TPL Properties Limited (PSX: TPLP) was established as a private limited company in 2007 under the Companies Ordinance, 1984. Its conducted its initial public offering in June 2016.

It is principally engaged in investing, purchasing, developing, selling, leasing or disposing off real estate assets mostly in commercial and residential asset classes. Its first project is Centre Point situated off Shaheed-e-Millat Expressway, Karachi, Pakistan.

Shareholding pattern

As of June 30, 2019, a considerable percentage of about 36 percent was held in the ‘others’ category followed by associated companies which owned about 31 percent of TPLP. Of this TPL Corp Limited held nearly 22 percent; other associated companies include TPL Holdings (Private) Limited, TPL Insurance Limited and TPL Security Services (Private) Limited. Sponsors, directors, CEO and children held about 12 percent, reducing their ownership from about 16 percent in FY16.

Historical financial performance

Due to the nature of its business, the topline of the company refers to its rental income. During FY16, its topline grew significantly by almost 57 percent year on year. This could be attributed to the company achieving 100 percent occupancy. Administrative expenses although increased in value terms, however, as a percentage of sales it had reduced from 20 percent in FY15 to 14 percent.

The company was unable to lift the profits with the same momentum as its rental income grew due to a fall in operating income, which consistently exceeds the rental income. The reduction in income was a result of decline in markup on savings accounts from Rs6 million in FY15 to Rs1 million in FY16 along with a decline in remeasurement adjustment on investment property.

In FY17, the rental income remained flat while gross and operating profits also exhibited a similar trend. Administrative expenses increased considerably in both, value terms as well as a percentage of topline as a result of additions in IT, marketing, admin and HR team. Net margins improved due to a contraction in financial charges; this was due to the elimination of short-term borrowings in the current period combined with a decline in mark up due to related parties.

Moreover, in FY17 TPLP acquired HKC Limited. The latter is engaged in ‘acquisition and development of real estate, renovation of building and letting out’. In addition, TPLP also issued about 65 million ordinary shares during the year, which caused the company’s EPS for the year to decline.

In FY18, the profitability hiked far exceeding the topline. This was on the back of unprecedented increase in operating income generated from gain on revaluation on investment property recorded at nearly Rs1.2 billion.

In FY19, margins normalised although still higher when compared to levels before FY18. The topline improved by about 10 percent year-on-year due to an upward adjustment of rental agreements with the company’s tenants. On the costs front, finance cost increased in both value terms as well as a percentage of topline due to increase in KIBOR rates.

During FY19, Securities and Exchange Commission of Pakistan granted TPLP a license to conduct REIT Management Services as a Non-Banking Finance Company. The company plans to launch REIT Fund(s) under its subsidiary TPL REIT Management Company Limited by FY21.

Quarterly results and future outlook

TPLP’s rental income increased by 25 percent during the first quarter of FY20 due to a revision of the contract with the tenants. A corresponding improvement was seen in gross profit, as a result. While gross and operating profits increased, a similar movement was not observed in net profits due to an increase in KIBOR rates and hence finance costs. This led to a 25 percent reduction in net profit year on year.

In addition, the world’s tallest mural was painted on TPLP’s first project Centre Point and was unveiled in the first quarter of FY20, on December 25, 2019.

In the years after TPLP’s IPO, the construction and real estate industry was flourishing. This was due to better security and law and order situation and more infrastructure development under CPEC among other factors. However, after FY18, with a change in government, and policies necessary to gear the economy towards stability, the business environment and sentiments altered - the investors were more cautious; this was substantiated with the fact that out of total foreign direct investment (FDI) of July and August 2019, a mere 1 percent was directed towards the construction and real estate sector.

According to the company’s annual report, the government is trying to encourage growth in the construction sector; however, it also has to abide by the global requirements such as Financial action task force (FATF). Limitations such as strict regulation for site development and the resultant disinclination of banks to expand their mortgage portfolio will have to be dealt with before this sector can reach the desired growth levels.

While commendable steps have been taken to improve security, relax visa policies to encourage tourism and attract international hotel chains, efforts are required to fix problems on the regulatory side such as centralised land registration and one stop platform to get construction permits to allow this sector take off. With the growing middle income group and greater need for housing units, the future holds potential for this sector.