Investor Update

Mar 28, 2021

Thank you for standing by, and welcome to the Precinct Properties Update Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Craig Toovo, Chairman, please go ahead. Thank you, Bernadette. Good morning, kia ora, Hello, 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 Holder, our CFO and Dan Fruin, Head of Analytics. I'll 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 the management company, AHML, to terminate the management services agreement and internalize our management functions. We have agreed to pay AHML with termination payment of $215,000,000 in total, $10,000,000 of development fees, we will no longer have to be paying to the external manager. We expect that the termination of 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 $145,000,000 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 On a pro form a basis, the internalization will result in $14,600,000 in total annual savings And lead to an increase in our AFFO per share on a pro form a basis or 6% given we are debt funding the transaction. The accretion based on our weighted average cost of capital remains a healthy 2.3%. Now turning to page 3 of the presentation. Importantly, as we announced this transaction today, it is worth reflecting on the significant role that AHL has played in providing management services Precinct during its 24 year history. A and P sponsored the listing of A&P New Zealand Office Trust back in 1997 with a small, Wellington 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 Bay 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 $1,500,000,000 development pipeline is evidence of this. The transformation of Precinct is highlighted very well on Page 4 that sets out the change in composition of the Precinct business Over the past 10 years and importantly, the positive change in Precinct's AFFO and dividends over the previous 6 years. This track record of cumulative growth in our year on year AFFO and dividends is something that we are very proud of, and we are now more confident than ever to continue this trajectory in The quality of the Precinct portfolio has changed dramatically in the last 10 years with the development of $1,500,000,000 of Premium quality real estate in Auckland and Wellington funded and passed through the sale of close to $800,000,000 of secondary grade assets. Turning to Page 5. In September last year, the independent directors of Precinct became aware of the portfolio review being undertaken by AMP, I'm the 50% owner of Precinct's Manager, and we established a subcommittee of the Board to assess the impacts. As a committee of independent directors, we agreed that the most optimal outcome for Precinct would be to internalize Precinct Management by way of agreement directly with AHML. We were aware of the times that the shareholders of AHML have the unconstrained right to sell those managed Rights to a 3rd party and we were concerned to ensure that an internalization 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 were subsequently provided with a waiver from the NZX of the requirement to hold a shareholder vote on the transaction. This was on the basis that although the transaction is with a related party, it was managed and negotiated by the independent directors On an arm's length basis and without the involvement of any related parties of the manager. This waiver ensured that we would proceed We're negotiating and agreeing terms to internalize management on behalf of and 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 Checkman Trip, which informed our negotiations, our pricing and our due diligence. Importantly, our independent advisors, PwC, have advised us that based on the terms agreed, the present value of the benefits Termination are estimated to significantly exceed the after tax costs. The independent directors have therefore formed a view that internalization is in the best And fair and reasonable to Precinct 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 gross internalization costs to be paid of 215,000,000 The fees on current development projects, which will not now be paid of $10,000,000 and the application for the IV for tax deductibility of the internalization cost resulting in a net cost to Precinct of $145,000,000 Pleasingly, we have secured all staff We are employed by AhML and they have all signed employment contracts to join the Precinct team from 1 April and this concludes our long standing executives, Scott, George and Richard. Importantly, as we transition through this phase, the Board of Precinct will remain unchanged. Mohammad Elani will remain as a Director representing our largest shareholder, Adia, who will retain their 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, 31 March, meaning that the linked will commence as an internally managed entity from 1 April. Turning to Page 7 and focusing on the benefits of internalization. As a consequence of the internalization on a pro form a basis, We expect annual savings and all fees after deducting the cost of internalized management of $14,600,000 The basis of this calculation is set out in detail in the appendix to 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 From the internalization payment and on this debt funded basis, we anticipate the AFFO accretion to be 6% per annum on a pro form a basis per share. This pro form a 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 one of our assets In addition to the financial benefit, there remains significant qualitative benefits, The retention of our management team improved alignment of interests between staff, directors and shareholders and perhaps most 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 $250,000,000 bank facility. This facility will increase Precinct's total bank facilities to $860,000,000 out of total debt of 1,450,000,000 Importantly, as we have developed our capital plans for the next stage of Precinct evolution, we have factored in the commitments we currently have, the The commitments that we're very likely to have and the asset sales which are now either committed or planned. This includes the likely timing for commitment to 1 Queen Street within the next three 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 $14,600,000 per annum. We will increase our AFFO percentage and we continue to grow year on year as we've 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. Thank We will now pause for a moment to fill that up for question registration. Your first question comes from Jeremy Kinkade of UBS. Please go ahead. Good morning, team. 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 A note 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, it's no contingencies. We have Taking advice from KPMG around the tax accessibility, I'm very confident of that outcome, But there are no conditions to the cancellation of the management contract. Thank you. And just one more. Obviously, we've got a pro form a 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 Thank you. There are no 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. Bernadette. That does conclude our conference for today. Thank you for participating. You may now disconnect.