ANZO reports a 5.15 percent decline in portfolio value since March

July 13, 2009

AMP NZ Office Trust (ANZO), New Zealand’s largest listed investor in prime commercial office property, has reported an unrealised $72.25 million (1,2) reduction in the value of its portfolio for the three months to 30 June 2009.

The 5.15 percent decline over three months follows an earlier nine-month interim revaluation to 31 March 2009. Carried out in mid-June, the latest revaluation states that ANZO’s portfolio value has reduced by a total of $239.10 million (1,2) or 15.24 percent over the full year to 30 June 2009.

ANZO chief executive Robert Lang said that the credit crisis, economic recession and its effect on the investment market have had a significant impact on most asset classes including property.

While the earlier reduction in value to 31 March 2009 had been primarily attributable to an increase in the capitalisation rates adopted by valuers, the latest three-month revaluation also showed the effects of a deterioration in sentiment held by valuers around market rental levels and rental growth projections, which also had a bearing on the increased capitalisation rates.

“This is consistent with our expectations and the views held at the time of ANZO’s recent rights issue,” said Mr Lang. “Valuations are under pressure from the dual impact of capital market illiquidity and weakening rental levels, and this environment is likely to prevail as the global and local economies struggle. In times such as these, capitalisation rates are the first to move, and market rentals and growth rates inevitably follow until they find their floor.”

“This is a circumstance that ANZO and its investors – along with investors around the world – are obliged to endure while macro-economic conditions remain weak.”

The revaluation was carried out by independent registered valuers CB Richard Ellis and Colliers International. It is subject to audit and will be incorporated into ANZO’s year-end financial statements as at 30 June 2009. Due to the timing differences in the reporting cycles of New Zealand’s listed property trusts, ANZO’s portfolio valuation is more current than those announced by other major property trusts.

Mr Lang added that the $201.3 million in new equity capital raised through ANZO’s recent pro-rata renounceable rights issue provided a prudent capital buffer. Gearing (for loan covenant purposes) at year-end is approximately 20.5 percent, well below the 40 percent loan covenant limit. ANZO’s capital commitments are fully funded through existing banking facilities, which do not expire until late 2011 and mid 2012.

Following the revaluation and the most recent reported NTA (disclosed in the rights issue Investment Statement dated 13 May 2009), ANZO’s net tangible assets (NTA) under NZ IFRS is forecast to decrease from $1.03 per unit to $0.97 per unit. ANZO’s adjusted NZ IFRS NTA (after reversing deferred tax on revaluation gains – which ANZO is not required to pay under New Zealand tax law) is projected to be $1.02 per unit, down from $1.11 per unit.

Mr Lang reiterated that the revaluation is unrealised and does not affect distributions to ANZO’s unit-holders. ANZO is New Zealand’s only specialist premium commercial office listed property trust, with a revised portfolio value of $1.329 billion.

He also pointed out that while market rentals were beginning to soften, ANZO’s contract rentals – and therefore revenues – were still growing. The revaluation has also confirmed that the portfolio is approximately 2 percent under-rented. “Although the valuers have appropriately responded to the investment environment, ANZO is continuing to benefit from a resilient portfolio, with a current occupancy rate of 97.2 percent.

“The outcomes being achieved with rent reviews mean that ANZO’s rental revenue growth for the full financial year to 30 June 2009 is expected to be consistent with the 12 percent increase recorded for the nine months to 31 March 2009.”

Mr Lang said rent reviews covering a total of 124,550 sqm or almost 50 percent of the portfolio area were scheduled to take place during ANZO’s current 2010 financial year, with under-renting on some leases ranging up to 36 percent. The rent views completed in the 2009 financial year had resulted in an average increase of 25.7 percent over the previous contract rents.

21 Queen Street Development
In line with accepted practice, the valuation of ANZO’s 21 Queen St building in Auckland treats the property as a completed but fully vacant development. The economic recession has significantly affected this project with the revised value as at 30 June 2009 declining further to $71 million. This compares to $87 million in March 2009. The project is expected to be valued below cost on completion and as a result, an appropriate impairment will be recognised in the year-end accounts. Mr Lang said the reduction has been driven by three main factors – near-term completion and currently-vacant state, softening in market rentals and capitalisation rate. While the recession has, for the time being, reduced the confidence of potential tenants, enquiry has recently improved and solid leasing progress is being made. Furthermore, the valuation is expected to improve following the development’s completion and it achieving fully leased status.

Outlook
Mr Lang said the economic climate is likely to remain challenging through the course of the coming financial year. He noted that in responding to this outlook, the board and management have taken a particularly proactive and cautious approach to preserving value in the Trust’s business. Following the recent rights issue and extension of bank facilities, ANZO’s balance sheet is one of the strongest and lowest-geared in the Australian and New Zealand listed property markets. In addition, ANZO’s rental cash flows remain strong, underpinned by high-quality tenants (27.6 percent of the portfolio NLA is leased to the Crown), with a weighted average lease term of 4.7 years. These features mean that ANZO and its unitholders can move forward with cautious optimism.

ANZO’s full-year result for the year to 30 June 2009 is scheduled to be announced on August 13.

ANZO is managed by AMP Haumi Management Limited.

Footnotes:
1. Excludes 21 Queen St in Auckland, which is classified as a development property and is held at cost.
2. Before deducting $7.2 million in capital expenditure over the year, including $2.0 million in capital expenditure over the three months to 30 June 2009.

About ANZO
ANZO is New Zealand’s largest listed investor in prime and A-grade commercial office property. A unit trust listed on the New Zealand Exchange, ANZO currently owns 15 New Zealand office buildings with a total gross value of more than $1.3 billion – Auckland’s PricewaterhouseCoopers Tower, ANZ Centre, IAG House, AMP Centre and 21 Queen Street; and Wellington’s State Insurance Tower, Vodafone on the Quay, HP Tower, 125 The Terrace, No. 1 and 3 The Terrace, Pastoral House, Mayfair House, AXA Centre, Deloitte House and 29 Willis Street (Chews Lane).

Valuations carried out by Colliers International and CB Richard Ellis.
* Ground lessors’ interest. Valued on DCF basis to reflect 49 year remaining fixed (highly over-rented) cash flow