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

Thank you for standing by, and welcome to the Precinct Properties Update Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Craig Stobo, Chairman. Please go ahead.

Thank you, Bernard. Good morning, everybody, and welcome to the briefing for the announcement we have made this morning regarding the internalization of Precinct Properties. I'm Craig Stobo and I'm the Chairman of Precinct, and it is a great pleasure to be here with you this morning. In attendance with me is Scott Pritchard, Precinct's CEO; George Crawford, Precinct's Deputy CEO; Richard Hilder, our CFO; and Dan [indiscernible], Head of Analytics. If I just turn to the slides that you have in front of you, Page 2 of the presentation sets out the key details of the transaction. We're delighted to announce that we have reached agreement with the shareholders of a management company, AHML to terminate the management services agreement and internalized our management functions. We have agreed to pay AHML a termination payment of $215 million in total. $10 million of development fees we will no longer have to be paying to the external manager. We expect that the termination payment will be tax deductible, and the binding ruling will be sought from IRD to confirm this. On this basis, the net cost of Precinct is expected to be $145 million. Most importantly, we have retained all staff from Precinct, including Scott, George and Richard, who are with me now. In addition, we're pleased to advise that on a pro forma basis, the internalization will result in $14.6 million in total annual savings and lead to an increase in our FFO per share on a pro forma basis or 6% given we are debt funding the transaction. The accretion based on our weighted average cost of capital remains a healthy 3.3%. Now turning to Page 3 of the presentation. Importantly, as we announced this transaction today, it is worth reflecting on the significant role that AHML has played in providing management services to Precinct during its 24-year history. AMP sponsored the listing of AMP New Zealand Office Trust back in 1997 with a small [indiscernible] focused office portfolio. The business has been through a number of transformational moments, including the corporatization in 2010, our fresh strategy and name change in 2012, the completion of commercial value in 2020. And this internalization is a further major milestone, the internalization of our management. AHML's role has been significant and the successful completion of Precinct's $1.5 billion development pipeline is evidence of this. The transformation of Precinct is highlighted very well on Page 4, which sets out the change in composition of Precinct's business over the past 10 years, and importantly, the positive change in Precinct FFO and dividends over the previous 6 years. This track record of cumulative growth in our year-on-year [ FFO ] and dividends is something that we are very proud of, and we are now more confident than ever to continue this trajectory into the future. The quality of the Precinct portfolio has changed dramatically in the last 10 years with the development of $1.5 billion of premium quality real estate in Auckland and Wellington, funded in part through the sale of close to $800 million of secondary grade assets. Turning to Page 5. In September last year, the independent directors of Precinct became aware of the portfolio reviews being undertaken by AMP. The [ 30% ] owner of Precinct manager, and we established a subcommittee of the Board to assess the impacts. As a committee of independent directors, we agree that the most optimal outcome for Precinct would be to internalize Precinct's management by way of agreement directly with AHML. We were aware of the time that the shareholders of AHML have the unconstrained right to sell those management rights to a third party. And we were concerned to ensure that an externalization proposal could compete with those options in terms of the speed and risk of execution. We, therefore, determined that to remain competitive, we would seek and was subsequently provided with a waiver from the NZX of the requirement to hold a shareholder vote on the transaction. This is on the basis that, although the transaction is with a related party, is managed and negotiated by the independent directors on an arms linked basis and without the involvement of any related parties of the manager. This waiver ensured that we would proceed with negotiating and agreeing terms to internalize management on behalf of an acting in the best interests of shareholders not related to the manager. In taking this approach, we have sourced specialist advice from PwC Corporate Finance, KPMG and Chapman Tripp, which informed our negotiations, our pricing and our due diligence. Importantly, our independent advisers, PwC, have advised us that based on the terms agreed, the present value of the benefits of termination are estimated to significantly exceed the after tax cost. The independent directors have, therefore, formed the view that internalization is in the best interest of and fair and reasonable to present and shareholders not related to the JV manager, AHML. Turning to Page 6. This slide sets out the key terms of the transaction, including the growth internalization costs to be paid of $215 million. The fees on current development projects, which will not now be paid of $10 million. And the application for the IRD for tax deductibility of the internalization costs, resulting in a net cost to Precinct of $145 million. Pleasingly, we have secured all staff who report by AHML and they have all signed employment contracts to join the Precinct team from April 1, and this includes our long-standing executives, Scott, George and Richard. Importantly, as we transition through this phase, the Board of Precinct will remain unchanged. Mohammed Alnuaimi will remain as a director, representing our largest shareholder [indiscernible] who will retain the 17.3% stake in Precinct. Rob Campbell and Chris Judd, both previously appointed by shareholders of the manager will now become non-executive directors. Due to the transition from an externally managed company to an internally managed entity, the Board felt it beneficial to retain the services of both Chris and Rob as we transition through this current phase. Importantly, the Board remains focused on succession planning and rotation of our Board of Directors. Finally, settlement for the internalization will occur this Wednesday, March 31, meaning that [indiscernible] will commence as an internally managed entity from April 1. Turning to Page 7 and focusing on the benefits of internalization. As a consequence of the internalization on a pro forma basis, we expect annual savings in all fees after deducting the cost of internalized management of $14.6 million. The basis of this calculation is set out in detail in the appendix of the presentation. Our management expense ratio will reduce significantly from 74 basis points to around 30 basis points. We have put in place new bank facilities to fund the internalization payment and on this debt funded basis, we anticipate the[ FO ] accretion to be 6% per annum on a pro forma basis per share. This pro forma basis assumes the completion of Bowen Campus Stage 2 and 1 Queen Street, the disposal of the remaining interest in the ANZ center and that we sell 1 of our assets valued at around $85 million to $95 million. Therefore, the full benefit of the accretion is expected to materialize in the 2023, 2024 years. In addition to the financial benefits, there remains significant qualitative benefits, including the retention of our management team, improved alignment of interest between staff, directors and shareholders and perhaps most of them significantly the removal of potential uncertainty in the event that the shareholding of the management company changed. Now turning to Page 8, Precinct will fund the internalization by way of a new 5-year $250 million bank facility. This facility will increase Precinct's total bank facilities to $860 million, out of total debt of $1.45 billion. Importantly, as we have developed our capital plans for the next stage of Precinct's evolution, we have factored in the commitments we currently have, the commitments that we're very likely to have and the asset sales, which are now either committed or planned. This includes a likely timing for commitment to 1 Queen Street within the next 3 months as we advance our design and advance our tender process. On this basis, after accounting for those changes, we expect our committed gearing to settle at around 36%, a level where we remain very comfortable. And finally, to Slide 9. Today is a great day for the Precinct business as we announced a significant initiative to internalize, and at the same time, retain our market-leading management team and also benefit from a stable and experienced Board of Directors with a stable, clear strategy. The benefits of the internalization are significant. We will save $14.6 million per annum. We will increase our FO percentage and we continue to grow year-on-year as we have been doing so since 2015, and we'll also simplify and benefit from greater alignment between our management team, our Board and our shareholders. I'd like to thank you all for joining the call, and I'm more than happy to take any questions from the audience. Thank you.

[Operator Instructions] Your first question comes from Jeremy Kincaid of UBS.

First question for me is just whether or not there are any conditions relating to the agreements. And in particular, we're obviously still waiting for and notes from the IRD saying that we can deduct the payment for this for tax purposes. So just wondering if the agreement is contingent on that and any other things?

No, there's no contingencies. We have taken advice from KPMG around that tax acceptability are very confidence of that outcome, but there are no conditions to the cancellation in all the management contracts.

And just 1 more. Obviously, we've got a pro forma idea of the savings to be expected. But could you just give us an idea of how much EBIT the management business made last year or over the last couple of years?

That's a promotion we don't have at Precinct. It's AHML promotion, so I can't provide that to you.

[Operator Instructions] There are there further questions at this time. I'll now hand back to Mr. Stobo for closing remarks.

Thank you very much for your attendance. We intend to hold follow-up meetings with those who wish to do so. Appreciate your time and look forward to your feedback. On behalf of Precinct, thank you for attending. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.