Precinct Properties New Zeolond Interim Results PROPERTIES NEW ZEALAND i 7 February 20] 6 Agenda Highlights Page 3 Section 1 – Strategy Page 4 Section 2 – Interim results and capital management Page 7 Section 3 – Market and portfolio overview Page 12 Section 4 – Development update Page 17 Section 5 – Fee review Page 24 Conclusion Page 26 Precinct Properties New Zealand Limited Scott Pritchard, CEO George Crawford, COO Note: All $ are in NZD unless otherwise stated FY16 INTERIM RESULTS www.commercialbay.co.nz Page 2 Highlights Financial performance Transformation of Precinct now underway $34.8m H1 FY16 net profit after tax +1.1% increase in net operating income1 $860m refinance secured in the period 12.8% Gearing Ratio Portfolio performance 52% pre-commitment achieved for the PWC Tower at Commercial Bay Stage 1 Wynyard Quarter committed 97% Portfolio Occupancy 5.8years Weighted average lease term including development pre-leasing FY16 INTERIM RESULTS Note 1: Net operating income is an alternative performance measure which Page 3 adjusts net profit after tax for a number of non-cash items. www.commercialbay.co.nz Page 3 'Enl?iglfxi Img?mw A ERERX A ll I: ka?pl I'm 13? ?a MA l?vn, tamnv%?7 A EjltpStrategy Recap ■ Concentrated ownership of strategic assets in prime locations ■ Bias to Auckland ■ Reduce average age of portfolio assets ■ In order to execute the strategy, Precinct will: – Dispose non-core assets – Undertake development – Drive value growth from investment portfolio ■ Strategy will result in: – Superior growth in earnings and NTA over the status quo scenario, – Reduce maintenance capex requirement – improving cash on cash returns, – Increased exposure to Auckland’s growing market, and – Significantly enhance portfolio quality FY16 INTERIM RESULTS www.commercialbay.co.nz Page 5 Progress to date ■ Acquired strategic assets Bowen Campus, HSBC House and Downtown with a bias to Auckland ■ Sold $274 million of non core assets increasing weighting to Auckland ■ Average age of assets reduced and quality improved ■ Funding achieved ahead of guidance ■ FY16 earnings consistent with previous guidance while gearing reduced ■ Transformational developments commenced – Wynyard Stage 1 – Commercial Bay $1bn Value of Auckland Waterfront developments 2014 As at Dec 2015 Portfolio Age in 2020 26 years 11 years Portfolio Quality A-Grade ▲ 60% 79% $558 m $784m - $950 m 40% 63% Weighting to Auckland (on completion of Developments) 79% Weighting to Auckland (on completion of committed developments) FY16 INTERIM RESULTS Value of assets on Auckland’s CBD Waterfront Value of development on Auckland’s CBD Waterfront Weighting to Commercial Bay precinct www.commercialbay.co.nz Page 6 Wynyord Quof?rer. Financial performance six months ended Dec-2015 ($m) Unaudited Unaudited Movement Net property income Indirect expenses Dec-2014 $53.7 m $62.1 m ($8.4 m) ($1.0 m) ($0.8 m) + $0.2 m ($4.1 m) ($4.3 m) ($0.2 m) $48.6 m $57.0 m ($8.4 m) ($6.0 m) ($16.9 m) + $10.9 m $42.6 m $40.1 m + $2.5 m ($6.9 m) ($4.8 m) ($2.1 m) $35.7 m $35.3 m + $0.4 m ($2.7 m) $0.2 m ($2.9 m) $4.3 m ($5.3 m) + $9.6 m EPS reconciliation to comparative period 4.00 c Performance fee Base fees EBIT Net interest expense Operating profit before tax Current tax expense Operating profit after tax Net realised gain / (loss) on sale of investment properties Unrealised net gain / (loss) on financial instruments Depreciation recovered on sale ($10.0 m) Deferred tax expense / (benefit) $7.5 m $1.4 m $6.1 m Net profit after tax and unrealised gains $34.8 m $31.6 m + $3.2 m Weighted Number of Shares on Issue 1,211.1 m 1,059.7 m 151.4 m Net operating income before tax - gross (cps) 3.52 cps 3.78 cps ($0.27 cps) Net operating income after tax - (cps) 2.95 cps 3.33 cps ($0.38 cps) 92% 81% 11% Payout ratio FY16 INTERIM RESULTS ($10.0 m) 3.50 c 3.00 c 2.50 c 2.00 c FY15 H1 - Net EPS Disposals Tax Expense Other Entitlement offer www.commercialbay.co.nz FY16 H1 - Net EPS Page 8 Net property income FY16 FY15 $ AMP Centre $4.6 $4.5 + $0.1 PwC Tower $8.2 $8.0 + $0.2 ANZ Centre $8.9 $8.4 + $0.5 HSBC House $4.1 $4.0 + $0.1 Downtown Shopping Centre $3.1 $3.3 ($0.2) Zurich House $3.1 $2.9 + $0.2 $32.0 $31.1 + $1.0 Pastoral House $2.2 $2.1 + $0.1 157 Lambton Quay $3.0 $3.5 ($0.5) State Insurance Tower $4.7 $4.8 ($0.1) Mayfair House $1.5 $1.5 - Deloitte House $1.6 $1.9 ($0.3) Bowen Campus $3.0 $3.3 ($0.3) No 1 The Terrace $3.6 $3.6 - Wellington total $19.6 $20.6 ($1.0) Sub Total $51.7 $51.7 - 125 The Terrace $1.3 $2.6 ($1.3) SAP Tower $0.0 $3.6 ($3.6) 171 Featherston Street $0.5 $3.1 ($2.7) 80 The Terrace $0.3 $1.2 ($0.9) $53.7 $62.2 ($8.5) Auckland total ■ Allowing for asset sales net property income was consistent with FY15 ■ Improved Auckland occupancy offset by vacancy in Wellington ■ Downtown Shopping Centre was 6% lower due to the increase in vacancy from the impending demolition. Reconciliation of movement in net property income Transactions and Developments Total FY16 INTERIM RESULTS www.commercialbay.co.nz Page 9 Taxation reconciliation ■ Tax expense increased by $2.1 million to $6.9 million ■ Higher tax charge: – Higher pre-tax profit – Lower depreciation deductions following asset sales – Lower feasibility deductions ■ Expectation FY16 effective tax rate will range c.12% due to demolition and development deductions generated in 2H16 Tax expense reconciliation Net profit before taxation H1 FY15 $34.2 m $35.0 m Less non operating income Depreciation recovered on sale $10.0 m Realised loss/ (gain) on sale of investment properties $2.7 m ($0.2 m) Unrealised derivative financial instrument (gain)/loss ($4.3 m) $5.3 m $42.6 m $40.1 m Depreciation ($10.9 m) ($12.6 m) Feasibility deductions ($3.3 m) ($4.5 m) $0.6 m ($1.2 m) $27.8 m $21.8 m ($0.9 m) ($1.3 m) Current tax expense $6.9 m $4.8 m Effective tax rate 16% 12% Operating profit before Tax Other deductible expenses Other deductibles Taxable income Prior period washup FY16 INTERIM RESULTS H1 FY16 www.commercialbay.co.nz Page 10 Capital management Borrowings reduced to $178 million following asset sales Gearing reduced to 12.8% from 20.1% (Dec 14 34%) Committed gearing around 35% in 2019 New 5 year $680 bank facility providing funding certainty with no refinance risk during development period ■ Additional $180 5 year facility secured, dependent on Bowen Campus success ■ Weighted average debt maturity increased to 5.6 years ■ Level of hedging to reduce as development capital is deployed ■ ■ ■ ■ Dec 2015 June 2015 Debt drawn $178m $323m Gearing - Banking Covenant 12.8% 20.1% 5.6 4.6 Weighted average debt cost (incl fees) 5.7% 5.4% Hedged 128% 62% 4.9 times 3.5 times 4.9 2.9 Weighted facility expiry (years) ICR Weighted average hedging (years) 100% $300 m 75% $200 m 50% $100 m 25% $1,200 m 150.0% $1,000 m 125.0% $800 m 100.0% $600 m 75.0% $400 m 50.0% 25.0% 100% 0% FY15 FY16 FY17 FY18 FY19 FY20 $300 m Bank Debt FY16 INTERIM RESULTS $200 m Dec 15 >FY20 USPP Listed Bond Dec 16 Dec 17 Hedging $200 m $400 m 0.0% Dec 18 Dec 19 >Dec 21 Year ending 75% Hedging USPP Bank Debt Dec 20 Listed Bond Hedging 50%www.commercialbay.co.nz Page 11 Hedging $400 m Debt Facility Expiry Profile December 2015 maturity and hedging profile Hedging June 2015 maturity and hedging profile Key metrics mwozo: 2518.. Q:o_ vo?o=o 5? 13:11 7? Portfolio activity Leasing Events ■ 11 Leasing transactions totalling 4,100 square metres secured at a 1.5% premium to June 2015 valuations. ■ New office leases in Auckland were secured at a 4% premium to valuation ■ Market events (leasing and reviews) compared to valuation were 3.1% higher – Majority of Wellington market reviews held at ratchet positions New Leases Number Area Auckland 2 1,041 m² Wellington 6 555 m² 8 1,596 m² Auckland 0 0 m² Wellington 3 2,506 m² Sub Total 3 2,506 m² Total Leasing 11 4,103 m² Rent Reviews Number Area Auckland 26 16,734 m² Wellington 27 27,983 m² 53 44,717 m² Sub Total RoR and Extensions Total Reviews FY16 INTERIM RESULTS www.commercialbay.co.nz Page 13 Portfolio metrics 5.8 years Lease expiry profile by Income (ex pre-commit) Weighted average lease term (including development pre-leasing) 97% Occupancy 26% of Auckland portfolio has a market event in FY16 67% weighting to Auckland Occupancy FY16 INTERIM RESULTS www.commercialbay.co.nz Page 14 Auckland market Forecast vacancy (CBRE, Nov 2015) Occupier Demand Supply Rental Growth Cap Rates ▲ Vacancy reduced and absorption increased due to growing employee base ▲ Increase in pipeline of office space mainly in fringe markets. Committed supply expected to be absorbed ▲ Growth as face rents increase and incentive levels further diminish ▼ Further yield compression reflecting strong CBD office demand and interest rate expectations FY16 INTERIM RESULTS Forecast net effective rent growth (CBRE, Nov 2015) www.commercialbay.co.nz Page 15 Wellington market Forecast vacancy (CBRE, Nov 2015) Occupier Demand Supply Rental Growth Cap Rates FY16 INTERIM RESULTS ► CBD based employment remains static. Crown growth limited due to ongoing RFP ▲ New supply emerging in the CBD. Impact likely for corporate market ► Rental growth remains limited due to increasing supply outlook and static occupier growth ▼ Capitalisation rates have firmed with continued lower interest rates and increased confidence of occupier market Forecast net effective rent growth (CBRE, Nov 2015) www.commercialbay.co.nz Page 16 Section 4 Development Update I..- mun 49mi? Commercial Bay Highlights ■ Commercial Bay will restore the waterfront as the heart of Auckland city ■ Major Queen Street retail development and landmark office tower ■ Retail centre comprises: – Unique laneway environment over three levels – 130m of Queen Street retail with around 100 new stores* ■ Office tower will be called PwC Tower and is 52% pre-leased ■ Construction set to commence June 2016 and expected to complete: – Retail – October 2018 – Office – June 2019 ■ Project estimated to cost $681 million with a guaranteed maximum price construction contract with Fletcher Construction ■ Expected yield on cost of 7.5% FY16 INTERIM RESULTS *Subject to QE Square agreement becoming conditional www.commercialbay.co.nz Page 18 Project description Retail ■ 3 levels of retail which includes HSBC Building & Zurich House ■ 18,000sqm of NLA* ■ Around 100 retail stores ■ Retail frontages to Queen St, Albert St, Quay St & Customs St Office ■ 30 levels of office above sky lobby ■ Sky lobby positioned above retail ■ Floor plates range from 1,324sqm to 1,375sqm ■ 39,000sqm of NLA ■ Mid level plant located on levels 22-23 Car parks ■ 278 basement car parking spaces ■ 3 levels of car parking with direct access to the new PwC Tower, Zurich House and HSBC Building CRL ■ 2 tunnels positioned at basement levels 2 & 3 FY16 INTERIM RESULTS *Subject to QE Square agreement becoming conditional www.commercialbay.co.nz Page 19 Commercial Bay leasing update Retail ■ Negotiations progressing with mini major retailers ■ Strong demand for food & beverage operators ■ Unsolicited enquiry from specialty retailers further supports development opportunity ■ Resurgence of CBD retail is generating significant growth in prime CBD retail rents Office ■ Enquiry remains elevated for remaining vacant space in new tower ■ Continued enquiry for back fill space throughout Auckland portfolio FY16 INTERIM RESULTS www.commercialbay.co.nz Page 20 Wynyard Stage 1 ■ During the period – Committed to stage 1 – Entered into 125 year prepaid ground lease – Appointed Hawkins and NZ Strong ■ Project progressing on budget and programme – Demolition completed – Commenced site works ■ Leasing status – 70% preleased – Innovation building (8,100m2) entirely pre-leased to ATEED on a 12 year term for Grid AKL (Innovation Precinct) – Mason Brothers c.25% pre-leased FY16 INTERIM RESULTS Key Metrics Net Lettable Area (NLA) 13,400sqm Total project cost $84m Grid AKL lease term 12 years Pre-commit % achieved (by area) 70% Expected valuation on completion $98.2m Expected annual rental fully leased $6.7m Yield on cost Practical completion 8.0% Mason Brothers – Dec 2016, Innovation building – July 2017 www.commercialbay.co.nz Page 21 Wynyard Stage 1 – leasing update ■ Exclusive negotiation for additional space in Mason Brothers which will take total pre-commitment to 87% across stage 1 ■ Further enquiry on remaining vacant space attracting good enquiry given characteristics of the space ■ Initial discussions underway for future stages of Wynyard Quarter FY16 INTERIM RESULTS www.commercialbay.co.nz Page 22 Government RFP update ■ Received Cabinet approval to enter the final phase of the Governments Wellington Accommodation Project – Pastoral House – Mayfair House – No 3 The Terrace – Bowen Campus ■ 1 The Terrace remains under consideration ■ Final phase progressing well – Agreeing final development agreements across multiple agencies – Agreeing sequencing and programme of works FY16 INTERIM RESULTS Page 23 www.commercialbay.co.nz Page 23 Section 5 Fee Review Fee review ■ In Accordance with clause 7.5 of the Management Services Agreement, the additional fees are reviewed to market every two years. Following advice from an independent expert, the latest review has been completed with the following changes: Fee Amendment Pre Post 12%-20% (of gross receipts based on 3 years and increasing by 1% per year thereafter) 11%-20% (of gross receipts based on 3 years and increasing by 1% per year thereafter) Reduction in scale of fees by 1% per year. Fees remain capped at 20% Renewal Fee 50% - 100% of scale of fees (as outlined above) 25%-75% of scale of fees (as outlined above) Range reduced to reflect market fee range applicable Market Rent Reviews 3% of total revenue or 10% of rental uplift 10% of rental uplift 3% of total revenue removed Development Management Fees 2.5% of total development costs (excluding land, finance, marketing, incentives) 3% of total development cost (as defined) plus up to a further 1% if project is successfully delivered (payable on completion) Development management fee structured following market research Leasing Fee FY16 INTERIM RESULTS Comment www.commercialbay.co.nz Page 25 'Enl?iglfxi Img?mw A ERERX A ll I: ka?pl I'm 13? ?a MA l?vn, tamnv%?7 A EjltpConclusion and outlook ■ Global uncertainty remains driven by concerns over China, commodity prices and banking sector confidence ■ NZ outlook remains positive underpinned by: – strong net migration – tourism and construction sectors – significant forthcoming infrastructure projects ■ Precinct well placed: – Portfolio well occupied with strong cashflows – Projects are fully funded consistent with FRM policy – Projects are well positioned, have pre-commitment and are generating very positive enquiry – Deployment of significant level of debt at lower than assumed interest rates is expected to support earnings track – Significant exposure to Auckland exposure and strong centralisation trends FY16 INTERIM RESULTS www.commercialbay.co.nz Page 27 'Enl?iglfxi Img?mw A ERERX A ll I: ka?pl I'm 13? ?a MA l?vn, tamnv%?7 A EjltpBalance sheet Financial Position as at Dec-2015 30 June 2015 $m Unaudited Audited Movement $1,569.7 m $1,611.8 m ($42.1 m) Deferred tax asset $3.1 m $4.3 m ($1.2 m) Fair value of swaps $17.7 m $15.4 m $2.3 m Assets held for sale $76.0 m ($76.0 m) Property sale proceeds to be settled $32.5 m ($32.5 m) $16.9 m $13.2 m $3.7 m $1,607.4 m $1,753.2 m ($145.8 m) Total Borrowings $190.1 m $340.0 m ($149.9 m) Deferred Tax Liability $30.3 m $39.0 m ($8.7 m) Fair value of swaps $16.6 m $13.9 m $2.7 m Other $30.1 m $22.0 m $8.1 m Total Liabilities $267.1 m $414.9 m ($148.0 m) $1,340.3 m $1,338.3 m $2.0 m 12.8% 20.1% -7.3% 1,211.1 m 1,211.1 m - 1.11 1.11 - Assets Property Assets Other Total Assets Liabilities Equity Liabilities to Total Assets Shares on Issue (m) Net Tangible Asset per security FY16 INTERIM RESULTS www.commercialbay.co.nz Page 29