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Precinct Properties NZ Ltd increased net profit after tax by 67% to $39.5 million ($23.6 million) in the December half on net operating income up 22% to $32 million ($26.2 million) – up from 2.63c to 3.1c/share. The company has lifted its first-half dividend by 5.5%, from 2.56c to 2.7c/share.

Precinct also announced yesterday that it’s in exclusive negotiations with Waterfront Auckland to become its development partner for commercial office within the Innovation Precinct at the Wynyard Quarter, on the Auckland waterfront.

A big factor in the profit increase was the $10.6 million fair-value gain in interest rate swaps ($1.7 million a year earlier), which chief executive Scott Pritchard said reflected the increase in market interest rates since 30 June 2013 and the unwinding of interest rate positions.

Rental revenue for the 6 months was up 20% to $82.6 million ($68.9 million), primarily due to new rental income from recent acquisitions. Excluding that, rent was up 3%.

Portfolio occupancy rose from 95% to 97%. The weighted average lease term was unchanged at 5.5 years. Across the portfolio, Precinct completed 30 leasing transactions covering 38,700m².

Mr Pritchard said rental growth in the Auckland office market was strong. The company completed 24 leases & reviews at an average 6% premium to June valuations.

Precinct also entered into negotiations with Auckland Council to co-ordinate the timing of works for the city rail link and the Downtown Shopping Centre development. Mr Pritchard said this project would take advantage of strong growth in demand for city centre office space and would reinvigorate the heart of the city’s main transport hub & waterfront area.

“Planning is progressing well towards a 2016 start for work when current leases in the centre expire. Precinct has appointed a leading international master planner, Woods Bagot, to work closely with local architects, Warren & Mahoney, in planning for this development and the company looks forward to sharing its vision for this new precinct as planning work is completed in the second half of 2014.”

At the Wynyard Quarter, Precinct has agreed non-binding commercial terms with Waterfront Auckland and expected to sign a development agreement within a few months. Final approval remained conditional on Precinct board & Waterfront Auckland approval.

The sites in question have a land area of about 1.1ha and the potential to develop about 46,000m² of gross floor area. “The leasing strategy for the sites will build upon existing efforts to create a purpose-built information communication technology & digital media hub that brings together innovative entrepreneurs & larger-scale companies as part of Auckland Tourism Events & Economic Development’s (ATEED’s) plans for a multi-building innovation precinct.

“Since our inception we have retained a city centre office sector-specialist strategy. This has not changed. This opportunity will complement our existing core cbd offering and allow us to widen our client base to innovative businesses through ATEED’s planned initiatives for high-growth technology businesses. We will also be targeting occupiers whose preference is for lowrise, larger floorplate accommodation, but with all the benefits of a central city location.

“The proposed partnership structure provides for a staged approach, including a prepaid leasehold structure.”

Mr Pritchard said Precinct’s programme of recycling capital out of its existing portfolio would provide funding for this opportunity, taking advantage of strong investment market conditions & a lack of competing stock.

Property expenses were $23.8 million, up 12%, but representing a 3% reduction after adjusting for recent acquisitions.

Following the 2 earthquakes that struck Wellington, the company engaged Holmes Consulting Group to undertake comprehensive inspections of its buildings in the city. These found no material damage to their structural integrity and the non-recoverable cost to repair superficial damage was minor.

Interest expense increased $4.6 million to $16.7 million, reflecting higher debt levels following the purchase of the Downtown Shopping Centre & HSBC House and interest costs associated with the ANZ Centre redevelopment being fully expensed.

Other expenses increased by about 13% as the size of the portfolio grew. Precinct outperformed the benchmark New Zealand-listed property sector return (excluding Precinct) resulting in a performance fee of $1.3 million being payable in the second quarter.

Tax expense of $3.9 million was similar to a year earlier ($3.8 million) despite higher pretax profit. This period’s tax expense relating to the higher profit was offset by an increase in depreciation associated with acquisitions and recognition of a tax deduction relating to the sale of Chews Lane in 2011, which reduced tax expense by about $1.2 million.

Mr Pritchard said an internal review of the 30 June 2013 valuations indicated no material value movement in the period. The 31 December investment property book values were consistent with Precinct’s policy of carrying investment property at fair value.

NTA at balance date increased from 99c to $1/share, mainly reflecting the fair value gain in interest rate swaps and Precinct’s policy of retaining earnings.

Precinct used the proceeds from a $50 million placement and a $12.5 million share purchase plan to repay bank borrowings, reducing them to $556 million ($603 million), and reducing gearing to 34.1% (37.3% at 30 June 2013).

Precinct also reduced its bank debt facilities to $610 million ($660 million at 30 June 2013) as the company carried excess funding capacity following the equity issues. The 2016 tranche was reduced, resulting in a weighted average term to expiry at 31 December of 3.6 years (4 years at 30 June 2013).

67% of Precinct’s drawn bank debt (57% at 30 June 2013) was effectively hedged through the use of interest rate swaps. This hedging resulted in a weighted average interest rate including all fees of 5.8% (5.6% at 30 June 2013) and a weighted average term of 2.4 years (2.2 years at 30 June 2013).

Mr Pritchard said Precinct started the year in Auckland with income-generating occupancy of 97%, significantly higher than at the same time last year. “After allowing for recent acquisitions & the ANZ Centre redevelopment, this improved position led to a 19% increase in Auckland’s net property income.

“The Auckland portfolio is now almost fully occupied, with only 600m² of office space available in the city. HSBC House, which was acquired in May 2013 and had benefited from a 6-month vendor underwrite, is now 100% occupied. 2500m² of space within the building has been secured at a premium to 30 June valuations.”

In Wellington, Mr Pritchard said continued success at State Insurance Tower had led to the portfolio being 96% occupied. “With the strengthening works in the former Central Police Station and reinstatement works almost complete, further leasing progress is anticipated in the next 12 months.”

On the company’s outlook, Mr Pritchard said: “Precinct is well positioned to capture earnings growth in the medium term, with the portfolio no longer over-rented and an expectation in Auckland of sound market rental growth. Earnings growth, however, will lag behind the market due to a lower level of impending expiry and a higher weighting to structured leases.

“In Wellington, market awareness of seismic performance and our commitment to seismic upgrades are contributing to an increase in occupier demand and an improved occupancy outlook. Sustained low prime vacancy rates, and price stability returning to the insurance market, should provide for some modest rental growth in the medium term.”

The company has maintained its guidance for the 2014 financial year of full-year after-tax operating earnings around 6.2c/share (before performance fees) or 6c/share (assuming 50% of the maximum performance fee is payable). Dividend guidance also remains unchanged at 5.4c/share for the full year, consistent with the 90% payout dividend policy.

Attribution: Company release.