Letlole blames profit decline on accounting entry

While experts quibble over the validity of fair value adjustments, Letlole has reported a 27 percent growth in rental income and new property acquisitions for the half-year ended 31 December 2020

Letlole blames profit decline on accounting entry

As the dust of a bitterly fought battle between two of the powerful ex-executives at Letlole La Rona settles, caretakers picking over the bones have found lukewarm financial performance.  However, management remains upbeat on the outlook as tenants who were behind in rentals began honouring their dues. 

The company has thus experienced a 27 percent growth in rental income for the half-year ended 31 December 2020, revenue for the period growing 27 percent above the prior year figure of P39.4 million. But the company’s profit before tax from both continuing and discontinued operations slumped by 7 percent from the prior year’s figure of P35.7 million to P33.3 million during the interim period. Letlole says this decline is mainly the result of a lower fair value gain than in the prior year.

Experts say fair value adjustments are an attempt by accounts to give a better picture of all factors that affect the income and balance sheets. But it is believed they also add a layer of ‘complication.’ In this case, only when the full-year financials are presented will they probably look a lot better than they otherwise may have been in comparison to the prior year - unless they are also adjusted. Accounting pundits say “fair value” adjustments to value of assets are put into the income statement even though they don’t mean money is being spent or received. 

Fair value is the price experts expect an asset would actually fetch in the market versus its price in the books of the company. It is said an adjustment has to be made between the two values if they differ, usually downwards. While some refer to fair value adjustments as “theoretical” others argue that although they ‘distort’ the financial performance, characterising them this way implies that they are not real.

Letlole’s fair value adjustment was P8.4 million in 2020 compared to P10.6 million in 2019 when the company owned key hotels that it has now sold to Cresta Marakanelo. Nonetheless, the investment property portfolio value increased by 26 percent and this can be largely attributable to new acquisitions. The investment portfolio, which consists of investment property and other investments, remains solid, standing now at over P1 billion. 

Letlole says it continues to pursue local and regional pipelines with caution. “LLR is in a strong financial position, with its lowly geared balance sheet presenting a significant financial headroom to raise capital to finance possible acquisitions opportunities,” the company says, adding that it remains conscious of the need to balance debt capacity and shareholder returns. 

The company’s relatively low loan to value of 23 percent enables it to leverage its existing portfolio to fund the upcoming acquisitions after which, it says, it will approach unitholders for an equity raise. 

Due to the contraction of the economy as a result of the Covid-19 pandemic, the company says it has seen its debtors’ book rising significantly. Letlole says it has focused its efforts on collection of arrears in order to improve its cash flows and thus enhance its distributions. “The company still remains able to meet its short-term and long-term obligations, with improved cash generated from operations in comparison to the prior year,” it says. Cash and cash equivalents at the end of the year were P59 million compared to P122 million at the beginning of the year.

The Board of Directors declared an interim distribution of 7.905 thebe per linked unit on 8 February 2021 in respect of the half-year period to 31 December 2020, comprising a dividend of 0.05 thebe and debenture interest of 7.855 thebe per linked unit.