AUGUSTA INDUSTRIAL FUND LIMITED
QUARTERLY REPORT October 2018
AUGUSTA INDUSTRIAL FUND LTD
The Augusta Industrial Fund (AIF) successfully raised its full equity offer in June 2018 and the level of investor interest was such that the offer closed over-subscribed. The objectives of the AIF are to deliver a sustainable and stable income return, plus the potential for capital growth over time. The industrial sector continues its stellar run with significant appetite for industrial investments. The Auckland and Wellington industrial markets have benefited from constrained industrial land supply which has limited the amount of new developments coming onto the market. With limited new supply, combined with strong occupier demand, market rental levels continue to reach new highs. In August, the RBNZ announced it expects to keep the OCR at the current low level through 2019 and into 2020. Low interest rates for longer should maintain support for the commercial property sector. The Augusta team has been focussed on the delivery of the new development at 862-880 Great South Road, Penrose. The collapse of Ebert Construction, the contractor appointed by the previous owner of the property fortunately occurred at a very early stage of the development with no construction having started. Within a short period of time, the team appointed Robert Cunningham Construction to deliver the development. We are also reviewing options for the remaining vacant land parcel which has excellent frontage to Great South Road.
Augusta Industrial Fund Ltd is considering making an offer of financial products in New Zealand. No money is currently being sought. No financial products can currently be applied for or acquired. The offer will be made in accordance with the Financial Markets Conduct Act 2013.
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The D&H Steel Construction building at 12 Brick Street, Henderson is a relatively passive investment with a long-term lease in place and at this stage provides the AIF with a stable income return. The cool-store and distribution complex at 20 Paisley Place, Mt Wellington has a new 12-year triple net lease to Icepak Limited, commencing 1st December 2019. Auckland’s specialty cool-stores are experiencing high demand from occupiers faced with very few expansion or relocation options. The Hub, Seaview, Wellington, a multi-tenanted warehouse and distribution centre, is benefiting from the acute shortage of available warehouse/distribution space in the locality. With tenants wanting to secure more space within The Hub complex, there is potential to extend lease terms and increase rents. The Augusta team is reviewing the acquisition of a number of industrial properties that would be funded through a second AIF equity raise early next year1. We will update investors shortly on this initiative. Acquiring additional properties will further diversify the AIF portfolio in order to provide a stable income return and create further opportunities for longer-term capital growth. We look forward to reporting further information in the coming months and thank you for your continued support.
INDUSTRIAL PROPERTY REVIEW
The industrial property investment sector has been a strong performer over recent years as market conditions have driven rental increases and yield compression. The continued strength in New Zealand’s economy has underpinned high levels of business formation and expansion over recent years which has in turn driven demand for industrial property. As a result, vacancy rates across the country’s major industrial precincts have fallen as the additional demand has, to date, outpaced new development despite a lift in construction activity. Competition for increasingly scarce leasing opportunities has seen upward pressure on rentals across most major centres.
Vacancy Rate
Auckland
2.8%
Tauranga
2.8%
Hamilton
3.0%
Wellington
2.6%
In New Zealand, the Reserve Bank (RBNZ), has repeatedly confirmed that interest rates will remain accommodative for a considerable period. In its August statement on interest rates, The RBNZ stated that it expects to keep the OCR at this level (1.75%) through 2019 and into 2020. The RBNZ went further stating that the next move in the OCR could actually be down. Given that interest rates, therefore, are set to remain lower for longer, interest in property assets will remain elevated.
Industrial Vacancy Rates 2018 Location
Looking ahead, it is likely that yields are at, or close to, their cyclical low. That having been said, a sharp increase in yields remains unlikely as increases in interest rates are almost certain to be limited and spread over an extended time frame. Central Banks, whilst wishing to “normalise rates” do not want to risk stalling economic growth through a premature increase in borrowing costs.
Trend over 12 months
Stable Returns The market dynamics discussed above have combined to produce strong and stable returns from institutional grade industrial investment property across New Zealand. As the graph below illustrates, total returns, the combination of returns on income and changes in capital values have stood at 10% or over since early 2012 according to figures released by MSCI.
Source: Bayleys Research
Investment yields have seen significant compression over recent years as competition for higher yielding assets has ramped up in the face of the western world’s low interest rate environment and the printing of money by central banks post the Global Financial Crisis (GFC). Analysis of Auckland industrial investment sales by Bayleys Research shows that the median yield was circa 5.4% over the final quarter of 2017. The median yield has remained at sub 6% since the final quarter of 2016 reflecting the ongoing demand for property assets. Interest rates across the western world have been held at stimulatory levels since the GFC. Against this backdrop, investors, ranging from individuals, through to syndicated offerings, and international superannuation funds have sought out higher yielding assets, which has included property. Whilst competition for a limited supply of investment product has driven yields to historic lows, returns have continued to provide a premium over risk free alternatives. In New Zealand, the risk premium over the returns generated by NZ 10 year government bonds has been holding at approximately 2.0% - 2.5%.
Investment Returns NZ Industrial Property (% p.a.) 20.0 15.0
Annual Total Return
Competition for High Yielding Assets sees Yield Compression
10.0 Total
5.0
Income Return Capital Return
0.0 -5.0 -10.0
March 2008 – March 2018
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A
B&C
AUGUSTA INDUSTRIAL FUND LIMITED
20 PAISLEY PLACE, MT WELLINGTON, AUCKLAND
12 BRICK STREET, HENDERSON, AUCKLAND 862-880 GREAT SOUTH ROAD, PENROSE, AUCKLAND
THE HUB, SEAVIEW, WELLINGTON D
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17-23 Toop Street, 25 Toop Street, 109-117 Port Road and 1010-103 Port Road, Seaview, Wellington.
The Hub, Seaview, Wellington Sector
Industrial
Land Area
52,756m2
Net Lettable Area
39,446m2
Tenant
PBT, Linfox, Fujitsu, Toll, Downer and others
Purchase Price
$44.90m
Valuation
$46.50m (December 2017)
Occupancy
100%
WALT
5.2 years
Key Highlights & Activities for the Quarter • PBT have leased the 2,096sqm space that was leased by the vendor, Seaview Commercial Investments, on a three year term at a rental of $181,555 which is an increase of $34,835 on the rental we were receiving. • Auto City have leased the western yard space that was also leased by the vendor, Seaview Commercial Investments, on a six year term and at a rental of $55,000 which is an increase of $12,660.
Key Activities for Next Two Quarters • We are working with Fujitsu on a fitout of their office space to better suit their requirements. They have a six year right of renewal due 1 April 2020 which we will be looking to secure with this work. Boundary lines indicative only.
• Toll have indicated that they may want to increase the size of their cool storage so we will work with them if there is an opportunity to extract better lease terms. • There is an opportunity to lease the eastern yard space to obtain extra rental income as the Seaview industrial market is short of vacant warehouse and yard space.
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862-880 Great South Road, Penrose, Auckland Sector
Industrial
Land Area
23,737m2
Net Lettable Area
8,855m2
Major Tenant
Graphic Packaging International New Zealand Limited
Purchase Price
$21.45m
Valuation2
$23.20m (December 2017)
Occupancy
100%
WALT3
8.5 years
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Key Highlights & Activities for Quarter • Existing Building Redevelopment Robert Cunningham Construction has recommenced the works to construct the new office, canopy and yard for Graphic Packaging. This follows the collapse of Ebert Construction, the contractor appointed by the previous owner of the property. Ebert’s insolvency occurred at a very early stage of the project and has therefore resulted in relatively minor lost time (approx. six weeks). • Development Land Unconditional agreement has been reached to dispose of approximately 45% or 4,200 sqm of the land fronting Great South Road to an owner occupier at a price of $1,000/sqm. After subdivision costs we expect net proceeds exceeding $1m. We anticipate settlement to occur in approximately six months, following completion of physical subdivision works.
Boundary lines indicative only.
Key Activities for Next Quarter 1
Includes forecast capex of $2.4m for redevelopment of Graphic Packaging premises
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“As if complete” following completion of redevelopment
3
From completion of the redevelopment
• Progress redevelopment of Graphic Packaging premises. • Complete design and lodge building consents for subdivision works. • Determine strategy for remaining land, either sale or development for retention in the fund.
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20 Paisley Place, Mt Wellington, Auckland Sector
Industrial
Land Area
13,630m2
Net Lettable Area
7,877m2
Tenant
Americold NZ Ltd, followed by Icepak Limited (a subsidiary of Halls Group Ltd) from December 2019
Purchase Price
$25.38m
Valuation
$25.90m (December 2017)
Occupancy
100%
WALT
13.2 years
Key Highlights & Activities for the Quarter • Americold continue to trade well from the site, with Icepak Limited gearing up to take over occupation from December 2019.
Key Activities for Next Quarter • Audit landlord owned plant at the property and review current condition and maintenance regime. • Work with both Americold and Icepak Limited to ensure the arrangements for the handover of the site in late 2019 meet expectations.
Boundary lines indicative only.
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12 Brick Street, Henderson, Auckland Sector
Industrial
Land Area
19,876m2
Net Lettable Area
12,012m2
Major Tenant
D&H Steel Construction Ltd
Purchase Price
$22.36m
Valuation
$22.36m (November 2017)
Occupancy
100%
WALT
9.5 years
Key Highlights & Activities for the Quarter • The tenant has reported strong performance for the quarter and continues to work on many of the largest structural steel projects across Auckland.
Key Activities for Next Quarter • Maintain a strong relationship with the tenant and continue active management of the property and plant.
Boundary lines indicative only.
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15 Year Lease Expiry Profile 28% Percentage of Commited Revenue Expiring
23%
Ye
14% 8%
5%
0%
g
in
nd
e ar
17%
ar
M 31
1%
0%
19
ar
M 31
20
ar
M 31
4%
21
ar
M 31
0%
0%
22
ar
M 31
23
ar
24
ar
M 31
M 31
25
ar
26
M 31
ar
M 31
27
ar
M 31
28
ar
M 31
0%
29
ar
M 31
30
0% ar
31
0%
M 31
ar
32
M 31
ar
*Icepak Limited lease for 20 Paisley Place does not commence until the expiry of the current lease to Americold (1 December 2019). For the purposes of this graph the terms of the Americold lease and Icepak lease have been combined.
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M 31
Year of Expiry (Financial Year Ending)
Largest 10 Tenants (Lease Revenue) Orange Box 4% Downer 4% Toll 4%
Other 5%
Mailing - Physical & Digital 4% Icepak Limited 23%
Jets 4%
Liquor 2%
Other 2%
Engineering & Infrastructure 4%
Packaging 14%
Linfox 5% Fujitsu 8%
Tenant Industry Mix (Lease Revenue)
Third Party Logistics 57% D&H Steel Construction Ltd 17% Steel Manufacture 17%
PBT Transport 12% Graphic Packaging NZ 14%
*Icepak Limited lease for 20 Paisley Place does not commence until the expiry of the current lease to Americold (1 December 2019). For the purposes of this graph only the Icepak lease has been included for 20 Paisley Place.
*Icepak Limited lease for 20 Paisley Place does not commence until the expiry of the current lease to Americold (1 December 2019). For the purposes of this graph only the Icepak lease has been included for 20 Paisley Place.
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Augusta Industrial Fund Limited Level 2, 30 Gaunt Street, Auckland PO Box 37953, Parnell Phone: (09) 300 6161