KIP operational update

28 March 2013

KIP operational update

Kiwi Income Property Trust provides this operational update covering the annual portfolio valuation outcome, The Majestic Centre seismic strengthening program, details of recent office leasing activity and distribution guidance.

Portfolio valuations

The Trust today reported an expected net increase of approximately $21 million (+1.0%) in the value of its portfolio of shopping centre and office assets for the year ending 31 March 2013. The overall value of the Trust’s property portfolio will stand at $2.08 billion.

The valuations were determined by independent valuers, are subject to final audit and will be confirmed in the Trust’s financial results for the year to 31 March 2013 to be announced on 13 May 2013.

Mr Mark Ford, Chairman of the Manager of the Trust, said: “Capitalisation rates are on a firming trend and consistent with this we have seen some pleasing increases in the value of our property assets. In particular, positive valuation outcomes recorded for the Trust’s retail portfolio will put us in a position at year end where we will be able to record an increase in underlying net assets per unit.”

The Trust’s undiluted net tangible asset backing per unit is expected to be approximately $1.13 as at 31 March 2013, up from $1.09 in the prior year, and the net bank debt gearing ratio is expected to be approximately 32%.

The weighted average capitalisation rate for the portfolio has firmed 27 basis points to 7.52% and the independent valuations indicate that over-renting across the portfolio is approximately 1.0%.

Retail portfolio valuation

The value of the Trust’s retail portfolio increased $21.5 million (+1.6%) to $1.35 billion, driven by its Auckland shopping centre assets. The Trust’s flagship asset, Sylvia Park, increased in value by $36.7 million (+7.3%) to $540.0 million due to its strong trading performance, and LynnMall, which was purchased by the Trust in December 2010 for $174 million, has continued to show value growth, rising to $204.0 million, an increase of $12.0 million (+6.3%) over the prior year.

At Northlands in Christchurch, the valuer has made allowances for the cost to complete reconstruction of an area within the centre that was closed in March 2012, and for the cost of certain earthquake remedial works that are the subject of an insurance claim. The centre’s value has accordingly been adjusted further downwards by $14.6 million to $205.5 million. A related insurance receivable of $16.6 million has been separately recorded.

Mr Chris Gudgeon, Chief Executive of the Manager of the Trust, said: “Northlands continues to trade well while good progress is made behind the scenes on reconstruction activities, with 10 new shops scheduled to open progressively between August and November this year. Steady progress is also being made on the resolution of insurance claims.”

“Completion of the claims lodgement process and resolution of appropriate remedial works and associated costs is expected to be ongoing over the course of the year. A number of claims have already been lodged, with some payments received,” Mr Gudgeon added.

At Centre Place in Hamilton, the value of the centre was adjusted downward by $7.1 million (-6.4%) to $104.9 million, consistent with a reduction in the projected value ‘on completion’, as account is taken of the level of rents and incentives required to complete leasing in a competitive environment. The projected net income on completion is now approximately $10.0 million (pre-amortisation of leasing fees and incentives), down from the initial target of $11.0 million. Despite this, both the leasing and construction programs remain on track for the target October 2013 completion date, with Hamilton shoppers keenly anticipating the opening of the new 7,000 sqm Farmers department store, the refurbished Hoyts multiplex cinema and the new specialty retail offer.

At North City in Porirua, a new 10-year lease to Kmart and a four-year lease renewal for Farmers have increased the centre’s weighted average lease term by 1.1 years, however a value decline of $5.9 million (-5.6%) was recorded due to market corrections in rental levels.

The weighted average capitalisation rate for the retail portfolio has firmed 24 basis points to 7.31%. The independent valuations indicate that overall retail rents are essentially at market levels.

Mr Gudgeon said: “It is pleasing to see the growth in value of our retail portfolio, underpinned by our Auckland shopping centres, Sylvia Park and LynnMall. Over the past two years, these two shopping centres have delivered combined revaluation gains in excess of $80 million.”

Office portfolio valuation

The value of four of the Trust’s five office buildings increased, but the value of the portfolio as a whole decreased by $4.2 million (-0.8%) due to a $14.3 million write-down in the value of The Majestic Centre, Wellington following an increase in the earthquake strengthening budget.

Mr Gudgeon said: “We set out in November 2011 to strengthen The Majestic Centre to 70% of New Building Standard (NBS) at a projected cost of $35 million. Having now substantially completed the structural design for the strengthening solutions it has been necessary to increase the project budget by $19 million due to an increase in the scope of work. The increase in the project budget will however allow us to strengthen the building to a target level of 100% NBS, in recognition of the strong tenant demand for fully strengthened buildings in the Wellington market.”

“The value of this rigorous and comprehensive strengthening project, which commenced on site in July 2012, has been recognised by incumbent tenants, Opus and New Zealand Trade and Enterprise, who have recently entered into new long-term lease agreements for a combined area of approximately 6,300 sqm.”

Excluding Beca House, which was sold during the period, and The Majestic Centre, the like-for-like value of the office portfolio grew by $11.0 million (+2.4%), reflecting generally improved market conditions. The like-for-like weighted average capitalisation rate firmed by 26 basis points to 8.08% and the independent valuations indicate that over-renting across the office portfolio has reduced to just 3.6%.

While not yet included in the core office portfolio, ASB North Wharf has also contributed positively to the valuation result. The building, which is on schedule for practical completion on 31 May 2013, recorded a $3.9 million (2.9%) value uplift. The building’s value ‘on completion’ is now projected to be $153 million.

Also during the year, the Trust's 3,026 sqm land holding at 119 Armagh Street, Christchurch, the site of the former PwC Centre, was sold for $4.96 million, comparing favourably with its $4.23 million book value.

Office leasing outcomes

The Trust has recently secured a number of positive leasing outcomes within the office portfolio.

Business law firm DLA Phillips Fox has agreed to a new eight-year lease for its existing premises within the National Bank Centre in Auckland. DLA Phillips Fox, which has been a tenant in the building since 1994, will continue to occupy 2,924 sqm of space over five levels, with a new lease commencement date of April 2014.

At The Majestic Centre, engineering consultancy firm Opus has agreed to a new 12-year lease term commencing January 2014. The firm will occupy 3,313 sqm of contiguous office space over three and a half floors. Also at The Majestic Centre, the New Zealand Government’s business development agency, New Zealand Trade and Enterprise (NZTE), has committed to a new seven-year lease, commencing February 2013 over 2,976 sqm of office space.

At the Vero Centre in Auckland, law firm Russell McVeagh has committed to a new 5.5-year lease to June 2021. Under the current lease, which expires in December 2015, Russell McVeagh occupies 7,453 sqm of office space over six floors but will down-size by one floor, to 6,216 sqm, when the new lease commences.

The office portfolio weighted average lease term increases by one year as a result of the above-mentioned lease agreements.

Distribution guidance

Mr Ford said: “As announced with the Trust’s interim result in November, the repayment of over $100 million of bank debt in the current financial year has been positive from a balance sheet perspective, however the reduction in rental income resulting from the sale of Beca House and the liquidation of our interests in the now

demolished PwC Centre contributed to a lower operating result. Consequently, we drew $2.4 million from the Trust’s long-held distribution reserve to offset this for the interim distribution payment.”

“Consistent with the interim distribution and, in-line with guidance, it is anticipated that Unit Holders will receive a final cash distribution of 3.30 cents per unit, taking the full year cash distribution to 6.60 cents per unit. The final distribution payment in June 2013 will include approximately $2.8 million from the distribution reserve, leaving a balance of approximately $10 million.”

“The New Zealand economy continues to show signs of improvement with economic growth of 2.4% and 3.2% forecast for 2013 and 2014 respectively1. Latest business confidence indicators have also been positive. Combined, this should lead to wages and employment growth, which will likely benefit both the office and retail sectors in the medium term. In the short term, we are mindful that New Zealand is currently experiencing drought conditions which may constrain economic growth.”

1 ASB Economics.

“Overall, our outlook continues to be governed by the moderate pace of economic recovery in New Zealand. We continue to see the need to remain cautious while at the same time take into account the cost and income impacts of our earthquake strengthening requirements, notably at Northlands Shopping Centre and The Majestic Centre. Based upon the outlook for the Trust and subject to a continuation of reasonable economic conditions, we are projecting distributions to Unit Holders, for the year ending 31 March 2014 to be approximately 6.40 cents per unit. After utilising a portion of the distribution reserve, this would represent a payout ratio of approximately 104% (before performance fees, if any).”

A full valuation summary has been provided to NZX with this announcement.

ENDS

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