Morningstar | Precinct's Hotel Generates Greater Leverage of Waterfront Assets. FVE Increases to NZD 1.45. See Updated Analyst Note from 16 Aug 2018
Narrow-moat-rated Precinct Properties reported fiscal 2018 earnings of NZD 6.32 cents per security, or cps, up 2.4% on the previous corresponding period and in line with guidance. The key office markets where Precinct operates, Wellington and Auckland, are both benefiting from very favourable tailwinds. Collectively prevailing rents for Precinct's assets in both cities are now below market rates.The Wellington market has seen a high rate of withdrawals of 100,000 square metres, mostly in relation to buildings with poor earthquake resistance credentials. Prime Wellington CBD office vacancy rate is 1% and the demand is robust from both corporates and the government, serving to collectively push up market rents. Auckland has also seen supply withdrawal totaling 140,00 sqm. This combined with high population and economic growth leaves the CBD with low vacancy rates and rising rents.
We've upgraded our rental growth assumptions and factored in some accretion from the planned NZD 70 million Stage 2 redevelopment of Wynyard Quarter and the waterfront site at 1 Queen Street Auckland of offices and a hotel. Our fair value estimate increases to NZD 1.45 from NZD 1.37. Narrow-moat-rated Precinct screens as fairly valued, with the guided 3.4% growth in distribution to NZD 6.0 cps for fiscal 2019 representing a yield of 4.3% before imputation credits. Our fiscal 2019 earnings forecast of NZD 6.6 cps aligns with guidance and represents growth of 3.4%.
The key change for Precinct is its first foray into the hotel subsector with the development at 1 Queen Street. Returns for hotels are superior than those for offices, but so is risk. Precinct has provided guidance that its expects the office component to be valued at a capitalisation rate of 5.1% versus 6.6% for the hotel. We'd normally be circumspect about office REITs delving into hotels, particularly when Precinct's returns are based on the hotels' operating performance. However, given the location right on the waterfront and adjacent to major Auckland office buildings, we see occupancy and rental risk as low. A 15-year management agreement to operate the hotel as "InterContinental Auckland" provides further comfort the asset will be appropriately managed and marketed.
Precinct Properties New Zealand is engaged in investment in predominantly prime commercial office properties in the central business district of major New Zealand cities. As of June 30 2010, Co. had total assets of NZ$1,299,328,000 and investment properties portfolio valued at NZ$1,276,800,000.
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