AMP NZ Office Trust Result to 30 June 1999August 13, 1999 AMP NZ Office Trust announces its result for the full-year to 30 June 1999. The operating result before revaluations and tax, and unit holder distributions has exceeded the prospectus forecast made in November 1997. An unrealised revaluation write-down of the Trust’s portfolio resulted in the net surplus for the period falling below the prospectus forecast. Key aspects of the result are:
Operating Result Up $3.5 millionFor the full-year to 30 June 1999, the Trust produced an operating result before revaluation and tax of $36.1 million, which is $3.5 million or 11% ahead of prospectus forecast. The key drivers for the superior operating result were higher than forecast net income from the property portfolio, and lower issue and interest costs. Net operating income from the property portfolio, at $44.3 million, was 6% higher than forecast. This arose in part from a better than expected performance from the office properties and the Wellington Parkroyal Hotel. Included in this figure is a one-off benefit from a favourable stamp duty ruling received during the period, which related to the original property acquisitions by the Trust. This effectively reduced issue costs/stamp duty by $2.40 million and contributed directly to the operating result. Fund operating and net interest expenses were also lower than forecast. This reflected the low interest rate environment during the period and lower than forecast interest bearing liabilities. Revaluation Write-down of $17.2 millionThe Trust’s policy is to undertake full property re-valuations at financial year end. A deterioration in the Central Business District (“CBD”) office markets in general and office rentals in particular over the period resulted in a net revaluation write-down of $17.2 million or 3.4% of the net portfolio value. While the write-down is clearly reflective of the difficult market conditions over the period, the quality of the Trust’s assets and overall strength of its portfolio has minimised the degree of write-down on a market comparison basis. Other office portfolios appear to have experienced write-downs of 5-10% over the same period. Although clearly disappointing in itself, with a write-down in the order of 3.4% the Trust has performed well in comparison to other office portfolios and the office market in general. Net asset backing on a fully diluted basis is 92.7 cents per unit. Net Surplus Down $13.7 millionIn accordance with accounting standards, the unrealised revaluation write-down is brought to account in deriving the net surplus for the period. As a consequence, the positive operating result of $36.1 million was offset by the revaluation write-down to generate a net surplus (after revaluation and taxation) of $18.9 million, $13.7 million below prospectus forecast. Distributions Up 14%While the revaluation write-down is brought to account as a revaluation loss in the net surplus for the period, it does not impact on the operating result and amount available for distribution. As a result of the higher than anticipated operating result for the financial year, the manager is pleased to announce an un-imputed distribution of 8.88 cents per unit for the full-year. This includes a normal distribution of 7.72 cents per unit and an additional one-off distribution of 1.16 cents per unit arising from the issue cost savings. An un-imputed interim distribution of 4.87 cents per unit was paid to unit holders on 31 March 1999. Accordingly, a final un-imputed distribution of 4.01 cents per unit will be paid to unit holders on 30 September 1999. The total distribution represents a 14% increase over the prospectus forecast distribution. The increased distribution is in accordance with the Trust’s policy to distribute substantially all of its available net surplus. OutlookA flat domestic economy and low levels of leasing and investment activity in the Auckland and Wellington over the past 12 months has created a difficult operating environment for both office markets. A contraction in general employment coupled with lower business confidence and the further release of office space onto the sub-lease market meant that the supply/demand imbalance remained unfavourable over the period. This environment led to a general deterioration in market rentals and growth forecasts, these having a negative impact on valuations across the sector. Despite difficult market conditions, key features of the Trust including its high occupancy level, tenure of its existing leases and strong cash flow ensured that the Trust performed comparatively strongly over the period from an operational cash flow and a valuation perspective. Looking forward, two key drivers will dictate the timing and the degree of recovery in the CBD office markets. Firstly, while the economy is undoubtedly in the early stages of recovery, it is likely to take some time for an improvement in real economic growth to flow through to CBD employment and office absorption rates. The experience of the early-mid 1990’s suggests however, that the higher quality sectors of the CBD office market are likely to respond more rapidly to economic growth and higher employment by way of increased demand and absorption of space, lower vacancies and increased rentals. A further facet of CBD property is that tenant groups have become increasingly sophisticated in terms of their requirements of CBD office accommodation. Tenant groups evaluating relocation or reconfiguration options are increasingly seeking greater occupational and cost efficiencies, increased comfort and convenience, and greater tenancy flexibility. These criteria have largely been met by tenants relocating to more contemporary, higher quality space offering these characteristics. A number of the major tenant groups currently seeking large parcels of space for example, have been able to occupy less leased area across the organisation by relocating to a higher quality building. These generally offer greater occupational efficiency without compromising comfort levels. An increasing trend to quality was identified by a number of research houses 12-24 months ago. Current evidence suggests that this trend has gained momentum over the past year, indicating that the premium sector of the office market should experience higher demand, higher absorption and greater rental growth going forward. The AMP NZ Office Trust has what many commentators believe to be the best quality CBD office portfolio in New Zealand. Market analysts identify the Trust as owning three of the best five buildings in Auckland and two of the best three in Wellington. As such, it is ideally positioned to benefit from increasing tenant demand for quality accommodation. When coupled with the portfolios high occupancy level of 97.4% and its weighted average lease term of 5.8 years, the increasing demand for and transition to quality property should translate into solid performance in the future. The Trust will be releasing its annual report in early October and will be holding a General Meeting at the PARKROYAL Hotel in late October 1999. Anthony Beverley |