |
The Line That Stands Apart
Operating profit is larger than revenue.
NIS 853.8 million of operating profit, on revenue of NIS 714.7 million. And larger than gross profit too, by NIS 329.1 million.
And this is not an error - it is an income-producing property company.
Under the accounting rules, investment property is measured at fair value, not at cost less depreciation. **When the value of the assets rises, the difference is booked to the income statement
- above the operating line.**
So Big's operating line is made up of two entirely different things: the profit from running the centres - rent less costs - and an accounting increase in the value of the assets themselves.
And the gap between gross and operating, NIS 329.1 million, is mostly the second. It is profit recorded in the books that did not enter the bank account.
This is the same phenomenon we saw this season at Amot, Afi Properties and Melisron - and here it is on another scale. At Melisron operating profit was NIS 559 million on revenue of NIS 588 million; here it passed revenue.
And What Happens Below the Operating Line
From NIS 853.8 million of operating profit, NIS 516.0 million was left pre-tax.
That is, NIS 337.8 million came off - about 40% of operating profit.
This is mostly financing, and it is the other side of the same coin: income-producing property is built and bought with debt. A balance sheet of NIS 45.17 billion against equity of NIS 15.61 billion means about NIS 29.6 billion is liabilities.
So it is worth holding both lines together.
The revaluation adds to operating profit, and the debt that financed those same assets takes away below it.
The first depends on an appraisal; the second is an actual payment. The financing expense leaves the company every quarter, whether asset values rose or fell.
Which means the figure describing the ongoing business is neither operating profit nor net profit, but gross profit - NIS 524.8 million, or 73.4% of revenue. That is the margin from running the centres themselves.
The Tax and the Split
Pre-tax profit of NIS 516.0 million and net profit of NIS 428.4 - meaning tax of NIS 87.7 million, an effective rate of 17.0%.
That is below the Israeli corporate rate of 23%. At income-producing property companies this is a familiar situation: part of the increase in value is not a taxable event until an actual sale, so the accounting tax on a profit that includes revaluation is below the statutory rate.
And of the net profit, NIS 62.1 million was booked to non-controlling interests, and NIS 366.3 million to Big's shareholders.
The Balance Sheet
| Total assets | NIS 45,174 million |
| Equity | NIS 15,614 million |
| Leverage ratio | 2.9 to one |
| Return on equity, annualised | about 9.4% |
Leverage of 2.9 is a relatively conservative level in this industry, where ratios of 3.5 to 4 are not unusual.
And the return on equity, about 9.4%, is computed on profit attributable to shareholders - NIS 366.3 million times four, over equity of NIS 15,614 million.
And it is worth remembering what is inside it: that return rests on a quarter in which revaluation contributed hundreds of millions. Without it, it would be materially lower.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is the cleanest case this season for explaining why operating profit at an income-producing property company must not be read the way it is at an industrial one.
Operating profit of 119.5% of revenue is not efficiency - it is accounting. At an industrial business such a figure is impossible; here it arises because the increase in asset values is booked to the same line that holds the profit from running them.
So I read this report from both ends. From the top - gross profit, NIS 524.8 million, which is the money the centres themselves generate. From the bottom - the financing expense, NIS 337.8 million, which is the fixed price of the debt that holds them. What sits between them is an estimate, not cash.
And what interests me in that combination: gross profit covers the financing expense comfortably
- 524.8 against 337.8. That says the ongoing business carries the debt structure without leaning on the revaluation, and that is the test I apply to every income-producing property company.
And what I would follow: not the size of the revaluation, but its direction. Revaluation works both ways, and in a quarter when the commercial property market cools, the same line that added NIS 329 million here could take away a similar sum - while the financing expense stays exactly where it is.
(An important note: this is my personal opinion only, and nothing here is a recommendation to take any action.)
