NZX and media announcement – 18 February 2014
Precinct records solid start to year
Performance summary for six months to 31 December 2013
Increase in net operating income[1] of 22% and 5.5% lift in first-half dividend
- Net profit after tax increased 67% to $39.5 million (2012: $23.6 million) following improved Auckland
occupancy, recent acquisitions, and gains on interest rate swap valuations.
- Net operating income increased 22% to $32.0 million (2012: $26.2 million) or 3.10 cents per share (cps) (2012:
2.63 cps).
- Half year dividend of 2.7 cps (2012: 2.56 cps).
Higher total portfolio occupancy of 97% (2012: 95%), improved occupancy and market rental growth in Auckland
- Across the portfolio, 30 leasing transactions covering 38,700 square meters.
- Strong Auckland office market rental growth with 24 market events (leasing and reviews), excluding Downtown
Shopping Centre secured on average at a 6% premium to June valuations, underpinned by growth in occupier demand.
- Eight market events in Wellington were secured at levels consistent with June valuations.
- Weighted average lease term across the portfolio of 5.5 years (2012: 5.5 years).
Capital management initiative
- Successfully raised $62.5 million of new equity, putting the company in a strong position to deliver on
existing development opportunities through future asset sales.
Precinct in exclusive negotiations at Wynyard Quarter
- Precinct announces today that it is in exclusive negotiations with Waterfront Auckland to become their
development partner for commercial office within the Innovation Precinct on the Auckland waterfront at Wynyard Quarter.
This development will be part of one of the country’s largest urban regeneration projects with which Precinct is excited
to be involved.
Precinct Properties New Zealand Limited (Precinct) (NZX: PCT)today reported its financial results for the six months to 31 December 2013, recording a net profit after tax of $39.5
million, up on the $23.6 million for the same period last year.
Scott Pritchard, Precinct’s CEO, said it had been a good start to what will be another active and important year for the
company when it will focus on optimising the investment portfolio, designing the Downtown Shopping Centre development,
repositioning non-core assets for disposal and participating in the Government Wellington office accommodation process.
“We are pleased to have started the year so strongly. These results put us in a good position to continue a strategy of
focusing on key assets, driving new leasing and progressing the development opportunities we have built up in the
portfolio.”
Improved Auckland occupancy and recent acquisitions contributed to a 22% increase in net operating income for the period
of $32.0 million (2012: $26.2 million).
Improved occupancy was matched by market rental growth, with leasing transactions and market reviews in Auckland secured
on average at a 6% premium to 30 June valuations. “We have been anticipating Auckland market rental growth for some time
and it is pleasing to now see this coming through. With no significant vacancy within the Auckland portfolio we expect
this trend to continue,” he said.
In Wellington, the July and August earthquakes contributed to a further increase in market awareness of the seismic
performance of Wellington’s CBD office stock with increasing demand for strong, quality buildings.
DOWNTOWN SHOPPING CENTRE
During the period Precinct also entered into negotiations with Auckland Council to coordinate the timing of works for
the City Rail Link and the Downtown Shopping Centre development. Mr Pritchard said this project will take advantage of
strong growth in demand for city centre office space and will reinvigorate the heart of the city’s main transport hub
and waterfront area.
Planning was progressing well towards a 2016 start for work when current leases in the centre expire. Precinct has
appointed a leading international master planner, Woods Bagot, to work closely with local architects, Warren and
Mahoney, in planning for this development and the company looked forward to sharing its vision for this new precinct as
planning work is completed in the second half of 2014.
WYNYARD QUARTER
Precinct is in exclusive negotiations with Waterfront Auckland to become its development partner for commercial office
property within the Innovation Precinct at Wynyard Quarter.
Non-binding commercial terms have been agreed with Waterfront Auckland, with negotiations progressing well and a
development agreement expected to be signed in the coming months. Final approval remains conditional on Precinct board
and Waterfront Auckland approval.
Wynyard Quarter is one of New Zealand’s largest urban regeneration projects and the sites in question have a land area
of approximately 1.1 hectares and the potential to develop around 46,000 square metres of gross floor area. The leasing
strategy for the sites will build upon existing efforts to create a purpose-built information communication technology
and digital media hub that brings together innovative entrepreneurs and larger scale companies as part of Auckland
Tourism Events and Economic Development’s (ATEED’s) plans for a multi-building innovation precinct in the Wynyard
Quarter.
Scott Pritchard, Precinct’s CEO, said. “Since our inception we have retained a city centre office sector specialist
strategy. This has not changed. This opportunity will complement our existing core CBD offering and allow us to widen
our client base to innovative businesses through ATEED’s planned initiatives for high-growth technology businesses. We
will also be targeting occupiers whose preference is for low rise, larger floor plate accommodation but with all the
benefits of a central city location.”
“The proposed partnership structure provides for a staged approach including a pre-paid leasehold structure.”
Mr Pritchard said, "Waterfront Auckland have already made huge progress in transforming Wynyard Quarter into one of
Auckland’s most exciting precincts for businesses and the public alike. Wynyard Quarter will benefit further over the
coming years from considerable public and private investment and its location within close proximity to the core CBD.
These factors should attract occupiers and ensure the success of the commercial development.”
Precinct’s previously announced programme of recycling capital out of its existing portfolio will provide funding for
this opportunity, taking advantage of strong investment market conditions and a lack of competing stock.
INTERIM RESULT OVERVIEW
Rental revenue for the six months was up 20% to $82.6 million (2012: $68.9 million). The increase was primarily due to
new rental income from recent acquisitions, the ANZ Centre becoming fully income-producing and improved Auckland
occupancy. Excluding the impact of acquisitions and the ANZ Centre redevelopment, revenue was 3% higher than the
previous interim period.
Property expenses were $23.8 million. This was 12% higher than the previous interim period, but once adjusted for recent
acquisitions it represented a reduction of 3%.
Following the two earthquakes that struck Wellington the company engaged Holmes Consulting Group to undertake
comprehensive inspections of its buildings in the city. These found no material damage to their structural integrity and
the non-recoverable cost to repair superficial damage was minor.
Interest expense increased $4.6 million to $16.7 million, reflecting higher debt levels following the purchase of the
Downtown Shopping Centre and HSBC House and interest costs associated with the ANZ Centre redevelopment being fully
expensed.
Other expenses increased by around 13% as the size of the portfolio grew. Precinct outperformed the benchmark New
Zealand-listed property sector return (excluding Precinct) resulting in a performance fee of $1.3 million being payable
in the second quarter.
Tax expense of $3.9 million was at a similar level to the previous interim period (2012: $3.8 million) despite higher
pre-tax profit. This period’s tax expense relating to the higher profit was offset by an increase in depreciation
associated with acquisitions and recognition of a tax deduction relating to the sale of Chews Lane in 2011 which reduced
tax expense by around $1.2 million.
The fair value gain in interest rate swaps of $10.6 million (2012: $1.7 million) reflected the increase in market
interest rates since 30 June 2013 and the unwinding of interest rate positions.
An internal review of the 30 June 2013 valuations was undertaken in accordance with our accounting policies. It
indicated no material value movement in the period. The 31 December 2013 investment property book values were consistent
with Precinct’s policy of carrying investment property at fair value.
Precinct’s NTA per share at balance date increased to one dollar per share, compared with 99 cents per share as last
reported. The increase in NTA mainly reflected fair value gain in interest rate swaps and Precinct’s policy of retaining
earnings.
CAPITAL MANAGEMENT
Two equity initiatives were undertaken in the period. The proceeds from a $50 million placement and a $12.5 million
share purchase plan were used to repay bank borrowings which reduced to $556 million (2012: $603 million). Precinct’s
gearing decreased to 34.1% (30 June 2013: 37.3%).
Precinct’s existing bank debt facilities were also reduced during the period to $610 million (30 June 2013: $660
million) as the company carried excess funding capacity following the successful equity issues. The 2016 tranche was
reduced resulting in a weighted average term to expiry at31 December of 3.6 years (30 June 2013: 4.0 years).
Of Precinct’s drawn bank debt, 67% (30 June 2013: 57%) was effectively hedged through the use of interest rate swaps.
This hedging resulted in a weighted average interest rate including all fees of 5.8% (30 June 2013: 5.6%) and a weighted
average term of 2.4 years (30 June 2013: 2.2 years).
PORTFOLIO PERFORMANCE
As noted, portfolio occupancy was maintained at 97% (30 June 2013: 97%) and new leasing was secured at a 3% premium to
valuations.
In Auckland, we started the year with income generating occupancy of 97%, significantly higher than at the same time
last year. After allowing for recent acquisitions and the ANZ Centre redevelopment, this improved position led to a 19%
increase in Auckland’s net property income compared to the previous interim period.
The Auckland portfolio is now almost fully occupied with only 600 square metres of office space available in the city.
HSBC House, which was acquired in May 2013 and had benefited from a six-month vendor underwrite, is now 100% occupied.
2,500 square metres of space within the building has been secured at a premium to 30 June valuations.
In Wellington, continued success at State Insurance Tower has led to the portfolio being 96% occupied. With the
strengthening works in the former Central Police Station com and reinstatement works almost complete, further leasing
progress is anticipated in the next 12 months. Precinct has responded to the first stage of the Government office
accommodation RFP for Bowen Campus, 1-3 The Terrace, Pastoral House and Mayfair House.
In total, 30 leasing transactions covering 38,700 square metres were secured in the period this helped maintain a strong
portfolio WALT of 5.5 years.
Precinct settled 5,200 square metres of market rent reviews at a 6% premium to valuation in the period. Across the 6,800
square metres of rent reviews, we saw an increase in passing rents of around 2%.
OFFICE MARKET UPDATE
The outlook for prime CBD office stock continues to firm as vacancy remains at low levels. According to CBRE, Auckland
Prime CBD vacancy decreased from 6.0% to 4.0% in the six months to December 2013. As a result, most research houses are
forecasting meaningful rental growth over 2014, consistent with recent leasing transactions in the Auckland portfolio.
Wellington’s Prime CBD vacancy also continues to decrease, with vacancy reducing from 2.9% to 1.2% over the six months
to December 2013. The Wellington portfolio is positioned well given low levels of prime supply and a concentration of
leasing activity for well-located, seismically strong buildings. A key consideration for the Wellington market is the
Government’s accommodation plans.
DIVIDEND PAYMENT
Precinct shareholders will receive a second-quarter dividend of 1.35 cents per share plus imputation credits of 0.21567
cents per share. Offshore investors will receive an additional supplementary dividend of 0.09787 cents per share to
offset non-resident withholding tax. The record date is 6 March 2014. Payment will be made on 20 March 2014.
EARNINGS AND OUTLOOK
Precinct is well positioned to capture earnings growth in the medium term with the portfolio no longer over-rented and
an expectation in Auckland of sound market rental growth. Earnings growth however will lag market due to a lower level
of impending expiry and a higher weighting to structured leases.
In Wellington, market awareness of seismic performance and our commitment to seismic upgrades is contributing to an
increase in occupier demand and an improved occupancy outlook. Sustained low prime vacancy rates and price stability
returning to the insurance market should provide for some modest rental growth in the medium term.
Guidance for the 2014 financial year remains unchanged with full-year operating earnings after tax expected to be around
6.2 cents per share (before performance fees) or 6.0 cps (assuming 50% of the maximum performance fee is payable).
Dividend guidance for the 2014 financial year also remains unchanged at 5.4 cents per share, consistent with the 90% pay
out dividend policy.
ENDS