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

Thank you for standing by, and welcome to the Precinct Properties Special Meeting. I would now like to hand the conference over to Mr. Craig Stobo, Independent Director and Chair. Please go ahead.

Good afternoon, everyone, [Foreign Language], and welcome to Precinct Properties Special Meeting of Shareholders. My name is Craig Stobo, Independent Director and Chair. Today's meeting is being held by the Computershare online meeting platform that allows shareholders, proxies and guests to attend. Shareholders and proxies attending also have ability to ask questions and submit votes online. For participants attending today, if you have a question to submit during the live meeting, please select the Q&A tab on the right half of your screen anytime. Type your question into the field and press send. Your question will be immediately submitted. Should you require any assistance, you can type your query and one of the Computershare team will assist with the chat function and reply to your query. Alternatively, you can call Computershare on 0800-650-034. Please note that while you can submit questions from now on, I will not address them until a relevant time in the meeting, at the end of the presentations. Please also note that your questions may be moderated or if we receive model questions on one topic, stapled together. While we will try to get through as many questions as possible, we do apologize 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 e-mail after the meeting. Voting today will be conducted by way of a poll. In order to provide you with enough time to vote, I will shortly open the voting for the special resolution. If you are eligible to vote at this meeting, you will be able to cast your vote online under the vote tab. Once the voting has opened, resolutions will allow votes to be submitted. To vote, simply select your voting directions from the options shown on the screen. Your vote has been cast when the tick appears. To change your vote, simply select change your vote. You have the ability to change your vote up until the time I declare voting closed. I now declare voting open on all items of business. I would now like to introduce you to the members of the Board and executive team joining us today. We have Anne Urlwin, Graeme Wong, Nicola Greer, Mark Tume, Chris Judd, Scott Pritchard, George Crawford and Richard Hilder. We also have present with us representatives from our tax advisors, KPMG; legal advisors, Chapman Tripp; and our registrar, Computershare. Now moving to the agenda of today's meeting. Today, there is one special resolution being put forward for shareholder approval. Shareholders are being asked to consider, and if thought fit, pass the special resolution approving the amendments to the constitution. This was detailed in the Notice of Special Meeting and Explanatory Memorandum sent to shareholders. The meeting will then proceed to any questions you may have on the proposed change to a stapled structure. As previously announced in our interim results earlier this year, we have been actively considering the option of moving to a stapled structure to support further strategic growth opportunities while retaining Precinct's portfolio investment entity, or PIE, status. Precinct consequently provided an update together with its Notice of Special Meeting last month in April detailing the proposal for Precinct to move to a stapled company structure. The stapling comprises a proposal by Precinct to undertake a corporate restructuring whereby each shareholder will receive an equal number of shares in Precinct Properties and Business Limited, Precinct Investments, which is currently a wholly-owned subsidiary of Precinct. Once issued, these shares will be stapled to the Precinct shares, meaning they can only be transferred or dealt with together. In order to give effect to the stapling proposal, amendments need to be made to Precinct's constitution, which requires the approval of shareholders by special resolution. The effect of the amendments to the constitution is that Precinct shares and Precinct Investments shares will be able to be stapled. Precinct has continued to evolve over the past several years. Following the internalization of Precinct's management in 2021, Precinct's structure has evolved from being externally managed to an internally managed real estate investment company. Our strategy has broadened to now include the ability to partner with direct investors, offering the ability for joint investment into our assets and large-scale development projects. To date, Precinct has successfully completed $1.6 billion of development of prime grade real estate. Has operated Generator which is Precinct's shared workspace business, established third-party capital partnerships, formed a residential development platform and most recently has been selected as the preferred development partner with downtown car park in Auckland with exclusive negotiations continuing. Precinct's capital partnerships are offering our business the opportunity to invest in a wider set of opportunities and utilize a strong market position that Precinct has. Precinct's capital partnering objectives include aligning itself with investors to co-invest in assets and developers and in so doing, enhancing earnings through improved return on equity, expanding capital management options and leveraging development opportunities to drive higher returns on capital. Looking ahead, Precinct's strategy continues to evolve as value-added opportunities continue to be identified, explored and executed. The Board and management of Precinct believe our strategic focus is well aligned to deliver long-term outperformance. Precinct's premium grade investment and development portfolio continues to underpin the business with high quality rental streams. We remain a central city real estate investment company, investing in high quality, strategically located real estate. As I've noted, given Precinct's strategic direction, future participation in a wider set of opportunities and growth in our capital partnerships, the proposed stapled structure will ensure the most robust company structure for Precinct. It allows flexibility for our business to continue to execute strategy while retaining PIE status. Proposed stapled structure, combined with strategy execution, is expected to provide significant long-term benefits to Precinct and its investors. If Precinct is to retain its existing company structure, it will require Precinct to limit its strategic aspirations and opportunities. This means Precinct will be constrained in its ability to continue to grow its management and operational business or pursue new growth opportunities to adhere to its PIE rules. The next slide illustrates the proposed structure of Precinct Properties Group and managed entities. As you may be aware, a stapled structure is a common corporate structure often used in the real estate sector in New Zealand and Australia. A stapled group comprises 2 listed parent companies whose shares are held together by the same shareholders in the same equal proportions. The shares in each parent company are stapled together, meaning they can only be transferred or dealt with together. In this case, if shareholder approval is received, the underlying assets of the stapled group will be the same as immediately prior to stapling. The diagram shown on this slide illustrates how Precinct has extended its business model and revenue streams. As a result, it has now got income and investments that are classified as both qualifying and non-qualifying to the purposes of PIE eligibility as set out under the Income Tax Act. As Precinct is a listed PIE under New Zealand's PIE regime this regime benefits New Zealand investors as all dividends received can be excluded from their tax returns. To maintain PIE status, Precinct must continue to satisfy all the PIE eligibility requirements on an ongoing basis. The loss of PIE status would have adverse consequences for all shareholders. In this case, Precinct's future distributions, including the distribution of capital gains amounts that are currently able to be received by shareholders without the need to pay further tax due to Precinct's current PIE status, will be taxable to shareholders as dividends at personal tax rates of, currently up to 39%. Supporting Precinct to move to a stapled structure will allow for further growth while ensuring both Precinct and its investors retain the tax benefits available under New Zealand's PIE regime by remaining a listed PIE. Moving to the next slide. The diagram here shows an illustrative 1,000 share shareholding in Precinct and how this shareholding will change after the proposed stapling. As you can see, a shareholder will retain 1,000 shares in Precinct and receive 1,000 shares in Precinct Investments. It's important to note that there is no change in the underlying assets represented by your shareholding. As illustrated in the last slide, stapled securities are investments that are contractually or constitutionally bound together so that they cannot be separated. The essential nature of a stapled security is that one element cannot be transferred without the element -- other element. If the special resolution is approved by shareholders today, Precinct will implement stapling and the stapled securities, i.e., Precinct Investments shares and Precinct shares, would form a single saleable unit that would trade on the NZX Main Board under a single ticker code. Before we move to the longer-term benefits, I'd like to take you through the short-term impact of the proposed stapling. On this slide, we have an illustrative example of the impact of the Precinct stapling on shareholder returns. It shows the impact of the financial year '23 dividend payment under the current structure compared with a stapled structure. It is based on FY '23 dividend guidance of $0.067 per share, and Precinct and Precinct Investments tax rate is 28% for the same financial year. Approximately between $0 million and $3.1 million of additional non-qualifying income would be required to return each investor taxpayer to the existing dividend amount. This could be made up of the combination of Precinct's different non-qualifying income sources, which includes funds management services, development management services, capital participation and for-sale developments and operating businesses. Depending on your personal tax rate, based on FY '23 dividend guidance, dilution to dividends paid to shareholders may range from 0.1% to 1.8%. However, as Precinct executes its strategy to grow its management services and operational businesses, it is expected that Precinct's non-qualifying income, which is derived directly or through its wholly-owned subsidiaries, will grow. Therefore, it is expected that any short-term dilution in dividend will be more than offset by the longer-term benefits of moving to a stapled structure. Precinct's existing group structure does not provide the required flexibility for Precinct to create, manage and grow new opportunities and adhere to a PIE status. Stapling is therefore the preferred structure when compared to the current structure as it allows Precinct to continue to pursue growth in non-qualifying income and investments without the limitations imposed by the PIE eligibility rules. In the illustrative example, the stapling becomes advantageous to shareholders with personal tax rates of greater than 28% once an additional dividend, net of taxes, at $0.012 per share or higher, attributable to non-qualifying income growth, is payable by Precinct Investments. The proposed stapled structure, combined with strategy execution, is expected to provide significant long-term benefits to Precinct and its shareholders. These benefits include providing flexibility for Precinct to continue to execute its strategy, allows growth in Precinct's capital partnerships, enables future participation in a wider set of opportunities including residential and large-scale development projects, ensures Precinct is fit for purpose to enable sustainable growth while retaining its PIE status and is expected to improve Precinct's capital management position, return on equity and long-term earnings for you, our shareholders. If shareholder approval is not obtained today, Precinct' constitution will not be able to be amended. As a consequence, stapling will not occur, shareholders will not receive Precinct Investments shares under the distribution and Precinct will remain listed on the NZX Main Board but will not be part of a stapled group with Precinct Investments. As I've mentioned earlier, retaining Precinct's existing company structure will require our business to limit its strategic aspirations as Precinct will be constrained in its ability to continue to grow its management and operational business or pursue new growth opportunities to adhere to PIE rules. So in summary, the active management of Precinct's high-quality portfolio is supporting both the evolution and execution of our strategy. A stapled structure will ensure Precinct is fit for purpose and able to continue to deliver on its strategy and growth potential, while ensuring Precinct retains its PIE status. The Board believes stapling is in the best interest of Precinct's shareholders and will ensure long-term growth for Precinct and you, our shareholders. We look forward to progressing and executing on our strategic growth initiatives over the next 12 months. As we continue to work with our existing and future capital partners and deliver on Precinct's long-term strategy, having the support of you, our shareholders, is an integral part of achieving us. Thank you, everyone, for joining us today. [Foreign Language] Let's now start with any questions we have today. So far, we've had one question sent through via e-mail prior to the meeting. So look, let's address that first. The question was from Alan Candy. Thank you, Alan, for sending the question through. Your question was, due to the area's Precinct Investments continues to generate income from, is the PIE status not available? The answer to that question is as follows, Alan. Due to the nature of the income and investments of Precinct Investments, which are all considered non-qualifying under the PIE regime, the PIE status is not available for this entity. Current PIE qualifying income and investments will remain within Precinct, Precinct's PIE status will continue. I hope that answers your question. We will now address any other questions submitted via the online portal. As I mentioned at the beginning of the presentation, we have the Board; management; representatives from our tax advisors, KPMG; and legal advisors, Chapman Tripp, with us today to answer any questions you may have. Please let us know if you have them online. A question here online has come through, thank you, is why did you choose to hold this meeting online rather than face-to-face meeting we, shareholders, could benefit of each other's questions? We have chosen to do this for a number of reasons, one of which is the ability to have hybrid meetings or online meetings. And I think as it -- my understanding, the number of people attending this meeting so far is about 25, 26 people online. We've had very strong indications of support by the shareholder willing to support the resolution. And it's an option that's always opened up to directors to hold a special gathering like this. Normally, and our Annual General Meeting, of course, we will have in-person or hybrid. Any other questions? I'll now proceed to the formal business of the meeting. As set out in the Special Notice of Meeting, voting entitlements have been determined as at 5:00 on Tuesday, 9th May 2023. Registered shareholders at that time are the only persons entitled to vote and only the shares registered in those shareholders' names at that time may be voted at the meeting. Votes can be lodged during the virtual meeting today or by proxies. For your proxy to be effective, it must have been received by 3:00 New Zealand Time on Tuesday, 9th of May 2023. Proxies have been appointed for the purposes of this meeting in respect of 635 shareholders, representing 69.14% of all shares on issue. Voting on the special resolution put before the meeting will be conducted by a poll only, and the Board recommends you vote in favor of the special resolution. Shareholders will also be given the opportunity to ask questions following the reading of the special resolution. Now moving to the special resolution. I move, as a special resolution, that the constitution of Precinct Properties New Zealand Limited, Precinct, be revoked and Precinct adopt the replacement constitution in the form described in the Notice of Meeting and Explanatory Memorandum and tabled at the special meeting and signed by the Chair for the purpose of identification to take effect from a time determined by the Board of Directors of Precinct and notified to NZX, and provided that this resolution will be deemed not to have been passed unless the Board resolve that, in the Board's view, the adoption of the replacement constitution remains in the best interests of Precinct and its shareholders taken as a whole. This special resolution is set out in the Notice of Meeting and on the voting form you will have received. We will now address any shareholder questions submitted online relating to the special resolution.

I have one question that's come through. Thank you. The question is, if stapled, will Precinct look into other commercial property investments, that is, other than currently retail office space? I can answer that question fairly succinctly in the sense that we already have exposure to other property assets, including car parks, including hotels. And you will have noticed from a disclosure to the NZX that we have now moved into a relationship with Lamont & Co, where we hope to invest in a city residential real estate. So the answer is yes. We are already moving in that direction. Stapling will enable us to go faster and execute in a more tax-efficient manner. There are no more questions. Thank you, Louise. That concludes our discussion on the item of business. For those of us today who are joining, I remind you that you can vote online now if you haven't already done so. In a minute, I will close the voting system. Please ensure that you have cast your vote on all resolutions. I will now pause to allow you time to finalize those votes. Voting is now closed. Finalized results will be announced to the NZX in due course. A copy of the announcement will also be available on our website. That concludes the formal business. Thank you all so much for joining us today and for your participation. I now formally declare the meeting to be closed. [Foreign Language]

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