Precinct Properties NZ Ltd has set itself apart from its peers, and in the early stages it’s been successful.
The next stage, as the company turns to development, will be a far more interesting departure from the often stodgy look of the sector as a solid, safe haven.
Other large listed property entities have taken on some development – notably Kiwi Property Group Ltd at Sylvia Park, Stride Property Ltd (ex-DNZ Property Fund) in recent months at Westgate, Argosy Property Ltd with a major Wellington refurbishment, and Goodman Property Trust has development as a regular feature of its business at Highbrook & other business parks, and now in the Viaduct.
Precinct is working on 3 projects which have significance geographically and as central business area catalysts – the Downtown block redevelopment at the foot of the Auckland cbd, the Innovation Precinct in the Wynyard Quarter and the Bowen Campus in Wellington’s government office zone.
While the dimensions of each project are large, they come with a very different balance sheet from most in the listed property sector, and they also come with changes at board & executive levels.
The listed property sector learned from business downturns that gearing above 40% is risky, and most stick to a debt level in the range of 30-40%. Precinct this year has dropped its gearing from 33.8% to a low of 11.3%, with expectations that it will rise as development occurs.
It’s also diversified its debt sources, along the lines started by Goodman Property Trust when bankers proved unreliable allies at the start of the global financial crisis 8 years ago, but going even further this year with a $173 million US private placement, the first of this kind of debt for the sector, and a local bond issue, on top of raising $174 million in equity from shareholders.
Precinct lifted its net profit after tax by 4.5% to $122 million, operating profit 7% to $68 million, gained $65 million in revaluations, and increased net tangible assets from $1.04 to $1.11/share.
Company chair Craig Stobo told the annual meeting in Auckland on Wednesday the US placement & bond issue “provide greater comfort around Precinct’s financing through a period when it is contemplating undertaking significant development activity. Both transactions have diversified Precinct’s funding sources and added valuable tenor in a laddered approach.
“Last year we also completed sales of our non-core assets, and we are on track to meet our vision for a portfolio of younger buildings. Our portfolio is now all located in prime locations. And indeed our Downtown development site is in the prime location in New Zealand.”
Pritchard on strategy
Chief executive Scott Pritchard explained the Precinct growth strategy of having concentrated ownership of assets in truly strategic locations: “The key feature of the strategy is having ownership of a number of buildings in one party’s hands in the best locations, and for Precinct to then be able to influence the tenancy mix, the associated amenity and, importantly, the quality of the real estate.”
Such strategies can, of course, go wrong, as insurers the AMP Society (Precinct’s founder) & NZI found in the 1980s. NZI aggregated a whole block from Queen St through to High St, except for one small title, then saw the holding dismantled as the market turned rapidly downward. NZI had multi-tower visions for Chancery which also foundered, while AMP entertained thoughts of bridging across Victoria St East between new headquarters and a redeveloped Whitcoulls site.
All those schemes were grand beyond wild dreams and typically ended in the dustbin when the upcycle inevitably ended. Nowadays, international turmoil could change business cycles overnight, but there is more to all 3 of Precinct’s major projects than a 1980s-style flight of the imagination.
Here, there’s a highly important difference, as Mr Pritchard noted: “We have taken advantage of the market cycle. We purchased $244 million of real estate in 2012 when the market was soft and have sold $274 million of assets in the last 12 months when the market has been very strong.
“The assets we acquired are now worth $45 million more than what we paid. Similarly, the assets we have sold were sold for $42 million more than what they were worth 3-4 years ago. This represents an $87 million creation of value. Following these sales and the capital management initiatives identified by the chairman, we are very pleased to both reduce gearing and advance new developments while also maintaining dividends.”
The Downtown redevelopment fits in with repositioning of public transport in the cbd, further reduction of the roles of private vehicles & parking buildings, revisiting the role of public gathering places, and better acknowledging the rise in volume of cruise ships arriving in a business district which has been hopelessly, embarrassingly out of tune with that sector.
Mr Pritchard told shareholders: “We have followed a strategy for transforming the company and growing value, while continuing close management of risk & reward. We have remained experts in cbd real estate and continued to build strong business partnerships. We have focused our resources on key opportunities in key precincts and shifted the balance of our portfolio towards Auckland.
“Pleasingly, we are seeing strong demand from current clients who want to expand or, in some cases, want more space because their businesses are growing and they are hiring more people.
“We are also happy with Precinct’s position in Wellington. Our asset sales helped right-size our portfolio in this market. Clients remain keen to get quality corporate space which remains at a premium.
“In Auckland we are enjoying the benefits of strong population growth, leading to vacancy levels at all-time lows, ensuring that our portfolio is fully occupied. Global research also shows that employees & residents worldwide are moving back to the cities as urban areas are regenerated.
“Recent research by CBRE confirms that in Auckland the large majority of occupiers have a preference for space near the waterfront. Auckland’s cbd will grow by around 1750 new workers every year for the next 6-7 years. An estimated 200,000m² of new space will be needed to meet this demand.”
Turning to the Wynyard Quarter, Mr Pritchard said: “We will invest around $84 million in stage 1 developing 2 buildings, which are already 70% leased. The 8100m² Innovation building is entirely preleased to Ateed (council company Auckland Tourism, Events & Economic Development Ltd) on a 12-year term, housing Grid AKL, which is an exciting opportunity for Auckland City. The Mason Brothers building is 25% pre-leased to architects Warren and Mahoney on a 10-year term.
“The expected annual rental, fully leased, is $6.7 million, representing an 8% yield on cost, with an expected valuation of $98 million on completion. We expect to begin construction this month, with the Mason Brothers building finished by December next year, and the Innovation Centre at the site completed in July 2017.”
Economic environment, and internal advances
In closing, Mr Pritchard said: “We think the economic environment remains positive. We have seen some risk from lower commodity prices & rising construction costs and we always need to allow for global financial shifts. But Precinct is in a good position. We are well funded, well placed in strategic, central locations and have a quality portfolio. The occupier market is strong, with demand expected to remain high for some time. The Auckland cbd retail market continues to go from strength to strength, with pedestrian counts up, new entrants arriving and more established retailers returning.”
Longstanding director Graeme Horsley retired from the board at the annual meeting, replaced by Australian director Launa Inman. While Mr Horsley’s independence & expertise must be missed, Ms Inman has arrived with an impressive CV across a range of businesses, including directorship of the Commonwealth Bank and growing her own enterprises.
When a shareholder asked why not replace Mr Horsley with someone of similar stature, Mr Stobo responded: “The company has changed – from 6 staff to over 40, and a depth of experience we never had before. Graeme was critical to our understanding. In addition, we have directors who have deep property experience in Australia & globally.
“For the next stage we were looking for a person who had experience in retail. Launa filled those ticks for us, so I think we have a good spread of expertise.”
Mr Stobo also expanded on the changes in debt sourcing after a shareholder suggested it was forced by banks reducing their lending. Not so, Mr Stobo said: “We’ve been concerned about laddering & diversifying our sources of funding to keep a tension in pricing. The banks are keen for us to use them, but we’re not solely relying on them anymore.”
Attribution: Annual meeting.