Analysis Of Equity And Capital Structure Of Real Estate Firms Listed On ASX

Selecting Public Limited Companies Listed on ASX

Capital structure of any business firm can be defined as the funding of its operating and investing activities through various types of funds. These funds can be classified mainly into two forms – equity capital and debt capital. Equity capital is accumulated from the owners of the business, whereas, debt capital is collected from different third parties (Robb & Robinson, 2014). It is very essential for a business firm to maintain a proper capital structure to continue the operations properly.

The total equity, which is one of the most important source of capital financing, is the liability to the owners of the business. For the company form of businesses, it is attributable to the shareholders of the company (Jõeveer, 2013). The total equity is consisted of different elements of equity capital. Some of the elements, such as, share capital, retained earnings, general reserve etc. are directly attributed to the shareholders. On the other hand, some equity funds, which are created for some specific purposes, for example, asset revaluation reserve, capital reserve etc., are indirectly related to the owners and can only be paid back to them at the time of liquidation of the business.

In this report, four real estate companies, namely, Divine Limited, Dexus, Centuria Metropolitan Reit and Charter Hall Retail Reit, have been selected to analyse the capital structures and the movements of various equity elements.

As discussed above, the total equity is comprised of different types of equity funds. However, it is not necessary that all the companies must have same elements. The two elements, which are common for all companies, are share capital and retained earnings or accumulated profit/loss. The other elements may vary from company to company (Ampenberger et al., 2013). The equity capital structures of the four selected companies also indicate the same, which are discussed below:

The equity capital structure of Devine Limited includes contributed equity, reserves and accumulated losses. Contributed equity is the capital fund, collected by issuing equity shares and the reserve is created for the share based payment expenses and benefits. Accumulated losses have been generated from the losses from the operating activities year by year.

Devine
Contributed Equity	292367	292367	292367	292367	0%	0.00%	0%
Reserves	161	355	331	336	-120%	-6.76%	2%
Accumulated Losses	-43893	-79917	-117806	-146198	82%	47.41%	24%

From the table, it can be stated that the company has not issued any equity share over the four years and hence, share capital has remained unchanged. The reserves have increased, which denotes that the company have paid more share based payment expenses over the years. However, as the company has incurred net loss in every from 2014 to 2018, the accumulated losses have rise up drastically, which is not a positive sign for the company.

Dexus maintains almost same equity structure as Devine limited. However, apart from share based payment reserve, its reserve also includes asset revaluation reserve, cash-flow hedge reserve and treasury securities reserve. The movements in the equity structure of Dexus over last four years are shown below:

Dexus
Contributed Equity	1833.4	1990.6	1984	2126.7	9%	-0.33%	7%
Reserves	-9.3	8.6	9.1	6.9	192%	5.81%	-24%
Retained Profits	193	190.3	321.7	427.2	-1%	69.05%	33%

The company has issued equity shares in 2015 and 2017, which has led to increase in contributed equity, whereas, due to share re-purchase on 2016, it has decreased from the previous year. The amount of reserves has increased significantly from 2014 due to profits in asset revaluation, cash flow hedge, security payment expenses and treasury securities (Jain, Singh & Yadav, 2013). However, in 2017, the company has earned lower profits from cash flow hedges and provided higher benefits for treasury securities in comparison to 20 6, which has caused mild fall in reserve amount. As the result of the net profits, earned in 2016 and 2017, the company has been able to increase its retained profits for the last two years.

Understanding Equity Items and Changes

Apart from the common elements, i.e, share capital or issued capital and retained profits, the total equity of Centuria Metropolitan REIT includes non-controlling interest. It can be defined as the amount payable to or receivable from the minority shareholders of subsidiary companies.

CMA
Issued Capital	29255.257	129110.151	129328	397637	341%	0.17%	207%
Retained Earnings	-6357.569	-4383.713	22902	11564	31%	622.43%	-50%
Non-Controlling Interest	20269.395	110529.922	119250		445%	7.89%	-100%

Consecutive increase in the issued capital of the company indicates that it has generated huge capital funds through issuance of share capital in last three years. Moreover, the profits, generated in 2015 and 2016 has also helped the company to turn its negative retained earnings to positive. However, though it has earned profits in 2017, the retained earnings has decreased, comparing to last year, due to distribution of dividends to its shareholders (Serfling, 2016). The non-controlling interest had increased in 2015 and 2016 and in 2017, it has become nil. It depicts that the company has collected all the receivables from the minority shareholders of its subsidiaries.

Charter Hall Retail REIT finances its equity capital through contributed equity, reserves and accumulated losses. The following table shows that the company has generated capital funds by issuing equity shares on 2015 and 2016, but any further issuance has not occurred in 2017. The reserve, which is comprised of foreign currency translation reserve and cash flow hedge reserve, has been negative in each year, though it has decreased over the period (Chen, Wang & Zhou, 2014). It has become possible as the company has recovered the losses from foreign exchange translation and cash flow hedging in the recent years. The company has generated profits in 2015, 2016 and 2017, which has helped to decrease the accumulated losses also.

CQR
Contributed Equity	2127	2153.3	2269.6	2276.3	1%	5.40%	0%
Reserves	-8.8	-0.1	-1.3	-3.4	99%	1200.00%	162%
Accumulated Losses	-863.1	-803.5	-736.1	-598.4	-7%	-8.39%	-19%

Debt-to-equity ratio can be very helpful to describe the capital structure of any company. It denotes the proportion of debts, used for financing the total capital of a company relative to the proportion of total equity. Hence, the debt-to-equity ratios of the four companies are compared below in the following graph:

                   

The graph shows that except the Dexus, debt-to-equity ratios of all other companies are lower than 1. Hence, it can be stated that except Dexus, all other companies have used more equity capital to finance its total assets than debt capital.

Conclusion:

It can be concluded that Centuria has maintained its capital structure properly in comparison to other companies and also raised relatively more funds through share issuance. It has helped the company in operational activities and to maintain the profit margins steady. Whereas, Devine and Charter Hall have not issued shares significantly over the period and are still suffering from accumulated losses. On the other hand, though Dexus has also earned profits over the period, it has higher debts, which should be lower down at earliest. Otherwise, in future it may create several issues, such as, increase in interest expense, decrease in profit margins etc.

Reference:

Ampenberger, M., Schmid, T., Achleitner, A. K., & Kaserer, C. (2013). Capital structure decisions in family firms: empirical evidence from a bank-based economy. Review of Managerial Science, 7(3), 247-275.

Chen, H., Wang, H., & Zhou, H. (2014). Stock return volatility and capital structure decisions.

Jain, P. K., Singh, S., & Yadav, S. S. (2013). Capital Structure Decisions. In Financial Management Practices (pp. 77-158). Springer, India.

Jõeveer, K. (2013). What do we know about the capital structure of small firms?. Small Business Economics, 41(2), 479-501.

Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 27(1), 153-179.

Serfling, M. (2016). Firing costs and capital structure decisions. The Journal of Finance, 71(5), 2239-2286.