PCT
07/11/2014 09:46
ADDRESS
REL: 0946 HRS Precinct Properties New Zealand Limited
ADDRESS: PCT: Precinct 2014 AGM Chairman and CEO Address
Precinct Properties New Zealand Limited Annual General Meeting
10:00am (New Zealand time), Friday 7 November 2014
Crowne Plaza, 128 Albert Street, Auckland
Chairman's Opening address
Good morning. It is good to see you here today. My name is Craig Stobo. As
Precinct's Chairman it is my pleasure to welcome you to our annual meeting.
And also to do so when your company has had another good year.
As a Board we are very happy the company has continued to build a stronger
position across our portfolio. This is in large part thanks to continued good
execution against a clear strategy. We remain positive about the company's
direction and the opportunities it is developing.
Board and Executive
Before going any further, let me introduce your Board and Executive Team here
with me today.
I would also like to welcome our company representatives here today from our
auditors, Ernst & Young, our tax advisors, KPMG, our solicitors, Russell
McVeagh and of course many Precinct staff members.
It has been a year of growth and change, and we have also seen changes in
your Board.
Post-balance date Rob Walker, who I welcome here today, stepped down from the
Board. Rob, who had been the alternate director for Mohammed Al Nuaimi, has
over a number of years made a real contribution to the success of Precinct.
We wish him well.
Replacing Rob as alternate for Mohammed we welcome Anthony Bertoldi to the
Board. Anthony has 19 years of experience in the property industry including
5 years as CEO of the ING Retail Property Fund in Australia. This extensive
retail expertise and experience will strengthen the Board as we look to
execute on the Downtown project.
Results
As you can see from this slide, the company had a good year.
Net profit after tax for the year was $117.2 million. This included a $47.5
million revaluation and other non-cash items. After allowing for these items
our net operating income was $63.8 million. This is around 9% higher than in
2013 and reflects improved occupancy in the portfolio, increasing market
rents and recent acquisitions.
The momentum of the business in recent years and improving market conditions
allowed us to increase the dividend paid to shareholders in FY14 by 5.5%.
These solid results also came as we advanced a vision for lifting the quality
of our portfolio, focusing squarely on key opportunities and quality
execution and risk management.
Financial position
We also maintained a strong financial position. We reduced gearing from 37%
to 33.8%. We raised $62 million from two successful equity initiatives. Our
portfolio gained $47.5 million in revaluation to reach $1.73 billion.
Importantly this revaluation gain came not just from yield compression but
also from strong market rental growth.
This revaluation helped lift our net tangible assets by 5.1% to $1.04.
We generated a total return for the year of 8.9%. This compared to the sector
total return, excluding Precinct, of 8.0%.
This week we announced that we will borrow around $100 million from the
United States Private Placement market or the USPP market as it is more
commonly known.
The US dollar issuance comprised two tranches, a $50 million 10 year note and
a $25 million 12 year note. This type of term is just not available from bank
debt or the New Zealand bond market and sees our weighted average debt
maturity increase by 1 year to 4.5 years. The USPP market is large and
sophisticated so to have gained access to this market from a funding
perspective is very positive for our business. This transaction is a first
for the New Zealand property sector and strengthens our capital structure by
adding valuable diversity as we look to execute on our strategy.
Our Vision
The vision set out on this slide builds on a strategy we adopted in 2011.
We determined we would grow by being true to our point of difference as
specialist investors in quality CBD real estate.
We undertook a comprehensive review of our assets and classified them as
either active, strategic, core or non-core, as shown on the slide. Active and
strategic assets are those assets with significant existing value or future
value upside. These assets are central to our vision. Core assets are well
located prime assets that fit firmly within our strategy. Non-core assets
however are those assets that are generally considered lower quality and
relative to the rest of the portfolio are sub optimal.
We recognised the need to recycle funds out of non-core assets and to
reweight the majority of our portfolio to Auckland.
Three years on we have continued to deliver on, and see benefits from, this
strategy. And in the coming year we will continue to focus on progressing
the asset sales programme, maintaining high occupancy and ensuring our
remaining portfolio continues to perform well.
We are also continuing to focus on creating our own quality assets by
developing unique precincts in unparalleled locations.
As clients grow, or want to move on to bigger space, we want to move with
them, offering them quality options and a high level of flexibility which is
unique from an owner.
For example, we anticipate that both the new Downtown building and the new
buildings at Wynyard Quarter will become new offices for some of Precinct's
existing clients.
Anticipated Benefits
This slide shows our goals for 2020 and for improved long term earnings.
Currently the average quality of our portfolio is considered "A grade" by
market standards. By 2020 we want our average standard to be "premium". By
2020 the current portfolio will have an average age of 26 years and by
comparison under the 2020 vision we are aiming to reduce this to around 15
years.
A higher quality, younger portfolio will bring operational benefits in
reduced maintenance, improved client retention and ultimately higher rent
levels.
Words like "unique" and "unrivalled" are often bandied about. But when you
look at Bowen Campus, Wynyard Central and the Downtown precinct there are
simply very few other office development sites in New Zealand or globally
that compare. It is an additional gain that around half the portfolio is now
on Auckland's highly attractive CBD waterfront.
Outlook and Dividend
Selling assets will in the shorter term reduce rental income while we reduce
our debt levels.
But while we progress the sales programme and pre-fund planned developments
we also plan to maintain dividends.
Auckland's strong office market will help maintain portfolio earnings and we
will work to keep occupancy high in tight markets where we are enjoying
strong demand. We will also benefit from a changed tax position while we
recycle much of the portfolio.
The 2015 first quarter dividend of 1.35 cents per share is in line with
guidance and will be paid on 11 December.
Board Focus
There are genuinely exciting prospects ahead for the company. But as a Board
we remain focused on ensuring growth is closely managed.
It's worth remembering the assets we are planning to develop are currently
earning income. They are not bare land. Before moving to development the
Board will want to be satisfied we have appropriate levels of pre-commitments
from future occupiers.
We will follow proven, pragmatic approaches. We look forward confidently to
further gains in the coming year.
I will now ask Scott Pritchard, Precinct's Chief Executive Officer, to take
you through the year in executing the company's strategy.
Thank you.
Scott Pritchard, CEO
Positioning the portfolio
Thank you Craig.
I agree with the Chairman's sentiments about the position that the business
now finds itself following a number of years with a clear and concise
strategy.
From my perspective, it is the existence of this strategy and the clarity of
it, which sets Precinct apart from it's peers. Precinct's strategy includes;
- Sector specialist in CBD based real estate
- Being expert in it's field - a consequence of being sector specialists
- Establishing long term business partnerships with occupiers
- Creating its own assets through development activities which improve the
Portfolio and retain clients.
To help deliver on our strategy we have strengthened our executive team with
three recent appointments. We welcomed Davida Dunphy as the new General
Counsel and Company Secretary, Kym Bunting as the new General Manager of
Property and Andrew Buckingham to the newly created role of General Manager
of Development. Andrews's involvement with the development of Sylvia Park and
the recently completed ASB building located at Wynyard Quarter will be
valuable as we look to execute on Downtown and Wynyard Central. I will talk
shortly about these projects but before I do I would like to cover the year
just gone.
Key metrics
As always, the numbers tell much of the story. And the ones you see on this
slide confirm it has been another good year.
At 98%, occupancy is well above our historical average of 96.5%. We signed
57,000 square metres in 61 deals. As evidenced by this chart we have now seen
occupancy increase steadily over the past 5 years.
Our weighted average lease term remains strong at 5.4 years. We expect that
this will likely reduce further in the short term before once again extending
out following the commencement of our development activities at Wynyard,
Bowen and Downtown.
Operational Update
Occupancy within the Wellington portfolio has remained strong and is
currently around 97%. We experienced an increase in enquiry levels which led
to a number of new leasing deals.
During the year we completed extensive upgrades of 80 The Terrace and the
former Central City Police Station in Wellington. 80 The Terrace has now been
completely repositioned and the success of this refurbishment project has led
to the building being almost fully leased. Works at the former Central City
Police Station have seen the buildings seismic rating improve significantly.
These gains reflected a tightening market which benefitted our portfolio,
with "A" grade vacancies in the city falling from 4% last year to around 2%.
In Auckland we have seen a further increase in demand for space, particularly
in prime and A-grade buildings. Following further success in our Auckland
portfolio we are now around 99% occupied.
Most pleasingly, we are now seeing strong growth in passing rents when new
leases or renewal options are exercised. Again on our rent review program, we
have completed reviews across about a third of the portfolio and have settled
those reviews at 3.5% above valuation.
Overview of Key Events
This slide takes us to some of the key events over the year.
We were pleased to enter into a development agreement with Waterfront
Auckland to develop commercial office property at Wynyard Central.
In progressing towards the planned Downtown project in Auckland we advanced
negotiations with Auckland Council on coordinating the timing of works with
building a City Rail Link tunnel at the site and the conditional sale of
Queen Elizabeth Square.
And since balance date we were pleased to be advised that Bowen Campus, and
our other assets at 1 -3 The Terrace, Pastoral House and Mayfair, have been
shortlisted by the Crown as part of the Wellington office accommodation
project.
There are no guarantees of the outcome, but we see this as an encouraging
step.
Wynyard Central Opportunity
The area shown on this slide shows the 1.1 hectare site we will be
developing at Wynyard Central.
This will be part of one of the largest urban regenerations in the country,
and we are partnering with Waterfront Auckland who have already invested
considerably in this undertaking.
The picture gives you an idea of the way business activity in the city is
increasingly following a new east-west axis on the waterfront, rather than up
and down Queen Street. We believe this waterfront axis will become
increasingly important as both private and public investment is made in the
area.
Wynyard Central
Wynyard is also highly attractive because of the structure of our
arrangement with Waterfront Auckland and because it allows us to offer a type
of space that we have never been able to provide before. As here we will be
catering to clients in high-growth tech businesses or those seeking larger
floor plates.
Development is planned over four stages. Land will be drawn at each stage.
Importantly what this means is that we will pay for land on a stage by stage
basis and only once we have de-risked the development through pre-leasing.
Development work also won't begin until we are comfortable with the level of
occupancy pre-commitment.
This structure encourages a strong partnership between ourselves and
Waterfront Auckland.
We are currently planning on beginning work at Wynyard Central in 2015 with
the commencement of stage one. This stage will consist of a new build and the
refurbishment of an adjoining character building. We are looking forward to
beginning this stage and excited by the sites potential for the future.
Bowen Campus
Made up of the Bowen State and Charles Fergusson buildings, Bowen Campus
also offers a unique position.
The site occupies approximately one hectare right next to Parliament and the
Beehive, with 30,000 square metres of net lettable area and resource consent
for 60,000 square metres of office space.
We bought the campus in 2012 for $50 million; it has been almost entirely
occupied by the Ministry of Social Development, whose lease has been extended
to October 2016. At expiry of this lease the property, which has a passing
yield of around 12%, would have generated around $25 million in net property
income.
As I've mentioned, we are encouraged that Bowen has been shortlisted as part
of the Crown's Wellington office accommodation project.
We entered into this RFP process about this time last year. It has been a big
undertaking for the Government and for ourselves. We expect to know its
outcome by the end of this calendar year.
Downtown Project
The Downtown project In Auckland provides another exceptional opportunity.
Collectively, Zurich House, the Downtown Shopping Centre, the AMP Centre,
HSBC building and the PwC Tower give us a unique two-hectare land holding on
the waterfront.
We have always known that what we have managed to secure is an incredible
opportunity. However the unique nature of the project has become more
apparent the past 6-12 months. The process of engaging international and
local architects and exploring the potential for the site has highlighted
that this site is truly unique.
We know of no other entity that owns such a prestigious position in the
centre of the county's biggest city on the waterfront. The fact the site
incorporates public transport, retail space and office space and is located
in one of Auckland's key tourism precincts is also unique.
We are determined and excited about delivering something special for
shareholders and also for Aucklander's.
Downtown
As this slide shows, the Downtown area also stands to benefit from broader
change and growth across Auckland.
The number of CBD office workers and inner city residents are forecast to
increase significantly over the coming years. This growth is built on the
back of a strong Auckland economy and increasing population growth. We
anticipate that the downtown precinct will benefit from this growth as the
core CBD continues to shift to the waterfront.
The addition of the city rail link will further enhance the site and connect
the precinct with more Aucklanders including the projects main trade area of
some 160,000 residents.
The households that make up this main trade area are some of the country's
most affluent. This catchment coupled with the adjacent cruise ship terminal
make the site a compelling retail offering with 160,000 cruise passengers
arriving or departing annually right next to the new development.
Master planning & Next Steps
The master plan has been a starting point for shaping the entire project. Our
vision is to restore the precinct as the heart of the Auckland CBD. We also
want it to have a distinctively Auckland feel.
We are very pleased with the project's concept designs and look forward to
sharing these with you and Aucklanders soon.
As I've mentioned, we are also working to confirm arrangements with the
Council and Auckland Transport soon on the CRL rail tunnel and Queen
Elizabeth Square.
Another big step will be the conversations we will have securing
pre-commitments from clients as we go into 2015.
Sales Programme
We are progressing with our asset sales programme of selling non-core assets
to recycle funds into development opportunities.
We have recently placed 80 The Terrace - an asset in Wellington - onto the
market and have been working with a number of buyers to sell SAP Tower in
Auckland.
We remain committed to selling assets from the existing portfolio to fund the
new developments.
Market Outlook
Auckland's CBD market shows every sign of continued strength where financial,
professional and administrative services are driving demand. Vacancy levels
for prime and A-grade office have reduced from around 6% a year ago to just
1.4%.
Most research houses now forecast Auckland rental growth at 4% to 7% each
year in the next two years. Not surprisingly, we have witnessed valuation
increase.
Investors, both domestic and from offshore, are also recognizing the strength
of the market in Auckland which has led to further compression in cap rates.
The Wellington market remains in good shape following a number of years with
little or no growth, and has very little vacancy as occupiers have targeted
prime and A-grade buildings.
The trend towards seismically strong and well located properties has helped
us lease all vacant space within State Insurance Tower, and all but one floor
in 80 The Terrace. We also see signs of rental growth from the Wellington
market as the number of CBD based workers begins to rise.
We agree with research houses now forecasting growth of between 1% and 4%
over the next few years in Wellington.
Outlook
We look forward to the new year ahead. We are operating in strong markets
where Wellington is improving and Auckland is showing strong gains.
Over the next two years we will progress our sales programme to remain in a
strong financial position. We will keep a primary focus on operational
performance to keep after-tax earnings and dividends at current levels, while
we reduce our debt levels.
We expect to achieve earnings of 6.2 cents per share in 2015 before
performance fees.
Looking further to the future, we look forward to the new use of our capital
bringing solid earnings and growth.
Thank you. I will now hand you back to Craig.
End CA:00257375 For:PCT Type:ADDRESS Time:2014-11-07 09:46:28
