Precinct Properties NZ Ltd & Precinct Properties Investments Ltd (PCT) Earnings Call Transcript & Summary

2020 Annual General Meeting. Just a few housekeeping notes before we get started, in case you aren't aware, the bathrooms are located out the black panel door to the right. Towards the retail center, you'll see the signs. And in emergency, the fire evacuation stairwell is underneath the escalators downstairs and Generator staff will guide you out of the room. The emergency meeting point is down the road towards the [ tipper bars ] outside the Downtown Car Park. We have full COVID-19 contact tracing on site. The QR scan code is outside the room. Hand sanitizer is out for your use. And we've got additional PPE gear if you require it. Given the current restrictions on overseas travel and those imposed on public gatherings in recent months due to the pandemic, today, we've adopted a hybrid meeting. So in addition to the in-person meeting being held, shareholders, proxies and guests can attend the meeting online via the Lumi platform. All attendees can watch a live webcast of the meeting. Through them, all shareholders and proxies have the ability to ask questions and submit votes virtually. With some of my fellow Precinct Board members either based or currently overseas, this format also allows them to be present today. Whilst not everyone is able to be in attendance at today's in-person meeting, it is great to see so many of you here joining us at our Generator Commercial Bay Meeting and Event Suites. We hope that those of you who traveled to the new PwC Tower this morning got here with ease, and I do encourage you to take a look around and see firsthand what this space has to offer and define architectural details of the premises. We have several Precinct and Generator event staff present today who can help you if you're needing their systems. Turning to the results. 2020 has been, without doubt, extremely challenging. The effects of COVID-19 continue to be present at both the local and global level. And like many others, our industry and our business have been inevitably impacted. However, despite these more challenging times, Precinct has continued to perform well during the last financial year. Our results reflect the resilience of our business, the premium nature of our assets, high-quality client base and the dedication of our people and partners who support it. Precinct has continued to move forward. Completing the largest development in Precinct's history this year, the Commercial Bay premises in Auckland has placed our business in a very strong position. Its opening involved a huge effort by all our people and our partners and is truly a symbol of New Zealand's road to recovery in a COVID economy. What a transformational project it has been since 2012 when the old Downtown Shopping Centre was acquired. Our aspiration was to create a world-class waterfront destination on a par with the best gateway cities around the world, and we believe Commercial Bay has truly achieved this. As a business, we are committed to continuing on our strategic pathway to develop world-class assets, enhance our portfolio and grow value for you, our shareholders, our owners. I would now like to introduce you to the members of the Board and executive team joining us today. Don Huse, Anne Urlwin, Graeme Wong, Launa Inman, Rob Campbell, Chris Judd, Scott Pritchard, George Crawford and Richard Hilder. Mohammed Al Nuaimi is unable to attend this year's meeting and has given his apology. As you're aware, Don Huse is due to retire in the second half of 2020 as part of Precinct's Board succession planning arrangements. He will consequently be stepping down on the 18th of November after serving 10 years on this Board. Don has chaired both the Audit and Risk committee and due diligence committees. He's made a significant contribution to the audit and risk function over the past 10 years. As this is Don's last AGM, we would like to farewell him today and thank him again for the significant contribution he's made to Precinct since 2010. All the best, Don. Would you please join me with an appreciation for Don? Today, we welcome Aditya Bhargava to the Board as alternate Director for Mohammed, and he replaces Anthony Bertoldi, who has recently resigned. On behalf of the Precinct Board and management team, I'd like to thank Anthony in absentia for his contribution to the business and being an alternate Director for Mohammed since 2014. Importantly, in accordance with the NZX code, a majority of independent directors is maintained. We also have present with us today representatives from our auditors, Ernst & Young; tax advisers, KPMG; legal advisers, Chapman Tripp; and our registrar, Computershare; together with Precinct and Generator staff. Now moving to the agenda of today's meeting. We will begin with reviewing the performance and activity of Precinct over the last financial year. And following the conclusion of this presentation, we'll then take any questions you may have. We will start with in-person questions from the floor before moving to any online questions received. We do welcome any feedback, and we'll consider any other matters you may properly be wanting to ask of us at the meeting today. The meeting will then proceed to the formal business, where we will consider 3 ordinary resolutions. The first one is to consider my own re-election as a Director. The second is to consider the re-election of Launa Inman as a Director. And the third resolution is to consider that the directors be authorized to fix the remuneration of Ernst & Young as auditor for the ensuing year. Due to the hybrid nature of today's meeting, questions can now be submitted through the webcast portal for those attending virtually, now that the meeting has started. This can simply be done by clicking on the speech bubble icon. This will open a new screen. At the bottom of that screen, there is a section for you to type your question. Once you have finished typing, please click the arrow symbol to send. While you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on one topic, we'll try to amalgamate them together. We will try to get through as many questions from the floor and those submitted online as possible. I do apologize on behalf of the Board in advance for any questions submitted online that we are unable to answer due to time constraints. In this case, questions will be followed up by an e-mail after the meeting. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I'll shortly open voting for all resolutions. For those attending virtually, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring you up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no submit or send button, as the vote selected is automatically recorded. Votes, however, can be amended up until the time the poll closes at the conclusion of the meeting. I now declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time. Should you experience any difficulty casting your vote or asking questions online, please refer to the instructions provided in the virtual annual meeting guide that accompanied the Notice of Meeting you would have received. For those physically attending today, we do hope you will all stay and join us for some light refreshments after the meeting is concluded this morning. Before we review the 2020 highlights for Precinct, I would like to update you all today on our Board's succession planning. This year, Launa and I retire in accordance with NZX Listing Rule 2.7 and, being eligible, stand for re-election by shareholders. However, Launa has announced her decision to retire from the Board in 2021. The directors wish to thank her very much for her contribution to the company since 2015, which included the development of Commercial Bay. The Board has commenced a director search process as part of the succession planning and is expected that a successor to Ms. Inman will be announced earlier in the year to enable a smooth transition of responsibilities. I would also like to confirm that following our annual review on Director remuneration by the Board, we will not be proposing any adjustments to shareholders today. In line with last year, we are holding the director fee rates approved at the 2018 Annual General Meeting at the same level. Any new directors joining Precinct during the current financial year will be paid in line with these rates. Now moving to the highlights. As I mentioned earlier, 2020 has been an extremely challenging year. Despite this, Precinct has achieved a number of highlights for the business, most notably achieving further growth in our adjusted funds from operations, AFFO. Pleasingly and in line with guidance, Precinct's AFFO increased 5.9% to $0.0629 per share with our full year dividend to shareholders at $0.0630 per share being paid for the '20 financial year. This represented a year-on-year increase of 5%. Our portfolio metrics remain strong. We have a portfolio of properties that is 98% occupied. We also have a weighted average lease term of around 8 years, illustrating the average remaining term for all leases to expire in our portfolio. These metrics reinforce Precinct's earnings security and the stable and secure income our portfolio generates. We have also progressed our development assets during the year, which Scott will take you through shortly in his presentation. While the COVID pandemic and its impacts continue to evolve, we strongly believe our strategy will continue to deliver in these more challenging times. Like many businesses, 2020 required Precinct to focus on business continuity amidst disruptions caused by COVID. For our business, that has meant ensuring the right procedures and suitable precautionary measures were in place to help protect the health and well-being of all our people. As you know, health and safety is a highly material issue for our business. This included implementing and adopting additional health and safety requirements at all of Precinct's buildings and at construction sites when construction restarted in April 2020. These protocols included the physical distancing rules for everyone on site, additional PPE gear and the ability to contract trace if necessary. I'd personally like to commend the Precinct team on the prompt action taken to plan ahead and adjust our business to operate safely under different COVID alert levels as and when changes were announced. You might recall, we were due to open retail on March 28, and the Prime Minister announced the previous weekend we were moving to Level 3, which meant we were going to go to Level 4 the following week. We had to move 1,500 contractors out of this building, remove all the food and alcohol, put up fences, put on security guards over that Level 4 period. It was an enormous effort to try and remedy and put in place preventative measures. I congratulate management for doing that. In addition, the outstanding proactive engagement taken with our clients on implementing a range of initiatives to support those of our occupiers who needed assistance. Thank you. Our business continues to actively embed a positive health and safety culture at Precinct, and we're pleased to report that there were no significant injuries during the 2020 financial year. We also completed over 900 principal audit and monitoring inspections during the year and recorded on-site audit scores in excess of our performance targets at both Commercial Bay, here in Auckland and Bowen Campus in Wellington. Successfully executing our long-term strategy has put our business in a very strong position. AFFO for the '21 financial year is expected to be $0.065 per share before performance fees, and a total dividend of $0.065 per share is expected to be paid. Consistent with our dividend policy, we are delighted to again be providing year-on-year dividend growth for you, our shareholders, our business owners. Payment of the '21 first quarter dividend will be made on the 10th of December this year. Before I hand over to Scott to give a more detailed overview of Precinct's operational performance, I just want to comment a little bit on the good progress made on sustainability at Precinct. During the year, we improved our Global Real Estate Sustainability Benchmark, GRESB, score from 69 to 77, above the global average of 72. Today, we can also announce our most recent 2020 GRESB score. Precinct achieved a benchmark score of 83. Pleasingly, our result was again the global average, which was 70. GRESB is considered the global standard for ESG, Environmental, Social and Governance benchmarking and reporting for real estate and remains our core ESG indices performance benchmark. Congratulations to management for achieving that score. Also during FY '20, an area of focus has been on the risks and opportunities presented by climate change. By partnering with Toitu Envirocare, Precinct has verified our carbon footprint and, as a result, we achieved Toitu carbon-zero certification. This means we have been able to accurately measure our greenhouse gas emissions and put in place strategies to manage and reduce impacts. We are also reducing the portfolio's carbon intensity. Our goal is to ensure all our office buildings have a minimum NABERSNZ rating greater than 3. Currently, 4 buildings in Precinct's investment portfolio had a certified NABERSNZ building energy efficiency rating of 3.5 star or above. While we have made good progress in this space, we will continue to strive to improve our reporting and reduce our emissions further. We have recently submitted to the Carbon Disclosure Product, CDP, and have now published our own Climate-related Financial Disclosures document, which identifies Precinct's risks relating to the physical climate impacts and also the transitional climate impacts resulting from a transition to a low-carbon economy based on TCFD, or task force on Climate-related Financial Disclosures recommendations. This can be found on the Precinct website under our Sustainability section. A comprehensive response to all Precinct's ESG factors will be material to our business and can be found in our 2020 annual report. I encourage you all to read this, if you haven't already. It will be a feature of our business going forward. The Board is totally behind management's initiatives to comply and to improve all these scores, and you'll hear more about that from the Board in the future. On behalf of my Board colleagues, management and wider Precinct team, I'd like to thank you all for joining us today, and to our shareholders, thank you all for your continued investment in Precinct during what can only be described as an extraordinary year. We look forward to advancing our opportunities and delivering sustainable returns in the year ahead. I will now like to hand over to Scott. [Foreign Language]

[Foreign Language] Thank you, Craig, and good morning, everybody. I am Scott Pritchard, Chief Executive for Precinct. As Craig mentioned, 2020 has been an extremely challenging year. However, we have benefited from having great people within our team and a very clear strategy. We have continued to refine our approach as we have progressed and now completed our 2020 vision. Our business is in a strong position, and we have delivered consistent results amidst the COVID pandemic. We have a sustainable dividend policy supported by AFFO, which has now been delivering the benefits of our strategy. This is notably reflected in the uplift in Precinct's FY '21 dividend guidance, which Craig just mentioned. While our investment in development portfolio are underpinned by high-quality client base, strong metrics in strategic locations, asset values have been impacted by COVID. Precinct's total comprehensive income after tax was $35.1 million, which was down on the previous year following a 2.2% decline in our property valuations. From a balance sheet perspective, Precinct's gearing, as measured under borrowing -- borrower covenants, was 28.8% as at June 30, 2020. This is substantially lower than our covenant of 50%. In addition, following the $150 million bank refinance, which occurred in February, Precinct's next debt maturity is not due until December 2021. In driving our business transformation, we have significantly improved the quality and the resilience of our portfolio. We have successfully divested B grade assets to invest into premium grade assets. As a result, we have attracted and retained long-term leases with high-quality occupiers. Our portfolio is well leased with occupancy of 98% and an 8-year weighted average lease term and provides a high degree of certainty that the rent will, in fact, be paid. This has been illustrated by Precinct receiving over 90% of its income during the New Zealand Level 3 and Level 4 alert levels. Precinct's high-quality client base includes government entities, which currently account for around 30% of all of our office revenue as well as corporate investment-grade occupiers, leading legal and professional services firms. A quick update on the ANZ Centre sale. The remaining 50% share in this property is progressing well. Consistent with our strategy, this is another capital recycling initiative, which allows Precinct to invest our capital into higher-yielding development assets. You may have heard a lot around the recent increase in the working-from-home trend and how this may impact our office market. Our view is that the role of the office remains as important as ever. We also believe the city center remains as important as ever. And we do not see a material change in the demand for office space in New Zealand. To illustrate this, just 2.5% of all of our office occupiers, which Precinct heads within its portfolio, have indicated that they will look to reduce their office space. The majority of our occupiers have recognized that office space remains critical for the success of their business. That is a key driver in attracting talent and is a key driver in fostering talent. Our expectation is that prime grade office space in central cities will remain as a core aspect of any successful business. Our occupier markets remain resilient. In Auckland, while more volatility in demand from occupiers is expected, most new supply is already leased. And in Wellington, we see this market as continuing to remain strong as it is underpinned by the solid demand from central government. Before I provide an update on our recently completed developments and those which are still under consideration, I would like to give an update on our Generator business. Generator has returned a solid and profitable performance for the FY '20 period. This has been driven by a 13% uplift in revenue despite the impacts of COVID, which essentially closed our events business for the final quarter. Our strategy of investing in the coworking and flexible space is now proving its benefits across the portfolio. This is evident as our Precinct leasing is now having some Generator element to it. Similarly, we also have clients who are growing out of Generator sites and moving into Precinct premises. During the year, Precinct announced the expansion of Generator's offering into Wellington. Centrally located at 30 Waring Taylor Street, the redevelopment is currently underway. This will be the first Generator site in Wellington and comprise private offices, coworking and event spaces. The property is very well located to drive value from the Wellington market, where we continue to see an increase in demand for flexible space. Now moving to our recently completed development project, Commercial Bay. Precinct officially opened the retail center to the public on the 11th of June this year. This marked a significant milestone for our business and also for the Auckland city center. Despite Commercial Bay opening under difficult circumstances from the impact of COVID, Precinct was delighted to welcome everyone to a new and exciting part of Auckland's city center. We are immensely proud to have opened Commercial Bay. It is an outstanding retail precinct that will redefine Auckland city center and play an integral role in its ongoing revitalization while also being part of New Zealand's economic recovery. Pleasingly, there has also been strong trading levels over the last 4 months at the center with sales performance being consistent with our pre-COVID consumption -- assumptions. Food and beverage have been a key outperformer reinforcing the high quality and best-in-market offering, which is critical to the success of Commercial Bay. There were a handful of restaurants and some international retailers who were not able to open on the opening day, and they have all since been able to open successfully. Now that we are still, fingers crossed, at Alert Level 1, Commercial Bay will continue to be well supported by Aucklanders and also those that visit Auckland city. The new PwC Tower, which we are in today, had its first clients, PwC and Jarden, move in during July. The tower is now 97% leased with really strong inquiry for the remaining but very small vacant space. We are also really pleased with the progress made at the second stage of Wynyard Quarter. Construction has moved well ahead despite the impacts of COVID, and we remain on program, which is a great result and a real credit to our main contractor, Hawkins. Leasing has also progressed, and we are delighted to have the office space now 100% leased. This is particularly pleasing given that when we committed to this project, there was no leasing in place in 2018. Now a brief update on our Wellington development project at 40 Bowen Street. It is the first of a pair of buildings planned for the Bowen Campus Stage 2 site. We are delighted with the ongoing level of inquiries from occupiers for Stage 2 since the beginning of this year. Pre-committed leasing currently represents 72% of the building's office net lettable area with leasing to quality occupiers such as EY, Fujitsu and our very own Generator. With construction now well underway, completion remains on schedule for late 2022. Being able to advance one of the 2 new office buildings at Bowen Campus has been particularly encouraging for our business amidst a challenging economic environment. This reinforces how strong and well positioned locally the prime office market in Wellington is. As as you know, in May this year, we made the prudent decision to put the redevelopment of One Queen Street on hold. While this was disappointing, the deferral period has enabled us to more reliably assess the long-term impacts on the tourism market and the New Zealand economy and ensure that the eventual redevelopment maximizes returns. Minor physical works have continued throughout the deferral period in relation to demolition and strip out works, positioning the asset for redevelopment. We are tracking well and making good progress on the options for the asset and remain hopeful of commencing construction works in 2021. While the outlook ahead will likely continue to present us with some uncertainty and some challenges, Precinct is looking forward to progressing with our opportunities. This includes our pipeline of development projects which I have touched on today. We are also committed to growing our market position in the coworking and flexible space market and taking a prudent approach in securing value-add opportunities to grow value for you, our shareholders. Before I hand back to Craig to take us through the formal business of the meeting, I want to reiterate, our business is in a very strong position. This is well supported by Precinct's high occupancy levels, long weighted average lease term, minimal portfolio expiry risk and a very high quality occupiers, which we are very fortunate to have as our clients. Being able to lift our dividend guidance for the FY '21 period further demonstrates the successful execution of our long-term strategy, and we are confident that we will continue to deliver strong results into the future. I'd like to thank both the Precinct Board and the Precinct team for their support and hard work during this extraordinary year. I'd also like to personally thank Don for his contribution to the business over the past 10 years. Your guidance and sage advice is greatly appreciated. And finally, to you, our Precinct shareholders, for your continued investment and your ongoing support. Thanks, everyone, for joining us today. [Foreign Language]

Scott, modest as he is, I'd like to record, this is his 10th year at Precinct as well. So thank you, Scott, for your patience, endurance and building a wonderful management team, including Generator from 6 people in 2010 to around about 100 today. So congratulations to you on what you've achieved on behalf of all of us shareholders and the Board. As I stated at the very beginning of the meeting, we'll start with any in-person questions and then move to any online questions. I'd now like to give any shareholder present in person today the opportunity to ask questions of the Board, management, the auditors or our solicitors from Chapman Tripp. Directors and management are also happy to answer questions from shareholders here more formally or informally during the refreshments to be held at the end of the meeting. When asking questions, can you please state your name and advise whether you are a shareholder? I'd now like to open the floor to any questions and comments. Ladies and gentlemen, would our shareholders like to ask of the Board and management?

I'm [ Bruce Pax ]. I'm the proxy-holder for Shareholders Association. You recently interviewed Bob Jones, where amongst his comments he expressed a view that Precinct has lost sight of tenants' needs by restricting their view out of the windows, which leads me into your customer satisfaction survey of 70%. You aim to raise it to 80%. Why are your tenants telling you it's not right now? And how do you plan to change that?

I think, Scott, you might want to have a crack at that, do you? Just a brief parry or a counterpunch if I can use Bob's vernacular. Scott mentioned to you the percentage uptake in the new tower and our overall vacancy rates overall and the weighted average lease term. We have clients that want to come into this building. We have clients that want to come into our Wynyard Quarter developments. So the demand is there. Can we do better? All the time, and we're improving our concierge functions the way we work in this particular Precinct for the 10,000 or so workers that are present in these towers that's around the Precinct. But is there anything else you want to add there for Mr. Pax, Scott?

Look, I just -- great question. Yes, client satisfaction for us is fundamental. And we have measured it for the last 10 years. And we have generally sat between sort of 70% and 75%. Having gone through this last period and the level of uncertainty that businesses are facing, there's a lot of fear among some of them, particularly earlier in the year. And so I think what we're seeing there is some people being a little bit fearful about the fact that they may have locked themselves into long-term leases, and they're wanting to be able to sit down with us and have a conversation about how we can, I suppose, foster their growth or foster their future needs. And we take that satisfaction survey really seriously. Generally speaking, if you're sitting in the 70s, that's really high for property owners because quite often it can be quite a combative relationship between a tenant and landlord. We're not allowed to use that term tenant and landlord in our business. We use our clients. They're really important to us. And so we generally try and foster a very long term relationships. We always seek to try and drive our satisfaction levels higher, but one of the key things that they're looking for at the moment is flexibility. And so with Generator, we are definitely being able to offer more and more of that. And so that is a new way of thinking for us and also for our clients. So I think how businesses will occupy space will evolve, and we're really trying to lead that conversation in New Zealand.

Thank you. Another question. Your GRESB score is fantastic. How do you improve that? Is it a high cost and adding more on or...

We have a specialist in our management team, Richard Hilder, who can talk to how he managed to achieve that amazing score of 83% from last year. Richard?

Can you hear me? Great team, really. So a lot of team effort put behind that. So it's not a huge cost involved, but a lot of effort, a lot of work behind that. How do we improve? Certifications of our buildings. So NABERSNZ ratings in Green Star. So more buildings that we can build like that, the higher our score is going to be. So I'd like to see us lift that next year again.

When COVID struck, obviously, you had a lot of communication with your tenants, some of whom...

Clients.

Sorry, clients. And you mentioned you've got 90% of the return. Of the 10% that is out there, what is abatement and what is deferral? What's the ratio, roughly?

Maybe, Scott...

Yes. So through that period, we've had $1.7 million of rental income that we haven't received. It's about 50-50, which is abatement. And that's where our occupiers actually had a contractual right within their leases that if they couldn't access their premises, then they didn't have to pay rent. And the other half is rent relief that we have provided, particularly to some of our retailers and the cafés that sit within our lobbies and some of those businesses that, look, if they can't access their premises, they simply can't earn a living. And so we took the approach of really supporting them through COVID. So it's about $1.7 million in total for through to June 30.

So half of that [indiscernible].

No. No. What I'm saying is that $1.7 million of rental income was not recovered, and we won't recover it through to the June 30 period. And half of that was a contractual right. The other half was relief that we offered to our occupiers, and they would generally cafés in our lobbies and really small retail operators that simply just couldn't afford to pay the rent.

Sorry, I didn't capture your name, sir.

Michael.

Thank you, Michael. Any other queries for Jermain to hand the microphone around? Okay. You are very satisfied. Fantastic. Well, I'll now turn to online, and there are no online questions. One online question? I haven't got a refresh on here, unfortunately, Dan. Did you want to read it out from me, Dan? You can be the proxy for the online question.

How much of an impact do you expect the Auckland CBD road and metro works to have on your performance in the coming years? Also, what are the plans to take advantage of America's Cup happening soon?

Okay. On the first one, it kind of is what it is. We rile against the cones in our city and the one-way nature of some of our streets. It's frustrating for the ultimate consumer clients that come through our Commercial Bay Precinct as it is for our office workers. You will notice the difference when the old Queen Elizabeth Square and the area between us and Britomart is finally resolved with no cones and no fences and the timings in place. It will be amazing place and time for the America's Cup, which races -- which commences in mid late December. This part of town will be a beneficiary of some of that. Obviously, the borders are closed. We won't have overseas tourists for some time. We don't have any visibility of that. But we expect our area downtown to be a beneficiary. The restaurants and cafes are open. They're looking forward to the business. And the more we can celebrate that through our own marketing initiatives to attract people to this part of town, the better. Okay. Anything else on the floor? All right then, thank you very, very much. I'll now proceed to the formal business of the meeting. As I'm up for re-election today, I'll ask Anne Urlwin, Independent Director and Chair of the Audit and Risk Committee, to take us through the first 2 resolutions of the meeting. Thank you, Anne.