Core earnings disappoint as interest costs erode strong rents Great Eagle Holdings is banking on a proposed asset spin-off to slash its hefty debts and fuel earnings, after last year's robust rental growth was largely overshadowed by a sharp rise in interest expenses. The property investor, which aims to raise up to $5.46 billion by floating its prime office asset in a real estate investment trust this year, saw last year's core earnings edge up only 5.75 per cent despite a 70 per cent rally in its Hong Kong rental revenue. 'The significant rise in interest rates during the past year adversely affected the group's financial results, although the impact was mitigated by the incremental revenue from Langham Place,' deputy chairman and managing director Lo Ka-shui said. 'Looking forward, interest rates are likely to move further upwards in the coming months. Nonetheless, we remain committed to our goal to significantly reduce our financial gearing through asset divestiture, to enhance our financial manoeuvrability.' Although the company transformed a once-seedy part of Mongkok into the popular Langham Place retail hub, the project has left a mountainous debt on its balance sheet as interest expenses surged 88.17 per cent to $760.71 million last year. Net attributable debt stood at $14.31 billion at the end of last year, a drop of $352 million from 2004. Its gearing ratio was 59 per cent. Great Eagle's core earnings totalled $330.12 million last year, falling short of the mean estimate of $436.71 million in a Thomson Financial survey. Including a revaluation gain of $12.87 billion on its investment properties, net profit soared 223 per cent to $10.02 billion or $16.93 per share from $3.1 billion or $5.28 per share in 2004. A final dividend of 20 cents was declared. 'If Great Eagle gets a reit through, then it changes the whole capital structure of the company. What has held this company back is its relatively high gearing and the concerns of its interest coverage,' CLSA head of regional property research John Saunders said. The proposed reit, dubbed the Champion Reit, comprises the grade A Citibank Plaza in Central. It is expected to gain conditional approval from the Securities and Futures Commission this week after the stock exchange approved the spin-off plan earlier this month, sources have said. Riding on the robust demand in the leasing market last year, Great Eagle saw rental revenue for its Hong Kong properties jump sharply by 70.45 per cent to $788.5 million. However, rental at its flagship office property Citibank Plaza slid to $330.5 million from $335.3 million because the management was selective on tenants. Rental at its retail flagship Langham Place contributed $362.6 million, nearly a tenfold increase. This helped boost total turnover to rise 24.42 per cent to $3.52 billion. Shares of Great Eagle surged 6.09 per cent to close at $30.45 yesterday.