ANZO full-year distributable profit up 2.5 percent

August 3, 2010

AMP NZ Office Trust (ANZO), New Zealand’s largest listed investor in prime commercial office property, has delivered a solid full-year performance, reporting a 2.52 percent increase in distributable profit (1) for the 12 months to 30 June 2010.

ANZO unit-holders will receive a 2.0 percent increase in gross distributions for the year, as communicated during the year and in line with the target stated in ANZO’s distribution policy.

ANZO’s acting chief executive Amish Vallabh said the result reflected both higher rental revenues and reductions in some expenses.

Financial Overview
Rental revenues were $4.54 million or 3.4 percent higher than the previous year at $137.92 million, reflecting continued positive rent review outcomes, new leases and lease renewals.

While direct (property-related) expenses for the year were higher (in line with expectations), indirect expenses were lower. Key items included a $4.83 million or 18.62 percent decrease in interest costs as a result of last year’s reduction in bank debt, while asset management fees were down $1.27 million or 12.99 percent due to lower portfolio values.

ANZO’s operating profit after current taxation for the year (the profit available for distribution to investors) (1) was up $1.49 million or 2.52 percent to $60.67 million.

Earnings per unit, based on distributable profit, were 6.08 cents per unit, compared with 8.39 cents per unit for the previous year and reflecting an increased number of units on issue following last year’s capital-raising.

ANZO unit-holders will receive a gross fourth-quarter distribution of 1.766 cents per unit, bringing the total gross distribution for the year to 7.058 cents per unit (compared with 6.92 cents per unit for the 2009 financial year). The net fourth-quarter distribution will be 1.616 cents per unit, bringing the total net distribution for the year to 6.113 cents per unit (2009 financial year: 6.337 cents per unit). The record date for the fourth-quarter distribution is 17 August 2010 and payment will be made on 24 August.

Mr Vallabh said 2010’s full-year distribution reflects a payout ratio of 100.5 percent of the distributable profit for the year. As at 30 June 2010, ANZO’s distribution reserve balance was $15.2 million.

ANZO is required under the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) to take into account a number of non-cash adjustments in reporting net profit. As previously communicated, this year ANZO is required to show a one-off, unrealised increase in deferred tax on revaluation gains following changes to depreciation rules announced in the Government Budget in May. ANZO also carried out two portfolio revaluations during the year, at 31 December 2009 and again at 30 June 2010, which showed a total decline in portfolio value of 7.75 percent or $115.3 million (2).

As a result of these and other items, including an unrealised loss on the fair value of ANZO’s interest rate swaps, ANZO has recorded an unrealised net loss of $152.12 million for the year, compared with an unrealised net loss of $192.84 million the previous year. The unrealised loss under NZ IFRS does not affect the profit available for distribution to investors.

Mr Vallabh said ANZO’s NZ IFRS net tangible assets (NTA) as at 30 June 2010 was $0.75 cents per unit, down from $0.97 the previous year as a result of the portfolio revaluations and the increase in deferred tax on revaluation gains required by the tax changes.

The adjusted NZ IFRS NTA (after reversing deferred tax on revaluation gains, which ANZO is not required to pay under current New Zealand tax law) is $0.92 per unit.

ANZO’s gearing ratio remains one of the lowest in the Australian and New Zealand listed property sectors, at 22.8 percent as at 30 June 2010, compared with the loan covenant ratio of 40 percent.

As at 30 June 2010, ANZO had 94.5 percent of its total bank debt fixed through interest rate swaps, at a weighted average interest rate of 7.90 percent (including margin and line fee). The interest cover ratio for the 12-month period ending 30 June 2010 was 4.07 times, compared with a covenant of 2 times.

Portfolio Update
ANZO’s portfolio occupancy rate as at 30 June 2010 showed a slight increase on the previous quarter at 90.4 percent, with 12 out of the 15 buildings in the portfolio now more than 95 percent occupied. The portfolio weighted average lease term was 4.5 years.

During the financial year, ANZO secured 23 new leases (including five new tenants to the portfolio), covering 26,406 sqm of office and retail space. These included the second-largest lease transaction by floor area in ANZO’s 12-year history – a new six-year lease to the Department of Corrections for the majority of the space in Wellington’s Mayfair House. A series of additional new leases concluded in the final quarter of the year included:

• Intellectual property lawyers and patent attorneys AJ Park – a 12-year lease for 2,150 sqm in Wellington’s State Insurance Tower, commencing May 2011
• Rabobank – a nine-year lease in Wellington’s Vodafone on the Quay for 1,470 sqm, commencing March 2011
• Southern Cross Travel Insurance – an additional 1,100 sqm in the AMP Centre in Auckland, on a nine-year term commencing October 2010.

A further 14 lease renewals, representing 15,156 sqm, were also negotiated, along with 78 rent reviews which resulted in an average 22.7 percent increase over the previous contract rentals. Another 24 rent reviews covering 35,000 sqm will be carried over to the new financial year.

Other key portfolio events of the year included the successful marketing campaign for the sale of five individually-titled retail units in Wellington’s Chews Lane precinct, resulting in all five being sold for a total of $11.7 million (before deducting disposal costs), ahead of ANZO’s book value at 30 June 2009 for the five units.

Outlook
The property tax changes announced by the Government in May 2010 will have a negative impact on ANZO’s net cash distributions from 1 July 2011 of around 7%-9%. The Government is also currently reviewing the ability to depreciate certain building fit-outs. Any changes to tax laws as they apply to building fit-out depreciation could have a further negative impact on net cash distributions.

The chairman of the board of ANZO’s Manager, Craig Stobo, commented: “Property market conditions continue to be challenging, with the Auckland office market, in particular, remaining difficult. While we have started to see the New Zealand economy return to positive GDP growth, volatility remains within the global economy and this will continue to have an impact on the road to a full market recovery in the property sector.”

He noted that for the year ended 30 June 2010, ANZO has delivered on its targeted minimum 2.0 percent annual growth in gross distributions. However, the outlook for ANZO’s financial performance and continued distribution growth over the next few years is contingent on meeting leasing targets, improving occupancy within the Auckland market, the risk of market rents continuing to soften, and continued improvement in the NZ and global economic outlook.

The Manager will continue to focus on ensuring ANZO’s business is in the best place to deliver long-term sustainable returns. The Manager will continue to review the portfolio configuration, capital structure and the distribution policy of ANZO.

Corporate Governance and Management Fee Review
A strategic review of ANZO’s corporate governance and management structure was initiated in October last year and resulted in a series of proposals being announced in February 2010. These include a proposed new corporate structure and governance model that clearly separates the interests of ANZO and its Manager, and a management fee structure that strongly incentivises the Manager to deliver the best investment outcome for ANZO’s investors.

Significant progress has been made with a number of regulatory bodies, including the Securities Commission, NZX, Overseas Investment Office and overseas regulators.  The Manager is currently working to finalise the terms of exemptions from the Takeovers Code to apply once ANZO is corporatised.  Once these are finalised the Manager intends to send unit-holders an information pack with a notice of unit-holder meeting to seek approval of the changes being proposed.

A recruitment process for a new chief executive has also been taking place and the new appointee is expected to be announced by the end of the September quarter.

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 NZ IFRS in July 2006.

2. Including capital expenditure during the year.

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 $1.27 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).