Interim Result Announcement for Six Months Ended 30 Sep 2011

16 November 2011

Interim Result Announcement for the Six Months Ended 30 September 2011

Kiwi Income Property Trust today announced its interim result for the six months ended 30 September 2011, delivering a distributable profit after tax of $36.0 million, up 9.1% on the previous comparable period. Unit Holders will receive an interim cash distribution of 3.50 cents per unit, in line with guidance.

In another active period for the Trust, key operating highlights included:

• operating profit before tax of $41.2 million, up 14.1% on the previous comparable period, driven by the recent acquisition of LynnMall Shopping Centre in Auckland

• lodgement of an insurance claim for the earthquake-damaged PricewaterhouseCoopers Centre in Christchurch and confirmation that it is to be demolished
• the divestment of two non-core assets at a combined sale price of $8.4 million
• solid progress on the ASB head office development at Wynyard Quarter
• the completion of the new foodcourt and dining lane development at Centre Place Shopping Centre in Hamilton
• strong sales performance at Northlands Shopping Centre in Christchurch post the earthquake events
• the execution of 92 new leases and renewals covering more than 14,000 sqm of space, and
• 341 rent reviews resulting in an average 4.5% rental uplift for those leases.

Looking ahead, the Trust is pleased to announce a $39.9 million redevelopment of Centre Place Shopping Centre in Hamilton to reposition it as a competitive CBD specialty centre, anchored by a new 7,000 sqm Farmers department store.

The Trust is also announcing today its intention to undertake strengthening works to the Majestic Centre, in response to a recently completed seismic evaluation, at an estimated cost of $35 million.

Financial results

Net rental income was $72.0 million for the six months ended 30 September 2011, up $4.6 million or 6.8% on the previous comparable period. This increase was largely driven by a $7.7 million contribution from LynnMall Shopping Centre, acquired on 31 December 2010, offset by $2.1 million of income in respect of the PricewaterhouseCoopers Centre which is now recognised within non-operating income as insurance proceeds.

Operating profit before tax was $41.2 million, up $5.1 million or 14.1% on the previous comparable period, assisted by a lower reported interest expense.
Distributable profit before tax was $43.8 million, up $6.8 million or 18.4% on the previous comparable period. After taking into account an increase in current tax expense of $3.8 million, distributable profit after tax was $36.0 million, up $3.0 million or 9.1%.

The Trust’s financial statements record the following significant, non-operating adjustments for the six months ended 30 September 2011:

Property revaluations [fair value change], -$65.0 million

Centre Place Shopping Centre (including Downtown Plaza) in Hamilton was independently valued by Jones Lang LaSalle as at 30 September 2011, resulting in the asset value reducing by $30.2 million to $86.5 million. The value reduction resulted from the continuing decline in sales and net income performance caused by increased competition.

Following the Canterbury earthquakes, the Trust has completed a seismic review of its core office portfolio. A detailed seismic assessment by structural engineers, Holmes Consulting Group, has identified that The Majestic Centre is a „moderate risk’ building using the New Zealand Society for Earthquake Engineering (NZSEE) system for grading buildings according to their assessed structural performance. The Manager’s intention is to proceed to strengthen the building so as to secure a „low risk’ NZSEE classification for the building, at an estimated cost of $35 million. Pending completion of the strengthening work, the investment property carrying value of this asset has been written down by $35 million as at 30 September 2011.

Strengthening work will commence as soon as practicably possible, following completion of design, consents and other preparatory works. The Manager will work closely with tenants to ensure that disruption is minimised during the upgrade works, the bulk of which are expected to be completed within 18 months.

Impairment of investment properties, -$27.3 million and insurance proceeds, $71.2 million

On 31 August 2011, the Trust’s insurance claim of $94.9 million was submitted to its insurer for the earthquake-damaged PricewaterhouseCoopers Centre in Christchurch, covering both material damage and business interruption. Subsequently the insurer confirmed its agreement that the building is not economically repairable and will be demolished.

An offer has since been made by the insurer (which has not been accepted) to settle the claim for an amount of $47.4 million.

For accounting purposes, $71.2 million of insurance proceeds have been recognised as income. This reflects the mid-point of the Trust’s submitted claim and the insurer’s offer. The book value of $25.8 million (building component) for the PricewaterhouseCoopers Centre has been written off, with the land component now recorded at its 30 September 2011 independent valuation of $4.5 million.

After taking into account the above items, along with other non-cash adjustments including fair value changes to interest rate derivatives, a profit after tax of $1.5 million was recorded.

Balance sheet and capital management

The Trust sold two assets during the period. 1-17 Broadway Avenue, in Palmerston North, sold for $2.0 million. This property was acquired by the Trust in 1999 to facilitate the relocation of its sole tenant, the Farmers department store, to The Plaza Shopping Centre as part of the centre’s redevelopment. The sale price equated to book value.

The Trust also sold its office building at 50 The Terrace in Wellington for $6.4 million. The sale price was in line with the 31 March 2011 valuation of $6.3 million. The property was acquired by the Trust in 2005 for $4.2 million and is located adjacent to another Trust property, 44 The Terrace, which is currently being marketed for sale by Colliers International.

The value of the Trust’s property portfolio reduced by $61.4 million (3.1%) to $1.92 billion as at 30 September 2011. The reduction reflects the above mentioned asset sales, the previously discussed value write-downs for Centre Place Shopping Centre and The Majestic Centre, the impairment of the PricewaterhouseCoopers Centre, offset by capital expenditure over the six months since March 2011.

Total assets, taking into account our allowance for insurance receivables together with cash on deposit, reduced by $6.8 million (0.3%) and as at 30 September 2011 the net tangible asset backing was $1.04 per unit.

Drawn bank debt at 30 September 2011 stood at $760.5 million, up from $759.0 million at 31 March 2011, and represents a bank debt to total assets ratio of 36.1%. In addition, the Trust had $84.3 million of Mandatory Convertible Notes funds on deposit and after allowing for this cash, the Trust’s net bank debt gearing ratio was 33.5%.

Post the reporting period, the Manager renewed and extended $297.5 million of bank debt facilities due to expire in March and April 2012, with new maturity dates between April 2016 and April 2017. A further $295 million of bank debt facilities with expiries in April 2014, April 2015 and May 2016 were each extended for a further 12 months. As at 30 September 2011, the weighted average term to maturity for the combined facilities was 2.0 years. Following the extension, this has increased to 4.0 years.

The Trust maintains $850 million of committed debt facilities by way of bilateral agreements with the four leading Australian-owned banks.

The Manager’s commitment to active capital management has led to the Trust’s weighted average cost of debt reducing from 6.71% at 31 March 2011, to 6.43% as at 30 September 2011, while 74% of the Trust’s debt was hedged.

Portfolio performance

As at 30 September 2011, occupancy across the Trust’s core retail and office portfolios remained at a healthy 97.2%, with a weighted average lease term of 4.0 years.

Retail portfolio

• Portfolio value: $1.24 billion
• Occupancy: 98.3%
• Weighted average lease term: 3.9 years
• Retail sales (incl. GST): $1.38 billion
• Specialty gross occupancy cost ratio (incl. GST): 13.7%

Total retail sales were $1.38 billion2 (including GST) for the year to 30 September 2011, an increase of 7.1% over the same period in the prior year. This reflected strong sales growth at Northlands Shopping Centre (due to earthquake redistribution effects) and The Plaza Shopping Centre (post redevelopment), together with solid increases at Sylvia Park Shopping Centre, LynnMall Shopping Centre and North City Shopping Centre.

On a comparable centre basis3, total portfolio sales increased 8.7% (or 4.1% excluding Northlands Shopping Centre) for the year to 30 September 2011.
The average specialty gross occupancy cost ratio (incl GST) improved to 13.7%, down from 14.2% six months ago.

In the six months to 30 September 2011, the Manager of the Trust completed rent reviews over 43,600 sqm of retail space, resulting in a 5.4% increase over prior passing rentals, while a total of 80 new leases or renewals were negotiated across the retail portfolio, reflecting the Manager’s active asset management approach.

At Centre Place, Hamilton, the Trust delivered a revamped foodcourt and new alfresco dining lane offer in time for the beginning of the Rugby World Cup. Both the dining lane and foodcourt opened 100% leased, with the outdoor dining precinct offering six new alfresco restaurant and café options and the indoor foodcourt comprising 10 food operators and 470 seats for diners, up from the previous 300.

Office portfolio

• Portfolio value: $571.6 million
• Occupancy: 95.5%
• Weighted average lease term: 4.3 years

During the six months ended 30 September 2011, 12 new leases were entered into and 11 rent reviews were concluded across the office portfolio. Consistent with the subdued office leasing market, no growth resulted from rent reviews while new leases or renewals recorded a 3.5% decline over prior passing rents.

Development

ASB North Wharf

Good progress continues to be made on the construction of the new head office building for ASB at North Wharf, Wynyard Quarter on Auckland’s waterfront. A fixed-price lump-sum construction contract has been executed with Fletcher Construction and the project remains on program to complete in time for ASB’s July 2013 lease commencement date.

The Trust’s involvement with this development has been structured to minimise its exposure to development and ongoing investment risk. Under the terms of the Trust’s Development Agreement with ASB, the rent payable by ASB to the Trust will adjust for any increases or decreases in the development agreement budget during the design, consenting and construction phases, so as to maintain the Trust’s projected yield.

Following execution of the construction contract, a comprehensive review of forecast expenditure has been completed and the development budget has been increased by $5.9 million to $132.14 million to provide for projected increases in construction, design, project management, holding and other costs. Once finally determined upon project completion, the actual cost increase will be recovered from ASB by way of a rental increase, such that the Trust’s target net rental income initial yield of approximately 8.5% will be achieved.

“When complete, this premium grade office building will provide an attractive investment return with a secure long-term income stream, underpinned by an 18-year lease to one of New Zealand’s leading banks,” said Chris Gudgeon, Chief Executive of the Trust’s Manager.

Centre Place redevelopment

The Trust is announcing a $39.9 million redevelopment of Centre Place Shopping Centre in Hamilton to reposition it as a competitive CBD specialty centre, which will be anchored by a new, two-level, 7,000 sqm Farmers department store.

“A new full range Farmers department store will complement our specialty retail offer and the recently completed foodcourt and dining lane developments. Centre Place will be firmly back on the map as a major retail destination offering fashion and entertainment in the heart of Hamilton city,” said Mr Gudgeon.

Farmers will take a 15-year lease over their new premises, with a target opening date in time for Christmas 2013. The redevelopment also features the construction of new premises for relocated mini-major, Rebel Sport and a range of new specialty retailers. Another key feature will involve the formal closing of Ward Street West, which currently divides the centre. Following Hamilton City Council’s completion of the road closure process, it will enable the creation of a covered pedestrian connection between the two parts of the centre.

“Centre Place has historically been the home of fashion in the Waikato and the planned redevelopment of the Centre provides Farmers with a great opportunity to operate a new large flagship CBD store in the heart of the fashion precinct,” said Managing Director of The Farmers Trading Company, Rod McDermott.

The Trust’s redevelopment of Centre Place complements Hamilton City Council’s „City Heart Revitalisation’ program. Hamilton Mayor, Julie Hardaker, said: “This is brilliant news and Kiwi Income Property Trust proceeding with this significant investment fits in so well with our own initiatives for the central city. The Council is committed to a number of projects aimed at bringing more life to Hamilton’s central city and this redevelopment is a very important part of that.”

Shopper carparking is becoming more accessible with Hamilton City Council undertaking works to improve access into its Garden Place carpark via a signalled intersection on Anglesea Street, due for completion in December 2011. Shoppers can also now access the Centre Place carpark on Bryce Street directly from Anglesea Street. The Council has also made good progress with landscaping and „street-scaping’ improvements to Bryce Street, Ward Street, Worley Place, Alexandra Street and Garden Place.

The incremental net income from the redevelopment is expected to provide the Trust with a return of approximately 8.4% on total project costs. The value of the centre on completion of the redevelopment is independently projected to be $140 million.

Interim distribution and distribution reinvestment plan

An interim cash distribution of 3.50 cents per unit for the six months ended 30 September 2011, together with imputation credits of 0.65 cents per unit, will be paid on 20 December 2011.

Since inception 18 years ago, the Trust has delivered a cumulative Total Return of 9.74% per annum5 and has outperformed both the NZX Property Gross Index and the NZX 50 Gross Index over the 10-year period to 30 September 2011.

The Board of the Manager has approved the reinstatement of the Trust’s Distribution Reinvestment Plan, and set a discount of 2%. This means that eligible Unit Holders may acquire additional units in the Trust at a 2% discount to the average unit price at which the units have been traded through the New Zealand Stock Exchange during the pricing period. The record date for the interim distribution is 1 December 2011 and the distribution will be paid on 20 December 2011.

Asia Pacific Real Estate Association (APREA) 2011 best practices awards

In October, the Trust received two merit awards in the APREA 2011 Best Practices Awards, recognising its market-leading practices in portfolio reporting and corporate governance. The Trust also received a merit award for the best submission from New Zealand companies.

Outlook

The Trust’s outlook continues to be impacted by the current moderate pace of economic recovery within New Zealand. Solid trading partner performance in Australia and growth in China continue to support high export commodity prices and demand for New Zealand exports, offsetting in part the weaker outlook for global economic growth. In contrast, the domestic economy in New Zealand continues to be characterised by a cautious household sector, with only modest improvement in terms of retail sales growth. Economists continue to forecast an improvement in economic growth, with a more sustained recovery in consumer spending becoming established during 2012.

The Trust continues to benefit from its diversified portfolio of retail and office assets, with its sound and diverse tenant base and high overall occupancy rate. These defensive characteristics, together with a strong financial position and an active management approach, should position the Trust to continue delivering solid underlying operating earnings.

In line with previous guidance and subject to a continuation of reasonable economic conditions, a distributable profit after tax for the year ending 31 March 2012 of approximately 7.00 cents per unit is projected. Distributions to Unit Holders are projected to be 95% to 100% of distributable profit after tax, with the Manager withholding up to 5% to assist with the future financing requirements of the Trust.

About Kiwi Income Property Trust
Kiwi Income Property Trust’s objective is to optimise returns for its Unit Holders through the careful acquisition, development and professional management of its property portfolio. The Trust is listed on the New Zealand Stock Exchange and is ranked within the top 15 on the NZX 50 Index, and is a member of the NZX 10 Index.

The total value of the Trust’s property portfolio is $1.92 billion. Assets include:

Key Retail Assets

Sylvia Park Shopping Centre, Auckland
LynnMall Shopping Centre, Auckland
Centre Place Shopping Centre, Hamilton
The Plaza Shopping Centre, Palmerston North
North City Shopping Centre, Porirua
Northlands Shopping Centre, Christchurch

Key Office Assets

Vero Centre, Auckland
National Bank, Centre Auckland
21 Pitt Street, Auckland
The Majestic Centre, Wellington
Unisys House, Wellington
44 The Terrace, Wellington

Kiwi Income Property Trust’s website address is www.kipt.co.nz

ENDS

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