Thank you for standing by, and welcome to the Precinct Properties Half Year Results 2019 conference call. All participants are on a listen only mode. There'll be a presentation followed by a question and answer session. If you would like to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Scott Pritchard, CEO. Please go ahead.
Thanks, Amber, and good morning, everybody, and welcome to the 2019 interim result briefing for Precinct Properties. I am Scott Pritchard, and I'm the Chief Executive for Precinct, and I'm joined today by George Crawford, Precinct's Chief Operating Officer, and Richard Hilder, Precinct's Chief Financial Officer, as well as Henry Chung from First NZ Capital. The first half of the 2019 financial year has continued to be very active. We have completed the first building at Bowen Campus on time and on budget. We have increased portfolio occupancy to 100%, and we have secured a significant amount of pre-commitment leasing for our developments. Each of these items have had an impact on Precinct's operating and financial performance, and we're pleased to be here today to provide an overview of the company's position.
We're also pleased to be announcing an underwritten NZD 150 million equity raising to put the business into a position to take advantage of future opportunities. The program for today's call is outlined on page eight of the presentation. I'll shortly provide an overview of the highlights of the results before reviewing our progress against our own three strategic pillars. I'll then hand over to George to summarize the property markets and our portfolio performance. Richard will then take us through the interim results and capital management position for Precinct. I will provide an update on our development activities, an overview of the equity raising, and finish with some concluding comments. Upon completion of the presentation, we will be happy to answer any questions which you may have. Moving to the highlights page.
The first half of the 2019 financial year has seen us record a strong first half profit of NZD 25.5 million. Our operating income has remained consistent with last year, despite selling 50% of the ANZ Centre during the period. Pleasingly, our earnings per share on a pre-performance fee basis have grown by 2.9% compared to the prior comparable period. Our balance sheet has been strengthened in the period with the sale of NZD 191 million of assets, positioning our gearing at 24% at balance date. After assuming our NZD 150 million equity raise, our gearing will reduce to 18.5%, which positions the business to be able to fund our future opportunities. At an operating level, we have seen continued strength in the performance of our portfolio with occupancy reaching 100% at balance date.
This level of occupancy is a clear indication of the strength of our markets and the position that our portfolio holds in meeting the needs of our occupiers. We continue to see solid rental growth in both the Auckland and Wellington markets. Finally, we are pleased to announce today the acquisition by Precinct of the remaining 50% of Generator. The Generator business offers flexible workspace and co-working space for office occupiers based in the Auckland city center. The philosophies and strategy for Generator are well-aligned with those of Precinct, and we believe strongly that this acquisition places Precinct into a stronger position in a market segment which has been particularly active. Turning to page 10. Precinct's broader strategy remains unchanged, which is focused on three distinct aspects, including operational excellence, developing the future, and empowering people.
Our portfolio continues to attract good demand from occupiers with 100% occupancy reported for just the second time in the company's history. The strength in market conditions gives us increased confidence about our developments and confidence about increasing our ownership of Generator to 100%, following significant growth in this business over the past two years. Finally, we are commencing a sales campaign for two of our government-occupied assets in Wellington, Pastoral House and Mayfair House. Recycling capital from the portfolio into newer development continues to be an approach we will adopt given the success we have had to date. In terms of our development, we continue to see good leasing progress at Commercial Bay, with retail and office leasing increasing to 84% and 80% respectively. While leasing has progressed well, we have observed some minor slippage of about a month to the construction program at Commercial Bay.
At Bowen Campus, we have successfully delivered the Charles Fergusson Building, and the Bowen State Building is due for completion later this year. We've had good leasing progress on both Wynyard Quarter Stage 2 and One Queen Street in the period, lifting the level of pre-commitment in these two developments to 60% and 76% respectively. Finally, empowering people. With the acquisition of the remaining 50% of Generator and with this company becoming a wholly owned subsidiary of Precinct, the increase in staff numbers associated with the Precinct business increases to over 100. Secondly, Precinct has benefited from a strong and stable governance regime with a high-quality board of directors who have strongly supported the strategic direction of the company and its activities over the past eight years.
This year, we will be commencing a recruitment process looking to appoint a new independent director in the next 12 months to ensure a seamless transition. Finally, our approach to ensuring an inclusive and supportive working environment is something that we prioritize with our staff, which has this year seen us commence with obtaining a Rainbow Tick certification.
I'd like to now ask George to take you through a market overview and update on our portfolio performance.
Thanks, Scott. On page 12, as our business continues to evolve, so do the city center markets in which we are invested. In terms of city center retail, we continue to see strong interest from retailers, as evidenced by the Commercial Bay leasing progress, which Scott will speak to shortly. However, this is against the backdrop of softer retail trends and increasing market activity as other developments progress. The city center hotel market is now seeing new supply start to come online, and this is seeing room rates stabilize after a period of strong growth, around current elevated levels. This is as expected, and occupancy levels and room rates remain robust. Moving to page 13, the Auckland office market is in very good shape with a shortage of available space and solid demand. New supply beyond our own developments continues to be limited and lower than anticipated occupier demand.
There are different views across the market in terms of the extent to which this will translate to rental growth. However, as shown on the top right-hand side, even the more pessimistic commentators have lowered their vacancy expectations as the market has continued to perform well. The Wellington market is also performing well. Solid demand from both public and private sector, combined with record low vacancy rates and limited new supply, are underpinning the market. Moving to page 15, our investment portfolio continues to perform well. Across both markets, we are seeing our portfolio deliver rental growth higher than what is being forecast for the market generally. Across our leasing in six months, the rentals we achieved were on average 5.7% higher than the market rentals assumed in last 30 June evaluations, which is a good indicator of the strength of demand for our assets.
On page 16, it's been a strong six months for leasing, with over 16,000 square meters completed in the period in addition to portfolio leasing. This has included a new 15-year lease with Media Design School, over 60% of the space we're building at Wynyard Quarter Stage Two, concluding a 15-year commitment with Bell Gully, which will be for at least 3,800 square meters at One Queen Street, and agreeing terms for the tower portion, which is all of the remaining space at One The Terrace in Wellington. Moving to page 17, we are really pleased to report further progress at Aon Centre with all of the space available following the IAG expiry now being fully leased.
These premium floors at the top of the building have been entirely refurbished with new HVAC and upgraded base build. We have also been able to create an additional 800 sq m of net lettable area at the top level of the building. On average, the rentals achieved have been at a 21% premium to the previous passing rent. Overall, we've delivered an incremental yield of 12.6% on the capital spend. Moving to page 18, we're pleased to report that Number One The Terrace podium refurbishment is now complete. Treasury are in occupation. When the government Wellington accommodation project leasing was announced back in 2016, the tower component of One The Terrace remained as pending vacancy.
We've now agreed terms for an occupier to take all of the remaining space in the tower on a new nine-year lease following the completion of the tower refurbishment, which will be at the end of this year. Moving to page 19, as covered by Scott, we are announcing today a move to 100% ownership of Generator. We made our initial 50% investment in May 2017. Since that time, we've seen really strong growth and demand. We opened the Wynyard Quarter locations in October 2017. Then a further site at Britomart Place in July last year. Combined, this has seen Generator now running 12,600 sq m of space and become the largest flexible space provider in Auckland City Center with around 60% market share. We see this investment as being strongly aligned with Precinct's strategy.
This sector of the office space market is seeing growth and demand from smaller businesses who want access to the sort of amenities usually reserved for larger occupiers. In addition, aligning with Precinct's client base, we're seeing demand for more traditional corporate occupiers who are keen for flexible space to form one part of their overall real estate solution. We now have a very clear strategy and targets for the Generator business. With a solid platform and market position established, we have had operating losses as the business has traded up. The business is now achieving break even on a run rate basis. In the short term, we're focused on lifting occupancy levels into the range of 85%-90%, which would see us achieve annualized revenue of around NZD 20 million and enable us to deliver an EBIT of 10%-15% of revenue.
Longer term, we see opportunity for further profitability improvement as the business grows and we start to use the spaces more efficiently. Over the long term, we see continued growth and demand from this section of the market, in particular in the Auckland and Wellington City Centers. According to Colliers, flexible space is currently just 1.2% of the Auckland City Center market. If we compare that to other global cities where flexible space usage is approaching 5%, we can expect to see further significant growth and demand for this type of space. Thank you. I'll now hand over to Richard to take us through the interim results.
Thanks, George. Good morning, everyone. We had a strong first half with total comprehensive income after tax of NZD 25.5 million. This compares with NZD 17.7 million the same period last year, with the difference mainly attributable to the prior period fair value movement at 10 Brandon Street and the movement in financial instruments this period. Earnings per share pre-performance fees increased around 3% to NZD 0.0324 per share. The graph shown provides a bridge to the comparative period and illustrates the main drivers. As noted by George, the portfolio benefited from strong leasing and 100% occupancy. This performance, combined with the completion of H&M at Commercial Bay and the Charles Fergusson Building in Wellington, resulted in net property income being consistent to the comparative period. This was despite the settlement of a 50% interest in the ANZ Centre.
Tax expense for the period of NZD 0.4 million was NZD 2.3 million lower than the comparative period. This low tax expense reflects the significant amount of activity currently underway within both the development and investment portfolios. For the first time, we are reporting liquidated damages in relation to Commercial Bay. Included within the Commercial Bay construction contract is the right to liquidated damages if certain milestones are not met. As at December, NZD 15.4 million of liquidated damages have been withheld from the contractor. The amounts withheld have been recognized as part of the current liabilities, and the contingent asset has been identified. An internal review of the June 2018 property valuations has been undertaken. Despite market rental growth, there was no material value movement in the period for all the assets. Since June, interest rates have fallen significantly, which should support valuation cap rates at year-end.
This fall in interest rates, however, led to a fair value loss in financial instruments, which was the primary reason for the value of net tangible assets per share falling to NZD 1.39. The business remains on track to deliver full-year earnings of around NZD 0.066 per share, which is unchanged since August. Slide 24 provides a summary of net property income. After allowing for development transactions and investment assets being redeveloped, such as One The Terrace, net property income on a like-to-like basis was 1% higher. In Auckland, net property income was 1.8% higher, while Wellington income was broadly flat. In Wellington, net property income was impacted by foregone income associated with floors currently under development. For instance, the top floors of the Aon Centre and the lower levels of One The Terrace.
The completion of these projects, along with a strong occupier market, will lift net property income in future periods. Turning to Slide 25. As noted, tax expense for the period was NZD 0.4 million. Significant leasing success across the development portfolio resulted in a higher-than-expected level of leasing fees. In addition, development activity led to a high level of deductibles due to the disposal of fixtures and fittings across several assets. With around 90,000 sq m of development works currently underway and material works occurring throughout the investment portfolio, tax expense is expected to remain low. In the second half of the financial year, we will commence work at Pastoral House and tower works at One The Terrace. These projects, along with further leasing fees to be paid, are the main contributors to this expected tax position. Finally, on capital management.
During the six months, we refinanced around half our bank facilities and settled the sale of 10 Brandon Street and a 50% interest in the ANZ Centre. Despite continued development spend, these sales led to gearing falling in the period to around 24%. The announcement today of a NZD 150 million equity issue will see Precinct's gearing, which should disregard the convertible note, reduced further. Following the issue, pro forma gearing as at December falls from 24% to 18.5%. Total committed funding remains around NZD 1.2 billion for a weighted term of around 3.6 years. We continue to have sufficient capacity to deliver all committed developments with a balance sheet in good shape. Over the next 12 months, our borrowings will increase by around NZD 300 million as we complete Bowen Campus, Commercial Bay, and progress work at Wynyard Stage Two.
Our weighted average interest rate remains largely unchanged from the period, with hedging around 80% at December. I would now like to hand over to Scott, who will take you through the remainder of the presentation.
Thanks, Rich, turning to page 28. The current committed development pipeline consists of four developments comprising Commercial Bay, Bowen Campus, Wynyard Quarter Stage Two, and One Queen Street. Combined, these developments total over NZD 1.2 billion in capital spend and provide the business with a blended profit on cost of over 30% and a blended yield on cost of 7.3%. These developments are 83% pre-committed as at balance date, with a weighting to Auckland of 85%. In total, these developments will provide Precinct with about NZD 380 million in development profits. The next stage of our development pipeline consists of Bowen Campus Stage Two and Wynyard Quarter Stages Three and Four, with anticipated returns of 15% profit and a minimum 7% yield on cost. Turning to page 29. In the period, we have committed to two new developments, namely Wynyard Quarter Stage Two and One Queen Street.
Combined, these developments offer around 30,000 sq m of space, of which 20,000 sq m has already been committed. Importantly, this slide sets out the leasing progress made in the last three years across all of our developments, with a particular focus on uncommitted space. In total, over that period, Precinct has leased or committed around 50,000 sq m of space across a range of assets in order to reduce the extent of leasing risk and lock in significant development profits, whilst also repositioning the quality of the portfolio. Turning to page 30. Pleasingly, we have continued our leasing progress at Commercial Bay, with retail leasing increasing to 84% and office leasing increased to 80%. The retail is continuing to attract good interest from well-known and new to New Zealand retailers who want to be a part of this new retail destination.
Of the retail remaining to be leased, the ground floor is the main focus, with food and beverage, unisex fashion on level 1, and the service space retail being largely complete. The office leasing has increased slightly in the period. We are pleased with the inquiry and continue to feel comfortable about ensuring we are at least 90% occupied by practical completion. After including the small suites on one floor, we have just five floors remaining to be leased in the tower. Turning to page 31. In the period, we have made some minor scope changes, which has increased our total project cost budget to NZD 690 million. These changes have been made to optimize the design of certain aspects of the development, as well as create additional value. The additional NZD 4 million of changes will drive around NZD 6 million in value, which was captured in the 30 June valuation.
In addition, we remain on target to deliver a yield on cost of 7.5%. As always, we continue to observe the progress made on site relative to the construction program. There is around one month slippage to the program, which may impact on the previously disclosed completion dates. Like previous updates, the installation of the façade on both the office tower and the retail remains as the most important factor in terms of meeting program. Bowen Campus continues to progress on time and on budget. The Charles Fergusson Building was successfully delivered in December 2018, with occupier Ministry for Primary Industries steadily moving in over the December-January period. The Bowen State Building, now called Defence House, continues to progress with the majority of base build works now complete and the continuation of the integrated fit-out progressing.
This asset will begin generating rentals from 1 April this year, despite Defence's fit-out not completing until October this year. Wynyard Quarter Stage 2 is now underway, and we are delighted to have secured the Media Design School on a 15-year lease term for 60% of this building. Works to date are progressing well as we begin bulk excavation and in-ground works. We are engaged with a confidential party for one of the two remaining floors in the building and hope to complete this transaction in coming months. Turning to One Queen Street. The main progress in the period is the conclusion of a major leasing transaction with Bell Gully for at least 3,800 sq m in the building. Following this transaction, the development is now 76% committed and on track for works to commence midway through next year.
One of the key areas that we are looking at in terms of our development pipeline is a focus towards our next set of developments at Wynyard Quarter and Bowen Campus. These two sites offer us a further 42,000 sq m of area over four to five buildings, which can be developed in relatively small lots. We think this is attractive as the level of pre-commitment is lower than a large lot site development and can be met by a wider set of potential pre-commitment targets. Each site is being advanced from a design perspective and discussions are progressing with potential occupiers on each site. Now moving to section five and the equity raising announced today. The purpose of the capital raising is to position the business for future opportunities, including Bowen Stage 2 and the third and fourth stages of Wynyard Quarter.
These developments are between six to 12 months away, we will use the funds initially to pay down bank debt, which will see our actual gearing to reduce to 18.5%. The equity issue includes a NZD 130 million underwritten placement and a NZD 20 million underwritten retail offer with the ability to take over subscriptions. I'll shortly invite Henry Chung of First NZ Capital to explain more details of the offer. Turning to page 38. To provide context for the equity issue announced today, set out on this slide is the progress we have made over the past four to five years. We launched our 2020 vision in 2014 to transform our business, and in so doing, commence three large-scale developments, commence a sales program for over half a billion dollars of non-core assets, and undertake a comprehensive capital management plan, which matched our active management approach.
This table sets out the gains achieved by transitioning the portfolio from an older A-grade quality portfolio into a premium-grade portfolio offering higher returns. Page 39 sets out the value derived from this transformation. Most notably, Precinct has delivered around NZD 0.16 per share in NTA accretion, which is directly attributable from development activities. In addition, our earnings per share has increased by on average 3.5% per annum since 2012. Finally, our weighted average lease term is sector-leading at 8.5 years as a consequence of entering into long-term leases associated with our developments. Page 40 sets out the details of the opportunity to proceed with over NZD 300 million of developments, including Wynyard Quarter Stage 3 and 4, and Bowen Campus Stage 2. Like many of our other developments, we will seek enhanced returns with anticipated margins of 15% and yields on cost of 7%.
Following this equity issue, Precinct's committed gearing will reduce to 32%, providing sufficient capacity to be able to fund these future developments. As outlined during the presentation, it is anticipated that Precinct's gearing will reduce further following the sale of Pastoral and Mayfair House. Importantly, in reflecting the strength of our occupier market and the performance of our portfolio, we are maintaining our earnings guidance for the FY19 period of NZD 0.066 per share pre-performance fees. This ensures our guidance for the full-year dividend remains at NZD 0.06 per share, representing a 3.4% increase compared to the prior period. I'll now hand over to Henry Chung of First NZ Capital to take you through the details of the offer.
Thanks, Scott. As mentioned earlier, the offer is being structured by way of a NZD 130 million placement and a NZD 20 million retail offer underwritten by the joint lead managers, First NZ Capital and Credit Suisse. The placement is open to eligible investors, the joint lead managers have separately distributed details on the book build process. The final price under the placement will be determined by our book build process today, subject to an underwritten floor of NZD 1.45, which represents a 5.5% discount to last close. Under the retail offer, all existing New Zealand resident shareholders will have the opportunity to apply for up to NZD 50,000 of new shares at the clearing price of the placement. Precinct may accept an additional NZD 10 million of over subscriptions at a subscription. All shares issued under the placement and the retail offer will be eligible for the upcoming quarter two dividend.
Looking at the timetable on page 43, the placement book build is being executed today while Precinct is in trading halt. The book build is open until 5:00 P.M. Allocations will be advised overnight, Precinct will resume trading tomorrow following announcement of the final price. The placement will settle this Friday, 22 February, with the retail offer following closing on 5 March. I'll hand back to Scott to run through page 44 and the rest of the presentation.
Thanks, Henry. Finally, in terms of the equity raising, while we are proceeding with a placement and retail offer, we are focused on ensuring that we offer all shareholders the opportunity to participate fairly and ensure that investors who are willing to seek a pro-rata share of the offer will be catered for. The decision to proceed with a placement and retail offer was to ensure we had greater execution certainty in a market which has demonstrated elevated levels of volatility. Finally, Haumi, Precinct's largest shareholder, is not participating in the offer. This will see their holding reduced to 17.3% of all shares on issue. While they have chosen not to participate in this transaction, they remain very supportive of the business and its strategy, they have no intentions of selling down their stake. Lastly, some concluding comments.
While global markets remain volatile, we continue to have confidence in the occupier markets of Auckland and Wellington and the key drivers which are supporting them. The business is well-positioned after today's result and the equity raise. The business is set to further leverage its internal opportunities. We're excited about our ownership of Generator and believe 100% ownership of this business and exposure into this sector will give Precinct further operational leverage and exposure into this fast-growing sector. We continue to believe in our long-term strategy and the development opportunities which we have. We remain focused on progressing our market position and transforming the city centers which we operate in. I'd like to thank you all once again for dialing in today, we're more than happy to take questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Joshua Dale from Craigs Investment Partners. Please go ahead.
Good morning, guys. Just a few questions from me. First of all, just curious about the progress with backfill leasing in Auckland. There's generally not a lot of commentary on that. It seems like the two key gaps are close to 5,000 sq m in each of the ANZ and PwC towers, putting the Chapman Tripp space and also the balance of the PwC floors. Can you talk to the level of interest you're seeing there?
Hey, Josh. George here. Yeah, look, we're seeing really good interest across the space that will be vacated by PwC. That space is now all leased bar one park floor. Across ANZ Centre, we're seeing good interest there from park and single-floor occupiers, and we are launching a marketing campaign for the remaining space shortly. Overall, good demand on the balance of the portfolio. It's fully leased.
Okay, great. Just on 1 Queen Street, at the FY 2018 result, 50% of the construction cost had been fixed. Do you have an update on the remaining 50% and when you expect to lock that in?
Yeah. We're progressively working through that. We have advanced that through to 65%-70% at the moment. I'd expect that in the next three or four months, we'll progress another 15%-20% of that. Then there'll generally be 10-15 that will remain work in progress through design development and provisional sums.
Okay. At this stage, you're still comfortable with the NZD 298 million figure?
Yeah. Everything that we're seeing to date in terms of the pricing that we're receiving is consistent with or inside that figure.
Okay, great. Just one thing I noticed that was missing from your deck was commentary on the under-renting position. At FY 2018, it was 6.4%. Can you talk to that and what you're seeing there?
Yeah. We haven't undertaken an external valuation at 31 December. The leasing progress that George talked through in the presentation suggests that it's widened. Because of the deals that we've done to date, we're at a premium to valuation of around 5.7%. A smaller sample pool of evidence, but it suggests that 6.4% may have widened in the period. We'll undertake our external valuation at 30 June and get a clearer steer on where that under-renting is landing.
Okay, great. Thanks, guys.
Thanks, Josh.
Your next question comes from Jeremy Simpson from Forsyth Barr. Please go ahead.
Good morning, guys. Just a couple of things.
Hey, Jeremy.
The committed gearing, 32% now post the issue. Can you just remind me what that covers? I mean, does that cover Bowen 2 and 3 and 4 at Wynyard, or is it just the current committed projects?
Yeah, that includes everything we've committed to. Commercial Bay, Bowen Campus, Wynyard Quarter stage 2, 1 Queen Street, as well as the government RFP assets, and now One The Terrace and the works that we'll be undertaking there for that new leasing deal that we've just announced.
Great. Not the stage 2 then, and 3 and 4?
Correct. It includes stage 2 of Wynyard Quarter, but it doesn't include-
Oh, yeah
yeah. It doesn't include Wynyard stage 3 and 4 or Bowen stage 2.
Cool. Is there any assumption there of gains being made from the development gains being incorporated into the asset values there? Is it just on book values?
Hey, Jeremy. Richard here. It's assuming the development profit on the projects is realized. No through the cap rate compression over and above valuations from 30 June.
Cool. Just a couple more things. What sort of tax rate do you think we should use? I know it's a tricky one, it moves around a bit, but we should use over the next sort of two to three years through this period.
I think for this year, I'd be looking at around that effective tax rate of 1%. It will be a low second half. Next year, we'll continue works with Mayfair Pastoral continuing, and work at number 1 as well. I'd be low single digits as well.
Cool. Just the liquidated damages, is that it if everything stays on track from here? Is there potentially more if things go wrong?
No. That is what we have levied to date is at 31 December. Our expectation is that that will grow, given the extent of delay on site.
All right, cool. Thanks, guys. That was all for me.
Thanks. Appreciate it.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Jonathan Davis from ACC. Please go ahead.
Morning, team. I was wondering if you could provide me with some details-
Hey, Jonathan
on the fees associated with the capital raise. Do you anticipate any break fees associated with paying down debt?
In terms of the fees, look, they're generally market rates. I'm not going to get into the details of what they are, but they've been tested. They're competitive. We're comfortable with them. Rich, in terms of the break fees.
In terms of the bank facilities, we're not canceling any bank facilities. We're just going to.
I know
that down bank debt. Yeah, we're just repaying bank debt.
Okay. Just on Commercial Bay, is it your expectation that start will complete still in March now, or has that been pushed out?
No. The previously disclosed dates for completion are September 2019 for the retail and December 2019 for the tower. What we have observed is that there is around one month slippage to the construction program. It has been measured immediately post a pretty unproductive period in terms of Christmas and New Year. That slippage may impact on those dates, and that is what we are signaling at this stage. I think the next couple of months are going to be really important in terms of understanding just how much productivity there is on site.
Okay. The NZD 1.6 million that you received in the half from Bowen, is that just purely the Charles Fergusson Building?
Yeah, that is right.
Yeah. Okay. That was it from me.
Thanks, Jonathan.
Thank you. Your next question comes from Nick Mar from Macquarie Group. Please go ahead.
Morning, guys.
Hey, Nick.
Hey, just a quick one on the Generator thing. Now that it's 100% owned, how does the management structure work in terms of you guys spending time on looking at that business and also from the external management contract perspective?
Hi, Nick. How to work on a day-to-day basis. As the business has grown there over the last 18 months, there's a really strong layer of management within that business, which will remain after the finder exits. That management team there will report through to us as a management team here, and myself in particular. In terms of a management arrangement from a fee perspective, under the MSA, there will be an additional service, and the fee that will apply to that will be set at market rates. That hasn't yet been determined by the independent directors and the HTML. There's an approach which is set out within the management services agreement for that to be set at market levels and reviewed every two years.
That's great.
I think just to add to that, Nick. The large majority of the management function sits within that business.
Right. Yeah. No, that's cool. The Number One The Terrace, do you know roughly how much the additional CapEx is on that one for the new lease?
In terms of the refurbishment, we'd expect to be spending around NZD 750 a sq m. In addition to that, there has been strengthening of the building carried out already as part of the previous leasing of the podium levels.
Yep. No, that's great. Cool. That's all from me. Thanks a lot.
Thanks, Nick.
Thank you. Your next question comes from Shane Solly from Harbour Asset Management. Please go ahead.
Good morning, guys. I've got a couple of questions. There's no valuations, no revalues in the period. Did the board take any desktop at all?
Yeah, we did a comprehensive internal review, which basically tests evidence that we're aware of in the market, as well as our own internal evidence based on leasing transactions. The review and the approach that we take is where an asset sort of demonstrates movement in excess of 5% up and down, then we'd trigger an external valuation. None of the assets moved by greater or less than, or greater than 5% either way. Didn't trigger any external valuations. We had an internal assessment, but we haven't adjusted the valuations as at 31 December.
Okay. Just on the asset sales potential, what's the potential timing on Pastoral or Mayfair?
Both assets are subject to reasonably significant refurbishment works, which are part of the development agreements that we've agreed with the Crown. Our expectation is that it's more likely that a counterparty would contract on the basis of those works being completed and for the price to be determined on a yield on cost basis. In which case, Pastoral works are underway, and they'd be complete in the next 9-10 months, and then settlement would likely occur after that. Mayfair will start towards the end of this year, and the program for those works would be another 9-10 months. That's our expectation. That doesn't discount the possibility of someone coming in and actually stepping into the DAs and undertaking the works. We're looking at unlikely outcome with someone, and we'll take those out once the works are completed.
Key thing there will be obviously counterparty covenant. We'll be very focused on that. It's no surprise that we don't necessarily need the cash in the short term, it would be good to have down the track to fund our developments.
Okay, thank you. On gearing, where do you see optimal gearing for Precinct through this cycle?
Yeah, it's a good question. Post the equity issue, our committed gearing is 32. Once you overlay sale of Pastoral or Mayfair, you're getting into the high 20s. We see it in that early 30s range. We're still seeing really good growth in the market. We still feel really confident about our development book and the prospects for Wynyard Quarter stage 3 and 4 and Bowen stage 2. We're still very much minded towards continuing to drive growth out of our developments and keep improving the portfolio.
Thank you. On guidance, are you allowing for dilution from the capital raise, asset sales, Generator consolidation, is that right, in terms of 6.6 guidance?
Yeah, that's correct, Shane.
What does it look like after performance fees? What's 6.6 come to?
I think it's around six, around 6.4.
Okay. Dividends covered at 100% FO level or not?
Sorry, what was that, Shane?
What's the FO coverage ratio on your dividends then?
It should be around about the same guidance with our policy, it'll be around about 100%.
Okay. Thank you. Just my final question. Hollander not participating in the cap raise, any particular reason for that?
No reason other than, look, these guys deal in large chunks of capital, it's often challenging for them to actually put through approvals for relatively small parcels. In this instance, the sort of pro rata share would've been, almost too small for them to put up to their investment committee. Well, it was too small.
Okay. Thank you.
Absolutely. There's no reason for them to be changing their view. They remain very supportive.
Thank you. Your next question comes from Tony Sherlock from Morningstar. Please go ahead.
Morning, guys. Just on the Generator, can you talk to the difference in the all-in rental return that you get per square meter versus what you'd get on a conventional lease?
Yeah. I can talk to that, Tony. Look, the way that Generator provides space is on a desk per person per month charge rate, all in gross, fit-out, everything included. It's quite different from how you look at it traditionally on a per square meter basis. It would appear as a multiple of what a rental rate per square meter would be. With a lot more costs to come out of that in terms of appreciation of that fit-out, the provision of staff to service the space, et cetera.
Okay. There's no real comparison, but you get a 40% rental premium if you're converting space from one to another. If you're looking at it from an increment, you've mentioned you're at 1.2% of the city versus potentially as high as 5% in other markets. Do you see that getting to what, two and a half? Is that a reasonable figure for Auckland?
I think that's absolutely reasonable for Auckland. There is some new space in the pipeline already. Not from Generator, but from other operators. We expect to see other operators come into the market. I would expect that it could longer term exceed that 2.5% level. Within Wellington, it's currently less than 1%. That market is even less. From memory, I think Melbourne and Sydney would be sitting around 2.5%-3% currently.
Okay. Thank you. Just finally, should we view the Wellington assets as just a long-term funding source or are you more likely to come to the market and raise capital as you've done today?
No, look, I think, the assets that we're developing at Bowen Campus, we consider those absolutely as long-term holds, as we do with One The Terrace, just given their quality and their location, and core government assets which we don't intend to exit. Beyond that, we've got a couple of corporate assets which we think well-positioned. They're grade A assets. We think there's actually quite a bit of revisionary potential in the rents in both of those assets. We don't anticipate bringing those to market in the future. What we've done today is really position ourselves to be able to fund what's in front of us and the sale of Pastoral and Mayfair, a couple of sort of slightly older government assets we'll use for anything else that comes our way.
Okay. Thank you very much.
Thanks, Tony.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Pritchard for closing remarks.
Look, once again, thanks to everybody who has taken the time to dial into the call this morning. As we stated during the presentation, we're really pleased with the steps that we've made in the last six months towards our longer term strategy. I'd like to thank you all once again for your support. Have a good day.