One of New Zealand's biggest single-building public property syndications has been launched with Augusta Funds Management Ltd offering $70 million worth of capital in a limited partnership that will own a new Auckland CBD office building in which media organisation APN Holdings NZ Limited (NZME) is the anchor tenant.
The 11,117 square metre Building A is part of a recently completed two-building integrated commercial and retail complex at 2-4 Graham St which runs off Victoria Street West. The building will be purchased from a related company of the developer Mansons TCLM for $115,818,265.
Augusta is now offering 1400 investment units of $50,000 each in the limited partnership which will own Building A, with the balance of the purchase price and establishment costs to be funded by a loan from ASB Bank.
The offering has a forecast pre-tax cash return of seven per cent per annum ending March 31, 2017, which is projected to increase by one quarter of a per cent annually for the following four years.
Mike Houlker, head of Bayleys Investment Products and Syndications Division which is marketing the offering, says this means that the fund's forecast pre-tax cash return will climb to eight per cent in the year ending March 31, 2021.
"This represents a good return for a premium-grade investment property of this quality in the current low inflationary economic environment," Houlker says.
He says the offering's Product Disclosure Statement and supporting advertising make it clear the forecast returns are not guaranteed and that the actual distribution rate may vary. However, he says the forecasts are based on three main factors:
• All of the leases have fixed annual rental increases of three per cent per annum starting at the beginning of the third year of the lease to NZME and at the second year of leases to other tenants which include liquor company Pernod Ricard and law firm Meredith Connell.
• The interest rate on the loan from ASB is fixed for the first five years of the loan.
• The vendor and developer will provide a broad capital expenditure and defects warranty until February 2026. This means Mansons will generally be responsible for repairing any building defects for most of the next decade.
Houlker says the combination of these three significant factors means that income forecasts can be made with a reasonable degree of certainty for the first five years of the lease, assuming there are no tenant defaults or rental arrears.
The Product Disclosure Statement also indicates that the increase in returns over the forecast period does not guarantee further increases and, while it may continue to increase, the return following the forecast period may stay the same or be lower.
The property will have a weighted average lease term at August 15, 2016 (the anticipated settlement date) of 12 years by income.
NZME has a 15-year lease over the first three floors of the six-level building with two six-year rights of renewal. It operates a wide range of print, radio and online media businesses such as The New Zealand Herald, GrabOne and Newstalk ZB.
Last month NZME's parent company, the ASX listed APN News & Media Limited, announced a proposal (which is subject to shareholder approval) to demerge its New Zealand business and list it on the New Zealand stock exchange (NZX).
NZME has also applied to the Commerce Commission for approval of a merger of those New Zealand operations with the New Zealand business operations of the ASX listed Fairfax Media Limited. That merger is also subject to a number of further regulatory and internal approvals.
Mark Francis, Augusta's managing director, says an NZME-Fairfax merger would potentially strengthen the tenant covenant.
Meredith Connell, which has offices in Auckland and Wellington, leases the top floor of Building A on a 12-year lease with a six-year right of renewal. It holds the Crown Warrant for criminal work in Auckland, with the exception of Manukau.
Pernod Ricard, part of the global Pernod Ricard group, has its New Zealand head office on Level 5 of the building on a 10-year term with one six-year right of renewal. It distributes wine and spirits including brands such as Brancott Estate, Stoneleigh, Church Road, Mumm Champagne and Absolut Vodka.
The vendor, part of the Mansons group, is taking a nine-year lease back of the only vacant floor remaining in the building, with a bank guarantee from ASB Bank for the initial term of its lease. Mansons is actively seeking a new tenant for that floor. Houlker says the terms of any lease to a replacement tenant must be no less favourable than the Mansons lease which also includes annual fixed rental increases of three per cent.
Building A has six office floors of about 1850sq m each plus 113 basement car parks and 215sq m of storage in two underground levels. The building connects with the adjoining Building B, via an enclosed 20 metre high lobby atrium which has full height wall and roof glazing and opens onto an outdoor courtyard area.
The two buildings were designed so they could accommodate separate, self-contained tenancies. However, NZME and Meredith Connell have leased floors across both buildings, which are connected by sky bridges across the atrium.
NZME has its main reception off the lobby entranceway in Building A. It operates its radio stations, which include Newstalk ZB, Radio Sport, ZM, Hauraki, Flava and IHeart Radio, on the ground floor of both buildings with its announcers visible to the public through extensively glazed studios.
At 100 per cent of New Building Standard (NBS), the building meets all current seismic code requirements, has a Five Green Star 'Design' rating and is in the process of obtaining a Five Green Star 'Built' rating based on performance standards such as indoor environmental quality and energy and water usage.
Samara Phillips, Bayleys' syndicated investment manager, says the offering is being made at a time when the Auckland prime office vacancy rate is very low. "As set out in the Jones Lang LaSalle Valuation report on Building A, tenants have been demanding newer, greener and more efficient premises, which is the driving force behind the historically low vacancy rate for prime premises of 2.1 per cent," she says.
Francis says Building A represents an excellent opportunity to acquire a new, premium grade office building in the expanding Auckland CBD location of Victoria Quarter. "This precinct has experienced a growing commercial presence with low to mid-rise campus style buildings being constructed in recent years like the Spark head office complex located directly across the road from the Graham Street building. The precinct will get a further boost from the convention centre development which is underway on a nearby site.
"The scale and quality of this offer will enable us to continue the momentum and success generated by recent offerings such as the Progressive Enterprises Distribution Centre in Christchurch, a Countdown supermarket in Hamilton, the redevelopment of Oji Fibre's Penrose premises and Value Add Fund No. 1 - our first multi-asset unlisted property fund."
The Building A Graham Street Limited Partnership investment scheme will be overseen by Covenant Trustees Services Limited as supervisor.
Augusta Funds Management will be responsible for the establishment, administration and management of the limited partnership, the preparation of annual financial statements and the payment of monthly income distributions.
Augusta Funds Management is a wholly-owned subsidiary of NZX listed Augusta Capital Limited. It has in excess of $1.45 billion of assets under management on behalf of more than 3000 investors and encompasses over 150 commercial and industrial premises in New Zealand and Australia.
A copy of the Product Disclosure Statement can be found at www.premiumaucklandproperty.co.nz