Proposed tax changes will hurt investors: ANZO

February 4, 2010

AMP NZ Office Trust (ANZO), New Zealand’s largest listed investor in prime commercial office property, is maintaining unit-holder distributions for the first six months of the financial year in line with expectations.

However, the board of ANZO’s management company has expressed its concerns about the impact of two of recommendations included in the recent report by the Tax Working Group.

Chairman Craig Stobo said on behalf of the Board of Directors that the proposed removal of building depreciation and the introduction of a land tax, if adopted, will have a negative impact on the near-term stability of earnings and investor distributions for ANZO and other listed and unlisted commercial property entities.

ANZO’s prospective after-tax distributable profit (the profit available for distribution to investors) for the coming 2011 financial year would be reduced by approximately 8-10 percent in a worst-case scenario, whereby the depreciation allowance on buildings is fully abolished.

“Listed property is an investment which is particularly popular with older investors, who are already finding it tough in this economic environment and depend on regular income from their investments,” said Mr Stobo.

Meanwhile, there is also a potential impact on businesses from the proposed land tax, as the most likely outcome is that this will be passed through to building occupiers as permitted by the majority of lease contracts.

“The burden of these proposed taxes is therefore going to be borne by investors who have taken steps to provide for their future, and the businesses which are providing jobs for the current generation of workers – neither of which have much ability to absorb new costs in the current economic environment,” said Mr Stobo.

“New Zealand’s relative competitive position on the global stage and ability to attract capital from overseas investors will also be diminished by any new taxes that are imposed,” Mr Stobo concluded.

Commenting on ANZO’s governance and management fee structures, he said the separate director reviews of these two aspects, which were announced last year, continue to progress and an update will be provided before the end of February.

Announcing ANZO’s financial result for the six months to 31 December 2009, chief executive Robert Lang said unit-holders will receive a gross second-quarter distribution of 1.764 cents per unit (net 1.523 cents per unit). This is consistent with the first-quarter distribution on a gross basis and reflects the previously-communicated 2.0 percent increase in gross distribution for the full financial year. The record date for the second-quarter distribution is 18 February 2010 and payment will be made on 25 February.

Mr Lang reconfirmed that ANZO is on track for a full-year gross distribution of 7.058 cents per unit for the current 2010 financial year, representing an increase of 2.0 percent on the previous year.

Mr Lang said ANZO’s distributable profit (1) for the six months was up 18.5 percent on the previous corresponding period, on the back of higher rental revenues and lower interest costs and asset management fees.

Rental revenues for the interim period rose 7.8 percent to $70.32 million, as a result of continued positive rent review outcomes, new leases and lease renewals. Mr Lang noted that the rental revenues figure included some payments in settlement of rent reviews begun during the previous financial year and reflected growth in market rentals which had taken place during past years.

ANZO’s interest costs for the six months were down $3.22 million or 24.3 percent to $10.02 million, following the partial repayment of bank debt last financial year.

Asset management fees were 14.2 percent lower, due to reduced portfolio values. As previously advised, the management fee applicable to 21 Queen Street has been reduced by 50 percent to reflect the slower-than-expected leasing progress in this property.

ANZO’s net operating profit after current taxation for the period – the profit available for distribution to investors – was $32.1 million, showing a $5.00 million increase over the previous interim period.

Earnings per unit, based on operating profit after current taxation, were 3.22 cents per unit, compared with 3.94 cents per unit for the previous corresponding period. This reflects the increased number of units on issue following last year’s capital-raising.

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 a result, ANZO has recorded an unrealised net loss of $27.76 million, for the six months. This includes the interim portfolio revaluation announced in December 2009, which resulted in a net decline of $63.12 million (2) as well as a gain in the fair value of ANZO’s interest rate swaps. Mr Lang reiterated that the unrealised loss under NZ IFRS does not affect the profit available for distribution to investors.

ANZO’s gearing ratio remains one of the lowest in the Australian and New Zealand listed property sectors, at 21.7 percent as at 31 December 2009, compared with the loan covenant ratio of 40 percent. The interest cover ratio for the 12-month period ending 31 December 2009 was a healthy 3.13 times, compared with a covenant of 2 times.

ANZO’s net tangible assets (NTA) per unit as at 31 December 2009 under NZ IFRS was $0.91 per unit. 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) was $0.96 per unit.

Portfolio occupancy remains relatively steady at 89.9 percent. The portfolio weighted average lease term (WALT) was 4.5 years.

Portfolio successes during the interim period included:

• Seven new leases and eight lease renewals, with Mr Lang noting that tenants continue to recognise the opportunity to lock into the favourable terms on offer in the current market.
• Fifty-one rent reviews, resulting in an average net increase over the previous contract rents of 24.5 percent.

“Vacancy levels, both within the portfolio and in the market, are now rising off historic lows and this is translating into downwards pressure on rentals,” said Mr Lang. “We anticipate ANZO’s distributable profit for the full financial year to 30 June 2010 to be approximately level with the previous year. Looking further ahead, growing ANZO’s unit-holder distributions in 2011 will be contingent on factors such as achieving leasing targets for 21 Queen St, improving occupancy across the portfolio and market, and the proposed tax changes being considered by the Government.”

ANZO is managed by AMP Haumi Management Limited.

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. Includes capital expenditure of approximately $3 million for the six month period

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).

The financial statements accompanying this announcement reflect the fact that effective 1 July 2009 NZIAS 1 (revised 2007) requires ANZO to present a Statement of Comprehensive Income rather than an Income Statement.  This new statement required all non unit-holder changes in equity to be deducted from profit (loss) after tax to reflect a total comprehensive income (loss) after tax attributable to unit-holders.  At 31 December 2009 there were no non unit-holder changes in equity, resulting in the profit (loss) after tax being the same as total comprehensive income (loss) after tax attributable to unit-holders.