ANZO reports $59.2 million full-year distributable profit

August 13, 2009

AMP NZ Office Trust (ANZO), New Zealand’s largest listed investor in prime commercial office property, says capital management initiatives carried out during the 2009 financial year have resulted in a stabilised business able to withstand an uncertain recession prognosis, negative property valuation outlook and tough banking environment.

Chief executive Robert Lang noted that a three-year extension of half of ANZO’s bank debt facility had been followed by a $201 million renounceable rights issue, completed in June, allowing the balance of bank debt to be retired. The combination had secured ANZO’s funding on commercially-acceptable terms and had delivered a balance sheet that is one of the strongest and lowest-geared in the Australian and New Zealand listed property markets, with good headroom between ANZO’s actual gearing and gearing covenants and interest cover ratios.

ANZO undertook its renounceable rights issue in May in the interests of all unit-holders in the current economic times and declared a full-year gross distribution of 6.920 cents per unit (a 17.5 percent decrease from the previous year). The restabilised business and adjustment to recessionary conditions has enabled a revised and sustainable distribution outlook that includes annual gross distribution growth of 2.0 percent.  On this basis, ANZO is targeting a full-year gross distribution of 7.058 cents per unit for the current 2010 financial year, funded from distributable profit. Mr Lang pointed out that future distributions are underpinned by ANZO’s distribution reserve account, which now contains $15.6 million.

He said ANZO’s distributable profit (1) (operating profit after current tax) for the full year to 30 June 2009 was 13.4 percent higher than the previous year, at $59.2 million.  The decision to retain and allocate $11.5 million of the distributable profit to ANZO’s distribution reserve account was part of the capital raising and revision of the 2009 distribution and distribution policy adjustment, announced to the market in May.

ANZO unit-holders will receive a final gross distribution for the 2009 year of 1.364 cents per unit (net 1.333 cents per unit). The record date is 27 August 2009 and payment will be made on 3 September.

ANZO carried out two portfolio revaluations during the year, which recorded an unrealised reduction in the value of investment properties of $248.3 million (2) and an unrealised development loss of $34.4 million on the 21 Queen Street project in Auckland.  ANZO’s total assets at balance date were $1.4 billion, a decrease of 14.1 percent from the previous year following the portfolio revaluations. Total liabilities reduced by 30.0 percent, largely as a result of ANZO’s rights issue.

Net tangible assets (NTA) per unit at balance date under NZ IFRS was $0.97 per unit, compared with $1.47 a year earlier. 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) was $1.02 per unit ($1.63 as at 30 June 2008). The comparisons are partly reflective of the 309,635,422 new units issued in ANZO’s capital-raising, as well as the reduction in portfolio value.
Gearing at balance date was 20.5 percent, below ANZO’s bank facility covenant of 40 percent.  ANZO’s interest cover ratio for the year was 2.53 times and is expected to increase to in excess of 3.7 times during the 2010 financial year.

Mr Lang said ANZO’s rental revenue for the year was up 10.9 percent on the previous year to $133.4 million, largely as a result of the outcomes of rent reviews, which delivered an average increase of 25.7 percent over the previous contract rents. Although rental growth in the wider market had slowed, ANZO’s rent reviews were catching up with growth that had taken place over the previous two or three years. Mr Lang said 2009’s rentals could potentially have been higher but rent reviews were taking longer to settle in the current economic climate and a number had been carried over to the new 2010 financial year.

The momentum will continue into ANZO’s current financial year, with rent reviews covering a total of 124,550 sqm or almost 50 percent of the portfolio area scheduled to take place. Portfolio under-renting stands at three percent and under-renting on some leases ranges up to 36 percent.

Mr Lang said ANZO’s earnings per unit for the year (based on the operating profit after current taxation and calculated on weighted average units on issue throughout the year) were 8.39 cents, a 10.7 percent increase.
The unrealised losses in property values, in combination with a lower mark-to-market value for ANZO’s interest rate swaps at balance date, mean ANZO has reported a net loss for the 2009 financial year of $192.8 million under International Financial Reporting Standards (IFRS), which requires ANZO to take into account non-cash items.

Commenting on the 21 Queen St project in Auckland, Mr Lang said ANZO remains in advanced negotiations with multiple potential tenants for the office space, while ground-floor retailer Dick Smith Electronics is now open and trading. The project, which has been awarded a green star rating of five for environmental sustainability – the highest attainable under the New Zealand Green Star system – is on track for completion at the beginning of October.

ANZO’s portfolio occupancy at balance date was 97.2 percent (2008: 98.7 percent), with five properties 100 percent occupied. The weighted average lease term (WALT) is 4.7 years (2008: 4.9 years).

In addition to the 70 rent reviews completed during the year, ANZO’s asset managers had secured eight new leases covering approximately 7,000 sqm (compared with 9,870 sqm in 2008) and 21 lease renewals covering 22,170 sqm. The rentals on the majority of the renewals will be agreed in the first half of the current financial year.
Less than 11.4 percent of ANZO’s portfolio is subject to lease expiries during the current year, down from the expected 18.7 percent for the same period which was forecast a year ago – a reflection of ANZO’s proactive management approach and a renewed willingness by tenants to re-commit to their premises.

Mr Lang said tenant confidence was improving, albeit from a low base. “Eighteen months into the recession, we have had only three small tenant defaults, one of which has already been replaced on better terms with no loss incurred. This represents a very small proportion of ANZO’s 220 tenants and reinforces the benefits of a high-quality tenant roll.” He added that 27.6 percent of ANZO’s portfolio area was leased to core Crown tenants.

Mr Lang said ANZO’s board and management were satisfied with the way the business had been adjusted to withstand the recession and its legacy. “Overall, we believe ANZO is in the best position that it can be to perform operationally and deliver returns consistent with sustainable growth and a modest risk profile.

“For the 2010 financial year, the key focus will be our core business of maintaining the portfolio and improving income from leasing, renewals and rent reviews,” he said, noting that ANZO stands to benefit from 2009 rent reviews that have been carried over into the current year. “Recent surveys have shown that business confidence is beginning to return, which is a welcome sign. However, the valuation environment seems likely to continue to come under pressure while macro-economic conditions remain weak.”

ANZO is managed by AMP Haumi Management Limited.

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, 151 Queen Street, 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).

Footnotes:
1. In common with virtually all of New Zealand’s listed property entities, ANZO continues to hold the view that distributable profit is the most relevant indicator of profit. Under NZ IFRS, net profit after tax (NPAT) now includes a number of non-cash adjustments – some of which will never crystallise – such as deferred tax. Other non-cash adjustments include the fair value of interest rate swaps and unrealised revaluation gains/losses on investment properties. These do not affect the profit available for distribution to investors. It should also be noted that the presentation of this result and the accompanying comparative figures is consistent with ANZO’s previous practice since its adoption of NZIFRS in July 2006.

2. After allowing for capital expenditure of $7 million.