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Precinct raising $150M from an underwritten placement and retail offer

Precinct Properties New Zealand is raising $150 million with only $20 million available to retail shareholders and has paid for underwriting of both it and the $130 million placement to institutional investors.

The issue’s price will be determined by the institutional book-building auction but with a floor of $1.45 per share. Credit Suisse and affiliated firm FNZC are the lead managers and underwriters.

Retail investors will be limited to subscribing for a maximum of $50,000 shares each.

The shares, which are now in a trading halt while the placement is conducted, closed on Monday at $1.535.

As a matter of principle, "we strongly prefer rights issues" to the way Precinct has chosen to structure its capital raising, says New Zealand Shareholders' Association chair John Hawkins.

Nevertheless, Precinct has made some changes to try to mitigate the unfairness to retail shareholders, including raising the proposed number of shares individual investors can subscribe for. It has also added the ability to accept over-subscriptions up to $10 million," Hawkins says.

The property investor and developer says it will use the funds to initially pay down debt and on medium-term development opportunities including the Bowen Campus stage two development in Wellington and the Wynyard Quarter stages three and four, although it is six to 12 months away from starting them.

It will reduce gearing from an already low 24.3 percent to 18.5 percent. The company expects borrowings will grow by about $300 million over the next year and it expects to collect about $380 million in development profits from its current projects, which include One Queen Street.

Precinct's largest shareholder, Abu Dhabi-based Haumi, owns 18.8 percent and won't be participating in the capital raising. Its stake will be diluted to about 17.3 percent.

Chief executive Scott Pritchard told an analysts' briefing that Haumi's share of the capital raising would have been too small to put to Haumi's investment board.

Precinct, which also announced a 44 percent increase in first-half net profit, says it is maintaining its full-year earnings guidance at 6.6 cents per share. It will pay dividends of six cents per share for the year, an increase of 3.4 percent from the previous year.

All shares issued under the placement and retail offer will be eligible for the second quarter dividend of 1.5 cents per share, payable on March 27.

Net profit rose to $25.5 million for the six months ended December, up from $17.7 million in the previous half, on fluctuations in property and financial instruments valuations.

Net operating income excluding such non-cash items fell to $37.7 million from $38.2 million, or 3.11 cents per share or 3.24 cents before the manager's performance fee. Although a company, Precinct has an external manager, AMP Haumi Management.

The profit drop reflects the sale of a 50 percent interest in the ANZ Centre for $181 million, a move Precinct describes as asset recycling and part of its capital management.

The manager, which also has three directors on Precinct’s board, is paid a three-tiered base fee based on the value of Precinct’s investment properties excluding developments. It also receives a performance fee paid quarterly in arrears based on any out-performance of Precinct shares compared with the NZX Property Index.

Precinct has also earmarked for sale its Wellington buildings Pastoral House and Mayfair House which were valued at $42.9 million and $40.8 million respectively at June 30 last year.

Precinct’s highest profile development is Commercial Bay, the redevelopment of the former Downtown shopping centre at the bottom of Auckland’s Queen Street. Its total project cost has been revised up to $690 million from $685 million previously but is still on target to achieve a 7.5 percent yield on cost. It is being built by Fletcher Building.

Precinct says there has been “minor slippage” of about a month to the construction programme “which may impact previously disclosed completion dates of September 2019 for retail and December 2019 for office.”

It has withheld $15.4 million from Fletcher in liquidated damages as at Dec. 31 and Pritchard says he expects that amount will grow.

This is yet another delay confirmed. Last September, David Kennedy, who had been overseeing the Commercial Bay, left Fletcher.  

Kennedy had been recruited from Britain in 2017 to run Fletcher’s Building + Interiors unit, which builds high-rise projects, and his taking over Commercial Bay from Richard Coupe earlier in 2018 had looked like a demotion.

In 2017, when it became obvious that Fletcher was losing hundreds of millions of dollars on high-rise projects, Fletcher had been touting Commercial Bay as an example of how such a project should be run.

Staff retention is a key issue for Fletcher since it announced in early 2018 that it was going to finish its existing projects and then exit the skinny margin but high-risk high-rise construction market.

Precinct says leasing commitments for stage two of the Wynyard Quarter have now reached 60 percent of the project’s office area and that the Charles Ferguson Building on the Bowen Campus reached practical completion in December.

It says the Bowen State Building is on budget and on schedule for practical completion this year.

Occupancy of the investment portfolio reached 100 percent, up from 99 percent previously, and has a weighted average lease term of 8.7 years.

Precinct says it completed 21 leasing transactions covering 12,000 square-metres during the latest six months and new leasing was completed at 11.3 percent above previous contracted rents.

The company says it is buying the 50 percent of co-working space provider, Generator, that it doesn’t already own for $7.4 million.

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