Precinct Properties New Zealand : PCT announces full year profit of $162.1 million

NZX announcement - 17 August 2017

www.precinct.co.nz/annual-report-2017

1 Net operating income is an alternative performance measure which adjusts net profit after tax for a number of non-cash items as detailed in the reconciliation provided at the end of this announcement. Precinct's dividend policy is based upon net operating income. This alternative performance measure is provided to assist investors in assessing Precinct's performance for the year.

Net property income reduced to $90.4 million (2016: $104.5 million). Adjusting for developments and seismic repair costs, like for like net property income rose by 0.7% with Auckland increasing by 1% and Wellington flat.

As at 30 June 2017 Precinct's portfolio value increased to $2.04 billion (2016: $1.70 billion). This increase was due to the valuation gain and the significant development spend in the period. Precinct's net tangible assets per share at balance date increased 6% to $1.24.

Scott Pritchard, Precinct's CEO, said "We achieved strong progress across all our activities last year. We successfully completed our Wynyard Quarter Stage One development, commenced works at Bowen Campus and achieved good progress at Commercial Bay. We saw continued gains from executing on a strategy of specialising in our city centres."

Investment portfolio metrics have remained strong in both Auckland and Wellington. Occupancy increased to 100% at year-end (2016: 98%) and the WALT increased to 8.7 years. In total 56 leasing transactions across 37,500 sqm of space were secured during the period on a WALT of 6.9 years, reinforcing this year's strong operational result.

"Demand for city centre office space remains strong with Precinct reporting 100% occupancy across its investment portfolio. With limited supply available and overall vacancy rates at record lows, we expect this strong demand for office space to continue and be further driven by continuing employment growth in the coming years. Some additional supply has been completed in the fringe of Auckland City but this has matched demand and is not expected to impact the city centre market. The city's retail market also showed high occupier demand, and rental growth, with limited new supply outside Commercial Bay. Wellington's city centre office market also strengthened with high occupier demand and rental growth and reduction in supply".

The November 2016 Kaikoura earthquake had a significant impact on the Wellington market, and revealed structural issues at Deloitte House, resulting in a value write down of $26.1 million. This seismic event also reduced Precinct's earnings per share through lost income and seismic repair costs.

"We are pleased with our position in Auckland and Wellington. We now have a 72% and 28% holding in each market, positioning us very well as Auckland continues to grow. Consistent with our strategy to develop strong client relationships though a focus on providing high levels of service, we acquired a 50% stake in Generator the co-working and shared office space provider, which was recently appointed to operate the Innovation Precinct at Wynyard Quarter".

Development progress

Precinct has achieved a number of development milestones over the last 12 months including the completion of Wynyard Quarter Stage One. On practical completion the development was 100% leased. The development has provided Precinct with a high-quality asset with a WALT of 10 years providing a development profit of $16 million.

Significant progress at Commercial Bay has also been made with 66% of the office tower now being pre-committed, up from 60% last year. In the period we secured a further 4,000 sqm of space. Achieving an unconditional agreement to acquire Queen Elizabeth Square in December 2016 provided additional certainty to launch the retail leasing, with commitments being secured over 46% of the retail space. The retail precinct continues to attract high interest.

Pleasingly, the as-if-complete value of Commercial Bay increased by $88 million to $941 million. This increase was driven by leasing success, higher rental levels and in recognition of the quality of the development. Forecast development profit1 has increased to $213 million and once complete the project is now expected to deliver a return on cost2 of around 30%. Forecast development profit1 from both Bowen Campus and Commercial Bay has increased to around $240 million of which approximately $160 million remains to be recognised in future years.

1 Development profit is calculated as independently assessed as-if-complete value less forecast total project cost.

2 Return on cost is development profit divided by forecast total project cost.

Commercial Bay remains on track for overall completion by mid 2019. The opening of the retail component has now been split into two phases with phase one, comprising around 20% of the retail, planned to open earlier than previously indicated in mid 2018. The opening date for the balance of the retail is now programmed for late Q1 2019.

The updated retail opening plan is not expected to materially impact the cost or returns to Precinct. Based on site progress to date, the revised opening plan is expected to mitigate risk from construction delays and help ensure a successful opening. We retain a positive working relationship with our main contractor and remain comfortable with the provisions of the fixed price construction contract. The project yield on cost remains unchanged at 7.5%.

Post balance date, the Crown has advised its intention to lease the remaining office space at Bowen Campus, increasing the office pre-commitment to 100%. Construction works continue to progress in line with expectations.

Senior management changes

In the period we were pleased to announce the appointment of Richard Hilder, formerly Precinct's General Manager of Finance, to lead the finance function in the role of Chief Financial Officer. Richard has been with the business for seven years. We look forward to his ongoing contribution. In addition and reflecting the increased activity of the business, Kym Bunting, Precinct's General Manager of Property, was appointed to the newly created role of General Manager of Transactions. Precinct's Chief Operating Officer, George Crawford will increase his commercial management responsibilities, assuming leadership of the property team and responsibility for performance of the investment portfolio.

Convertible note

Precinct has today announced that it is considering making an offer of up to $150 million of four year, fixed rate, subordinated convertible notes ("Notes") to institutional and New Zealand retail investors. The offer is expected to consist of a Priority Offer to eligible New Zealand resident Precinct retail shareholders, as well as a General Offer. The Notes are expected to be listed on the NZX Main Board.

Precinct has pre-funded its extensive existing development pipeline, including Commercial Bay. However it is considering issuing the Notes to provide the company flexibility to pursue prudently other projects, should they arise.