Ann: ADDRESS: PCT: Precinct AGM - Chairman's

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PCT
08/11/2012 13:02
ADDRESS

REL: 1302 HRS Precinct Properties New Zealand Limited

ADDRESS: PCT: Precinct AGM - Chairman's and CEO's speech

NZX and media announcement - 8 November 2012

Precinct Properties New Zealand Limited
Chairman's and CEO's speech delivered at the 2012 Annual General Meeting,
Intercontinental Hotel, 2 Grey Street, Wellington.

Chairman's speech
Good morning ladies and gentlemen. For those of you who don't know me my name
is Craig Stobo, and as Chairman of Precinct it is my pleasure to welcome you
to our annual shareholders meeting this morning. It is particularly pleasing
to be holding our meeting in Wellington, which represents around a half of
our portfolio and is a city which we are proud to have a stake in. We not
only have buildings in Wellington, but 8 staff and of course a large portion
of our investor base.
Last year was our first AGM under a new company structure. And this year I am
very pleased to welcome you to our first under our new name, Precinct. I am
also pleased to say that despite 2012 being for a low point in Precinct's
earnings, our view is that the progress made during the year provides the
company with strong foundations for growth.
However before setting out the year's results in more detail I would first
like to introduce members of the Board and Precinct's executive team here
today.
- George Crawford, Chief Financial Officer
- Robert Walker, Alternate Director for Mohamed Alhameli
- Anthony Beverley, Director
- Graeme Horsley, Independent Director
- Graeme Wong, Independent Director
- Don Huse, Independent Director and Chairman of the Audit and Risk committee

- Rob Campbell, Director
- Scott Pritchard, Chief Executive Officer

We also have representatives here today from our auditors, Ernst & Young, our
tax advisors, KPMG, our solicitors, Russell McVeagh and of course many
Precinct staff members.
During the year we welcomed Rob Campbell and Mohamed Alhameli as directors.
Both reflect the high calibre of people and the strong set of skills on the
Board.
Rob is Chairman of Guinness Peat Group, Summerset Group Holdings and a
director of Turners and Growers.
Mohamed Alhameli, who unfortunately cannot be with us today, is a member of
the Leadership team of Haumi Company Limited. He joins the Board replacing
Mohamed Al Qubaisi and is appointed by our Manager, AMP Haumi Management
Limited.
On behalf of the Board I would like to thank our outgoing directors, Mark
Verbiest and Mohamed Al Qubaisi, for their contribution to Precinct and to
formally welcome Rob and Mohamed to the team.
As you are aware two independent directors are standing for re-election this
morning. Don Huse and Graeme Wong both joined the board two years ago
following corporatisation.
The Board prides itself on the fact that we represent you, the shareholder.
This is a direct result of the changes we made in our corporate governance
structure two years ago. Retaining a majority of Independent Directors who
are elected by shareholders ensures that decisions are made in the best
interests of all Precinct shareholders.
Of equal importance is ensuring a constructive relationship with The Manager
- AMP Haumi Management Limited. The Manager continues to provide management
services to Precinct and has once again performed strongly over the previous
12 months. I am pleased to report that the Board and the Manager are well
aligned in their focus on delivering value for Precinct shareholders. As an
example of this alignment, over the last 12 months the Manager and the
Board have worked together constructively to consider a number of acquisition
opportunities.
I am pleased to say that the outcome of these processes has been the
acquisition of two assets which the Board believes strongly enhance the
strategic positioning of the Precinct portfolio.
While the business has progressed with two strategic acquisitions, it has
also evaluated many more opportunities. Following a disciplined approach to
due diligence, the Board and Management has, on a number of occasions,
decided not to proceed with acquisition opportunities as they were not
considered to be in the best interests of Precinct shareholders.
Most importantly, this alignment has led to a solid financial performance
over the previous 12 months, which I will now focus on.
Our net profit after tax for the year was $45.1 million, a significant
improvement on the previous year.
Despite this increase, net operating income for the year declined to $51.3
million and net dividends to shareholders fell by around 8%. This outcome,
while not in itself, desirable, was in line with our expectations for the
past year for reasons I will go into shortly. Overall we were satisfied with
the performance of the company during 2012.
As mentioned earlier, 2012 also saw the company continue to execute its
strategy by acquiring two highly strategic sites and in doing so establish an
exciting platform to meet new demand from clients in the future.
These acquisitions coupled with our new identity provide good foundations for
growth and give us a lot of confidence that the business is now very well
positioned.
The year's highlights as we saw them were:
o A continued refinement of our client engagement strategies which ensures
that we are matching our world class portfolio of properties with a world
class level of service. We have made significant progress in this area,
however we still believe there is room for further improvement.
o Following our shift to a service led property business, last year we also
completed a key process of bringing all the day to day management of
Precinct's properties under one management structure. This initiative is
focused on maintaining a high quality level of service across all our
interactions with clients.
As noted previously, during the year we retained a focus on considering
strategic acquisitions. Scott will take you through these in more detail, but
the sale of the Chews Lane asset and reinvestment of those proceeds into
Bowen Campus has put us in a strong position in a key part of the Wellington
market.
o And, although it fell outside the financial year, the purchase of the
Downtown Shopping Centre in Auckland provides us with an unrivalled footprint
in a key precinct by the waterfront with very good long term potential. Both
the Bowen Campus and the Downtown Shopping Centre purchases put us in a
position of generating strong revenues from both sites, while we consider
their future development opportunities.
o The final key highlight for 2012 was the renaming of AMP NZ Office Limited
to Precinct Properties New Zealand Limited. I will discuss this in more
detail shortly.
A key part of the Board and the Executive's job is to manage risk. Aside from
all the usual challenges of any business, the three areas we have focused
most on over recent times have been dividend sustainability, financial risk
management and earthquake-related costs and concerns.
During 2012 we continued our move towards a more sustainable dividend policy.
The revised policy is consistent with international best practice and is
designed to match dividends to the recurring cash flow generated by
operations after taking into account recurring maintenance capital
expenditure.
The new policy of paying around 90% of net operating income was originally
intended to be phased in over the 2012, 2013 and 2014 financial years. It is
encouraging however that we have managed to phase in our new dividend policy
a year earlier than expected due to earnings recovering earlier than
initially anticipated. This accelerated timeframe should mean that
shareholders start to see an increase in dividend from the 2013 financial
year rather than the 2014 period which was first anticipated.
Almost two years ago we reviewed and updated our approach to financial risk
management. The objective of the revised policy is to ensure we have
sufficient funds to meet all commitments, adequate time to pursue
alternatives to refinancing and adequate headroom to withstand any potential
portfolio devaluations. A clear interest rate risk-management approach was
also adopted to minimise risks associated with interest rate movements and
help provide sustainable stable dividends.
It is pleasing that these policies have been well executed and that we find
ourselves in a strong capital management position.
As outlined this time last year, Seismic concerns are continuing to play a
big part in shaping the market. You may or may not be aware that there are
various different types and levels of assessments for structural strength you
can undertake. The property industry, government and importantly the
engineers themselves all have different measures of structural strength.
Our approach has been to appoint structural engineering adviser, Holmes
Consulting Group, to undertake a comprehensive review of all our buildings on
a "best practice" basis.  This considerably exceeds a simple level of
compliance and can ultimately lead to computer-simulated 3D modelling to
identify potential vulnerabilities. An initial review of all our buildings
has now been completed and we are now working progressively through 3D
computer modelling, where necessary, across the portfolio.
As a consequence of the seismic assessments undertaken, we anticipate
spending between $15 - $25 million over the next 5 - 8 years to strengthen
the properties. This capital will ensure that the portfolio is highly
compliant with New Build Standards.
As an example of Precinct's pro-active approach, we are currently underway
with a $3 million seismic upgrade of the former Wellington Central Police
Station. The
safety of our clients is paramount and after discovering this building did
not meet earthquake standards we immediately announced our intention to
strengthen the building and importantly met with clients to assist them to
temporarily relocate from the building.
While we have allowed costs for on-going strengthening work across our entire
portfolio, it is pleasing that an independent seismic review and advice to
date confirms we are in a strong position overall in terms of building code
compliance.
Related to increased seismic concerns and in common with all property owners,
insurance costs have also risen. Over the last two years Precinct's insurance
premiums for the portfolio have increased by 160%. However these rises appear
to be lower than market averages because of the high quality of our
portfolio. All our Auckland leases, and around 50% of Wellington's, are on a
net basis (with insurance costs recoverable from our clients), reducing the
impact of insurance rises on operating profit.
As I've noted we reported a net profit of $45.1 million. This was well up on
the profit of $10.4 million last year. The main driver of the increase was a
turnaround in the valuation of our property portfolio, from a loss of $36.3
million in 2011 to a gain of $5.5 million.
Net operating income of $51.3 million was down on the $61.1 million we earned
in 2011. This was in line with our expectations; and reflects the vacancy
created when Westpac and BNZ left the portfolio, the impact of selling Chews
Lane on rental income and also the interruption to income from the ANZ Centre
redevelopment.
A cash dividend of 5.04 cents per share was paid for the 2012 financial year,
representing a pay-out ratio of 98% of net operating income.
Once again Precinct has out-performed its peers.
We achieved a 19.3% total return for the year, which was well ahead of the
New Zealand listed property sector return (excluding Precinct) of 11.6%.
The performance fee introduced during corporatisation now rewards the Manager
only for delivering market outperformance and is directly linked to
delivering improved returns for investors and ensuring greater alignment
between the Manager and Precinct. Based on the agreed formula, we paid $3.2
million of performance fees to the Manager during the year.
As independent directors, we are accountable to you as shareholders, and our
remuneration is paid out of a shareholder approved pool of $450,000.
The remuneration paid to Directors is reviewed to market every two years, and
this process has just been completed.
As a result, the total fees paid to independent directors will increase from
$354,000 to $390,000, remaining well within the $450,000 cap.
After several years of declines in property values, valuations have now
stabilised. We had a revaluation gain of $5.5 million compared with a loss of
$36.3 million last year.
The revaluation brings the total value of our portfolio to $1.33 billion,
with net tangible assets per share of 88 cents. Following the acquisition of
the Downtown Shopping Centre, Precinct's total assets now equal $1.42
billion.
Collectively, the new and higher value of our portfolio reflected the market
revaluation, the Bowen Campus acquisition, the redevelopment of the ANZ
Centre in Auckland and the sale of Chews Lane.
Interestingly, the valuations have confirmed that the investment market is
attracting greater interest from buyers as investors look for good quality
property investments with contracted cashflows generating good yields.
The recycling of capital out of Chews Lane and into Bowen Campus was one of
the highlights of the year. The full acquisition was funded through
Precinct's existing bank debt facilities which were amended through a new
$125 million tranche expiring in July 2017 and a $50 million reduction in the
July 2013 tranche.
The amended $475 million facility had a weighted average term to expiry of
3.2 years at 30 June 2012.
During the year gearing increased to 27%, reflecting the ANZ Centre
redevelopment and the Bowen Campus acquisition. This compares with 24% at 30
June 2011.
The acquisition of the Downtown Shopping Centre post balance date was also
funded through bank debt. As a result we negotiated a new $107 million
tranche expiring in September 2017 and a new $53 million tranche expiring in
July 2015. The new facilities replace our existing bank facilities and
increase the weighted average term to expiry to around 3.7 years and the
total facility amount from $475 million to $535 million.
Following this acquisition gearing has increased to around 31.5%, and remains
well within our banking covenant of 50%. The board remains comfortable with
gearing in the mid 30% range.
By now I trust you are familiar with "Precinct" as our new name.  We are
pleased with the very positive response it has had from within the team, who
like working under the new name and from clients and others in the property
and investment community.
Personally, I like it a lot. It signals more clearly that we are an
independently run company, with the implications that has for being better
focused on delivering strong returns for our shareholders.
Making the name change was also a carefully considered decision. We wanted to
help address confusion between ourselves and AMP. While AMP retains a 50%
interest in Precinct's manager our new identity is more appropriate for the
business we have become. We also see the new name as a natural evolution that
reflects the way the business has grown and matured over the last 15 years.
When we began in 1997 we were essentially a property investment product. We
had three dedicated staff, six properties and a portfolio worth $500 million.
 Today we are a property investment business, with 27 dedicated staff and
following the acquisition of the Downtown Shopping Centre, we have 16
properties with a total value of $1.42 billion. We have become much more
client-focused, and since we corporatised are now operating under a much more
aligned structure with a greater level of corporate governance.
Precincts governance structure, with a majority of Independent Directors
coupled
with an aligned fee structure, ensures that we are well positioned to
outperform our peers.
We are pleased to move forward under our own banner.  And it is good to be
doing so in a year where we feel the company is in such a strong position.
For the 2013 financial year we expect net operating income after tax of 5.8
cents per share before performance fees, which reflects upgraded guidance
following the Downtown Shopping Centre acquisition.
We also now expect to pay a dividend of around 5.12cps for the 2013 financial
year, a slight increase on the 2012 dividend.
As shareholders you can expect a 2013 first quarter dividend of 1.28 cents
per share plus imputation credits of 0.2169 cents per share. The dividend has
a record date of the 22nd of November and will be paid on 6 December.
Thank you for your continued support.  I will now ask Scott Pritchard,
Precinct's CEO, to take you through the company's operational performance
over the last year.

CEO's speech
Thank you Craig, and can I add my own welcome to our first AGM as "Precinct".

As Craig has outlined, it has been an active year.
With the Bowen Campus acquisition and more recently the purchase of the
Downtown Shopping Centre we have secured unique and strategic sites in both
cities.
And from an operational point of view the stand-out highlight has been the
continued high level of leasing; particularly as we have continued to win
substantial clients, who are happy to commit to us for significant periods.
If you go back about two years we had a total occupancy of around 90% and
faced the imminent departure of key clients Westpac and BNZ from our
portfolio. So to have re-established occupancy back to 94% is an achievement
we are very proud of. We are now in a position to drive occupancy back to
higher historical levels of around 96% or greater.
As Craig outlined, rental income, at $127.3 million, was down 7% on last
year's income of $137 million.
After allowing for the departure of Westpac and BNZ, the sale of Chews Lane
and the foregone income at the ANZ Centre, like-for-like income was in fact
3.4% higher than in the previous year primarily due to higher occupancy
within Zurich House. And we ended the year with a solid weighted average
lease term of 5.9 years, just up on 5.8 years in 2011.
Over the last year we leased, extended or renewed around, 16% of the
portfolio, amounting to 65 leasing transactions and 46,000 square metres of
office space. This included 20,000 square metres of vacant space.
This success continued a very strong trend over the last two years, during
which time we have leased a total of 110,000 square metres, 50% more than was
achieved in the previous two years.
One key factor driving this growth has been the improved market conditions in
Auckland. And we were also helped by a continued flight to quality in
Wellington where Precinct is now strongly positioned as the owner of premium
inner city office space.
I believe another key factor has been the focus we have continued to bring to
building strong client relationships.  With a fully in-house management team
we are now in a position to really focus on understanding what our clients
need. We aim to be flexible and attempt to exceed expectations.
It was really encouraging this year to have two cross-city leasing successes,
with existing Auckland clients, AON New Zealand and Regus, committing to nine
years and ten years respectively within our State Insurance Tower and 171
Featherston Street buildings.
A more recent example of this trend is the post balance date leasing in
Wellington to the ANZ Bank who have committed to four floors of 171
Featherston Street for a term of 12 years. The ANZ will take naming rights
for this asset as they make the space their Wellington corporate office. This
transaction builds on the strong relationship we have developed with ANZ
through the redevelopment of their Auckland premises.
It was also pleasing to see that leasing transactions concluded during the
year were secured on a healthy weighted average lease term of 6.6 years.
In many ways success in our business is the same as in any other: It's a
matter of matching a good product, with really good service. In the last two
years we have made strong gains by focusing on providing better service to
our client base.  But we are also sticking to our core strength by focusing
on long term growth opportunities and on quality office properties in the
central city areas.
The move to recycle capital from Chews Lane into Bowen Campus was a perfect
illustration of this strategy in action. This initiative will see Precinct
yield greater returns from Bowen Campus in the long term compared to the
Chews Lane asset which was, in my view fully valued.  And at the same time
Bowen Campus provides us with a good income stream while we consider future
development options.
Craig touched on the key acquisitions which we made this year. I would now
like to review these in more detail as they also show how we are putting our
strategy into effect operationally.
We acquired the Bowen Campus site in April this year.  We see it as
representing a first class long term investment. It is as close as you can
get to the centre of Wellington's government precinct without actually being
in the Beehive.  It is also a chance to regenerate a Wellington icon.
We were able to buy this site at a good price which is the key to any
successful investment, with a relatively low land and building buy-in rate of
$1,400 per square metre.  A particularly satisfying aspect of this purchase
was the fact that we were able to divest  Chews Lane, and invest that money
in this site which we think will provide better long term returns.
We have a good long-standing client in the site currently.  And while we
believe this site offers terrific development potential - with resource
consent for a further 29,000 square metres of office space - we are not under
any pressure to rush into this as we are currently earning good income from
the site which is now 95% occupied.
We recently responded to a Government Request for Proposal for 50,000 to
60,000 square metres of space in Wellington for which we believe Bowen Campus
would be entirely suitable. We are currently waiting on Government's
response.
While the site retains an existing resource consent for around 60,000sqm held
in one building, we are proposing to change the design of the scheme to
provide for four distinct buildings. This would require Precinct to redevelop
two of the existing buildings and potentially build two new buildings. We
believe our proposed design changes would result in ownership of assets that
are more liquid and of a higher value than would be the case under the
existing scheme.
This strategy will also assist us in undertaking this type of activity in a
staged manner which reduces development risk and enables more efficient
capital management.
While the acquisition of the Downtown Shopping Centre fell outside the
business year, I wanted to provide an update as it is a very exciting
opportunity.  And it shows again how strongly we are building on a consistent
strategy of owning quality space in hard-to-replicate inner city sites that
offer distinctive value.
We were very pleased to be able to buy this property as it gives us a unique
position in the heart of what we see as the downtown precinct in Auckland.
This is close to Auckland's major transport hub, and adjacent to the harbour
in a part of the city that businesses really want to operate from.
The site is especially valuable to us because it adjoins our other properties
in this precinct, including the PwC Tower, Zurich House and the AMP Centre.
This means it provides some exciting options in terms of development and
potentially linking buildings or access-ways.
Obviously the site is currently functioning as a retail centre and that is
not our main investment focus. And while we see the site always retaining
some retail, we didn't buy it solely for its retail value.  The retail
operations will continue to provide good rental income, but our primary
interest is in the potential office development available at this site. It
has resource consent for an additional 50,000 square metres of office space
so it opens up some great opportunities to create highly desirable space for
the future.
In the meantime, however, just like Bowen Campus, it is generating a sound
holding income so we can plan for future development at our own speed.
Many of you will be aware that Auckland Council's City Rail Link project
plans include the construction of a rail tunnel beneath the property. This
initiative supports our desire for the downtown precinct as it is expected to
draw many more people into the location and will only enhance the precinct's
attractiveness to city centre occupiers.
We fully support Auckland Council's call in the draft city centre Master Plan
for this precinct to showcase Auckland at its best, and we are keen to work
with the Council in making this happen.
Lastly I would like to focus on the redevelopment of the ANZ Centre.
We began the ANZ project this time last year, and I see it as a very good
example of how working hard to retain a client has also enabled us to reduce
risk and build in future growth.
As you might recall we were faced with the prospect of ANZ moving to a new
build with a competitor. At a single stroke this would have meant Precinct
not only losing a very important client, but also an increasing amount of
vacant office space available in Auckland, at a time where vacancy was
already elevated.
The solution we came up with of re-investing in the building has resulted in
ANZ committing for a 15-year lease which commences in 2014.  They have also
committed to a further three floors and will now occupy 21,500 square metres
compared with their original commitment of 17,700 square metres.
This investment has also enabled us to make sure that the building remains an
Auckland landmark and to tie it in more attractively with the whole St
Patrick's area.
We are on track to complete this work on schedule in mid 2013 when we will
have a significantly refurbished building in a highly desirable central part
of the Auckland city.
As I touched on earlier, the strength of the relationship with ANZ through
this project has now also meant that Precinct has secured the ANZ in
Wellington ensuring that ANZ is now Precinct's largest client paying around
11% of our annual rent roll.
We are continuing to focus on the inner-city areas of both Auckland and
Wellington.  Each city presents its own challenges but also its own
opportunities. And we are committed to both. Bowen Campus gives us an
additional strategic holding in Wellington while the Downtown Shopping Centre
purchase has shifted our overall weighting between the two cities slightly
more towards Auckland by 3%.
Overall, Auckland commercial building activity is demonstrating a significant

recovery while we see Wellington about 12-18 months behind in a cyclical
upswing, particularly on account of seismic concerns.
As this is a Wellington audience let's talk about Wellington first.
While all of New Zealand now has a new interest in earthquake resilience
there is no doubt that seismic concerns register more deeply here in the
capital. What is fascinating about the Wellington market is that occupiers
are placing a greater emphasis on the strength of their building over the
actual cost of their annual rent, placing the safety of their staff as their
primary concern.
This puts us in a strong position as there is a "flight to quality" and
occupiers continue to target prime and A-grade quality buildings of good
strength. We have seen examples of this in the past year with our new clients
Baldwin Holdings Limited and AON New Zealand taking up space in Vodafone on
the Quay and State Insurance Tower.
While overall Wellington vacancy has increased to 14% in 2012, prime vacancy
remains at extraordinary low levels sitting below 5%. With an aging stock
base, it is considered likely that the Wellington market will experience
greater refurbishment, redevelopment or development activity in the next
12-24 months.
Overall we see rental levels remaining stable in Wellington with the
potential for some increases as lease expiries fall due, and demand for good
quality space increases.
For the coming year, the Auckland leasing market looks encouraging, with
premium grade vacancy levels nearly 50% lower than this time last year and
most research houses now forecasting a good level of rental growth.
Occupier demand remains strong for high quality assets. We have seen the
finance sector and insurance companies, along with professional services
firms generally, looking to expand their space requirements. While we
initially observed businesses shifting from mid-town to downtown, over the
last six months we have seen a general increase in the amount of space
occupied in the Auckland CBD.
We are very pleased that Zurich House and ANZ Centre are now 100% leased.
We have also made good progress in leasing the former Westpac vacancy at PwC
Tower and also SAP Tower.
Overall, we see the outlook in both cities, and particularly in Auckland, as
positive for Precinct. It has been a very satisfying year for making good
gains in both leasing and in strong, strategic acquisitions. We have also
done this at a time when the market may be at a cyclical low. We look forward
to another strong year under our new banner as Precinct.
On behalf of the management team I would like to thank the Board for its
guidance and you our shareholders for your continued support. Thank you.
End CA:00229489 For:PCT    Type:ADDRESS    Time:2012-11-08 13:02:37