19 minute read
Chair Report - Andy Knight
Tēnā koutou katoa, me pēnei te kōrero, haere ngā mihi, haere ngā mate, haere whakamua tō
It has been an honour again to lead the Commercial Group through another year.
The Commercial Group covers both Taranaki Iwi Holdings LP (Holdings or TIHLP) and Taranaki Iwi Fisheries Ltd (TIFL). It is our job to supply Te Kāhui with the financial resources it needs to do its jobs over the long term.
It has been a difficult one for New Zealand and also for some of our assets, but we are pleased with our positive total return of around 5%.
We aim to do this prudently and sustainably while delivering wider impacts that align with Taranaki Iwi values.
We do this by choosing assets that fit our strategic allocation needs, but which also have wider resonance and delivery for Taranaki Iwi.
This might include increasing our land ownership, reestablishing our footprint in the rohe, providing housing opportunities or providing opportunities for mahi tahi with other aligned iwi.
There will always likely be a minority portion of our portfolio that cannot achieve wider impact. Currently this is limited to some of our financial assets, where work is underway to improve responsible investing alignment.
Performance Summary
It has been a difficult year for many households and businesses in New Zealand as our economy has had to deal with the long hangover of the loosest fiscal and monetary conditions the country has ever seen.
The reset from this has been painful while rising costs have continued to eat into businesses, as much as they have into household budgets.
On top of this, our major export market, China, has faced its own struggles. You can see this in the results for commodities businesses, including ones we own stakes in.
Some international economies have remained strong while inflation has been largely tamed. Financial markets have moved relentlessly higher. We know that financial markets have ups and down, but this year we have benefitted from the growth in our global financial assets, which has helped to balance out weakness in other areas.
We are grateful in such circumstances for the diversification we have built. This has allowed us to deliver:
• Operating profit of $2.8m. This result is before interest paid to related parties (including Marae/ Pā). This figure excludes revaluation gains in managed funds. These fall into ‘Other Gains and Losses’ and were strong this year
• Total Commercial Group profit (including revaluations and after related party interest) of $6.2m (Prior Year (PY) $5.0m) supported by managed funds and development property
• A total distribution of $2.8m was paid to Te Kahui –this is more than double the distribution paid seven years ago when TIHLP was first formed, and up $100k on Financial Year (FY) 23
At an operational level:
• We have a portfolio that is around 70% invested in assets that provide wider impact to Taranaki Iwi through supporting its values and goals beyond just commercial returns
• We have continued our work on housing in the rohe with nine houses completed this year, which will all be delivered to whānau under supported tenures. This is the result of years of preparation but only makes the start of what we’re hoping to deliver
• We have also delivered housing solutions via our investee Hāpai Housing, with five whānau placed into brand new, affordable units in Tāmaki Makaurau
• We have reviewed our managed funds to make sure manager values align with those of Te Kāhui, and have been making changes, post year end, accordingly
• Our hotel investment in New Plymouth did well to generate cash surpluses but has faced pressures, in common with a lot of tourism and hospitality businesses nationwide
• We have continued making incremental additions to asset allocations in our core direct asset areas of commercial property, housing and agribusiness
• We ran a Marae/Pā loan regime, helping Marae to achieve their financial goals by investing alongside Holdings. This had grown to $3.1m at year end
• We were joined by three new board members during the year and I would like to record my formal welcome to Taari Nicholas, Stephen Jennings and Daniel Harrison, who has served as an associate but is now a full director
Our Vision
We are guided by Te Kāhui’s vision and values:
• Me Tōngai Harakeke
• Kia rongomou, Kia manawanui, Kia aroha ki te tangata, Kia tika, kia pono
Our purpose is: to be an outstanding investment company for Taranaki Iwi and a respected economic leader in the Taranaki region.
We apply the Te Kāhui whenu to our commercial activity:
Our Current Portfolio
We plan our portfolio initially in terms of riskiness of income generation.
About half our assets generate secure income and so give us confidence to pay distributions year on year. The rest of the assets are aimed at generating growth over the long term to support a growing iwi or provide little return but deliver on Taranaki Iwi objectives.
We are close to fully invested and so the broad balance and diversity of risks we have now will likely remain similar into the future, even as the underlying assets may change.
By year end we had a total commercial pūtea (including TIFL quota at market value) of $131m. This is approximately $3m up on last year, after paying out close to $3m in distributions.
Our Investment Philosophy
We do a lot of thinking about our advantages, constraints and goals and have used these to inform our philosophy for how we deploy capital. We will:
• Operate as an investment holdings entity investing in a variety of assets and classes
• Build a balanced portfolio of assets that can deliver a mix of income and growth to ensure sustainable inter-generational balance
• Use direct investment where we have advantages that can drive premium risk-adjusted returns – such opportunities often flow from our relationships with other iwi and with the Crown as well as direct links to mana whenua– such direct investment should be able to support wider impact in line with Te Kāhui o Taranaki whenu
• Use liquid financial assets, where no direct access or advantages, to gain exposure and complement portfolio of direct assets
• Diversify across and within asset classes and manage carefully for concentrations
• Keep overheads low
Measuring Impact
In addition to income generation and growth, we think about how individual assets can respond to the whenu and Te Kāhui strategic goals.
Work is ongoing in this area with Te Kāhui to refine definitions and set measurable targets but broadly we think of assets as having:
· Having appropriate commercial returns and good impact
• Having some commercial returns but higher impact
• Having limited commercial return and impact only
• Having stronger commercial returns and limited impact
Examples of assets that have both good commercial and impact performance include:
• Tai-Hekenga – where we have invested with Taranaki whānui in line with Taranakitanga to take back land ownership from the Crown
• Puainuku and Hāpai – these are agri and property collectives respectively and in each of these we have again supported mahi tahi by working with a wider range of iwi to take back land and build our footprint. This includes commercial housing vehicles delivering housing in Tāmaki Makaurau, incorporating design to reflect our ownership.
Some assets we trade off some commercial return for wider impact. This includes assets like the hotel, which supports Taranaki Iwi profile under Taketake Tangata and Taranakitanga and local housing, which provides an essential service to whānau. More on this below.
Standard financial assets such as managed funds and private equity are areas where we cannot claim any wider impact, but they play an important role in diversifying our risks and returns.
Housing
There remains risk attached, so we operate within the portfolio parameters that apply to all our investments, but this can still deliver meaningful results.
A lot of work has gone on over the last six years to develop expertise in mixed-use housing development and delivery including building delivery partnerships, contracting efficiencies, partnership with Ka Uruora and so on.
We have been applying this model locally and to date have delivered 15 houses across eight sites, with nine of those delivered in the past year. All these houses already have or will go into supported tenures for Taranaki Iwi whānau.
We have a pipeline of 22 further houses that we hope to develop at Ōkato.
This is all being done by Holdings directly and delivered in-rohe.
In addition, through our investment in Hāpai Housing, we are invested in the delivery of hundreds of houses nationwide. Hāpai completed its first development during the year and placed 20 whānau (5 Taranaki Iwi) into affordable rental units and expect more to be concluded this calendar year.
This output will only increase as Hāpai expands its funding base and builds a reputation for reliable delivery.
Other Local Investment
Including the local houses project, we currently have around $22m invested in the rohe (including settlement fisheries quota), or just under 15% of the total portfolio. Without settlement quota it is around 11%.
Our main other local impact assets are our stake in the Novotel Ngāmotu Taranaki hotel; the properties we own and lease back to the Crown and various, mostly rural properties, that we own and lease to Te Kāhui.
We have a preference to invest locally, the challenge is always to make sure it is done economically, so that our choices today don’t limit the choices of tomorrow. Housing is one area where the model works. We are always on the lookout for others and have been completing work recently with Te Kāhui on refining our impact goals.
Asset Overview
The Hāpai whānau - property
‘Hāpai’ is a whānau of linked iwi-controlled vehicles developed to focus on three distinct types of investable property: commercial, residential and development.
• Hāpai Commercial Property LP (HCP) owns seven high-quality investment properties for long-term tenants across the motu, with two more under development – a GreenStar office building in Dunedin and a logistics hub for Cardinal in Auckland. We have a total investment of $15.5m in HCP as at the end of this year. This delivered us a cash return of 4.5%. This operating performance is in line with expectations but once the developments are complete, we expect cash returns to increase. Since our initial investment in 2019, Hāpai Commercial has delivered a total return of 16% per year
• Hāpai Housing develops and operates purposebuilt residential properties including conventional rental as well as retirement living. Hāpai Housing’s first project, Moroki, was completed in CY2023. Two further projects are under development in Wellington and Tāmaki Makaurau and due for completion this calendar year. Hāpai Housing has a pipeline of approximately 800 houses. Holdings has $7.4m invested. This delivered a cash return of 3.4% over the year. Again, as more projects are completed, this return will increase. Hāpai Housing has delivered a total return of 8.9% p.a. since inception in 2020
• Hāpai Development seeks to leverage value-add opportunities in special situations – generally where iwi can add value that others cannot. It has projects in Auckland and Christchurch. We have $5.2m invested and it has delivered a return of 20.5% per year, to date
Holdings was one of Hāpai’s foundation investors and appoints a director to the single board that oversees all three vehicles: this is part of the Hāpai philosophy – creating efficient but flexible structures and access. The other investors are all iwi and include many of our wider Taranaki whānau.
There are now 29 Māori investors or partners across the Hāpai whānau and it is a great example of collective iwi success.
Pūainuku whānau - agribusiness investment
Agribusiness is an area of strategic long-term global advantage to New Zealand, but there have been limited appropriate access options for non-operators to invest in quality assets.
Pūainuku was developed as the solution, and like Hāpai it also has three arms:
• Pūainuku Pastures owns a 13% stake in Dairy Holdings Limited (‘DHL’), New Zealand’s largest dairy farmer. We made an investment of $4.2m in FY21 that is now worth a little under $6.0m Operating returns came under pressure again in FY24 from rising costs and lower demand out of China. On the farms, production was only 94% of expectation. DHL is now fully self-contained and once it sells its West Coast assets will focus on performance consolidation. It has delivered a 11.8% p.a. total return since inception.
• Pūainuku Vines was formed in early FY22 to focus on hops and viticulture land on long-term lease to Giesen’s winemakers. We have $3.8m invested and it delivered a cash return of 5.3% in FY24 and has delivered an annualised total return of approximately 22% since investment. We do not consider such high returns to be sustainable
as they reflect uplifts in property value through good buying – but we expect stable and growing cash returns over time.
• Pūai Tangaroa was formed in mid-2021 to invest in kōura quota. We have a holding worth $2.0m and it generated cash returns of 1% during the year, impacted by interest rates on borrowings.
Novotel Ngāmotu Taranaki
The Novotel Ngāmotu Taranaki was acquired by Holdings in a consortium with Te Atiawa and PKW in January 2019. It is one of the region’s leading hotels and its newest purpose built one, with a prominent site on the main entrance to the New Plymouth CBD from the airport.
It has been a very tough time for hoteliering in New Zealand, with the obvious rigours of Covid-19, the metastasis into labour tightness, followed by huge cost increases and now with the tepid tourism recovery. The management team have done well to continue to deliver cash surpluses.
FY23 was a strong year, with cash returns double the year before. FY24 has been harder with a cash return about a third of last year’s and occupancy around 11% below what was hoped. This is not unusual for New Zealand and the team have done well to perform as they have. We are hopeful recovery will come, not so much with tourism, but through improved corporate sentiment now that we appear to have reached the top of the interest rate cycle. It is primarily a business travel hotel.
We continue to work on pathways to bring uri into the hotel trade.
The hotel has delivered an annualised return of approximately 1% (after depreciation) since our initial investment. This is below initial expectations of high single digits, but during extraordinarily challenging times for travel to and around New Zealand. To be able to still make cash profits is a testament to the management team.
Tai-Hekenga
Tai-Hekenga is a partnership of Taranaki Whānui linked iwi that has collectively purchased a large portfolio of Crown leaseback land in Wellington including schools, justice properties and specialist properties used by the Department of Internal Affairs.
The assets are land only. The improvements, and hence the bulk of the seismic risk, remains with the Crown.
Tai-Hekenga provides a highly secure income stream with strong asset backing in the unlikely event of sovereign default or other vacancy.
We enjoyed several years of very strong value uplift and then downwards pressure with rising interest rates. We expect that to reverse and in addition we will be commencing rent reviews (on five- and seven-year cycles) that will improve cash generation.
In 2019 we made a commitment of $10m into in TaiHekenga. The investment has grown in value to over $20m and our annualised total return since first investing has been above 20% reflecting the high land inflation. Our cash return for the year was 4.1% but this is expected to increase as leases are reset to the higher land values.
Te Pūia Tāpapa and private equity
Holdings is an investor in Te Pūia Tāpapa (‘TPT’). TPT is a grouping of 28 iwi and Māori investors seeking to partner with existing NZ institutional investors on large-scale private investments. We also have investments in seven other private funds.
We treat all private equity funds together as portfolio. It is New Zealand-centric and so has suffered from the general economic malaise with pressure across businesses.
Our total private equity exposure is around $15m and it has delivered annual average returns to date of around 5%, down from around 8% at the end of last year. We would hope for 10% -12% but expect the funds will have to hold assets for a year or two longer before the market starts to pick up.
Infrastructure
Holdings is an investor in Australasian infrastructure via the Dexus Diversified Infrastructure Trust (DDIT).
This is a long-established fund with significant scale assets in Australia and New Zealand. Locally the fund is a major owner of PowerCo, the local Taranaki and wider North Island lines company but its major asset is Melbourne Airport.
DDIT’s performance was a victim of Covid-19 and border policies and its recovery last year was hampered by downwards pressure on the value of income-type assets from rising interest and discount rates.
Holdings has around $10m invested. The fund generated a cash return of 3.6% this year and a total return of 10.5%. Over the longer term it has delivered a total return of 6.2% p.a. – a solid return considering timing of investment, early 2018, in relation to Covid-19.
Managed Funds
Holdings has around $19m invested in a range of liquid, managed funds, down $10m since the start of the year as drawdowns have been made to fund direct investments.
The funds are increasingly focussed on global equities. The funds that had the highest global exposure did the best, with returns between 15% and 20% as American markets were seemingly buoyed by AI and the hope of lowering rates.
Those funds with higher Australasian exposure fared less well. One fund delivered a negative return, and we are exiting it as we believe it should have done better and is not a market issue. We are also reducing our investment in other funds for strategic and responsible investing reasons.
Overall, the funds portfolio delivered a return of 7.2% in FY24 and an annualised return of 5.1% over the last five years.
Taranaki Iwi Fisheries Limited
TIFL runs a streamlined operation with all quota leased out, with income also coming from ownership of shares in Moana NZ (formerly Aotearoa Fisheries Limited).
There are no direct fishing operations and management, including treasury management, is provided on contract by TIHLP.
TIFL’s main quota lease arrangements were renewed during FY19 via a new, revised pan-iwi standard ‘Ihu Tō Mai’ Agreement. This gives TIFL simple, passive access to the value chain.
In FY24, TIFL delivered an operating profit of $253k. This is an increase on FY23.
Our costs
Our total costs of $0.5m represent a cost burden of only 0.45% on our assets. Of this, ~$90k is paid for group services delivered by Te Kāhui. We know that this is efficient compared to other iwi or comparable investment entities and we benchmark it annually.
Our Medium-Term Performance
While our total return was below last year’s and below our long-term goal of around 7% p.a., we remain on track over the longer term.
Over the last five years we have had an average annual return of 7.9% and we have had a return since inception of 7.1% since inception. This figure includes our earlier years when the portfolio was in its infancy and cash heavy, and returns were lower.
Our annual distributions to Te Kāhui have steadily increased each year, since inception, without fail.
These distributions have more than doubled from $1.35m in 2017 to $2.80m in 2024. This represents a growth rate of approximately 11% p.a.
Reserving
We analyse our equity to track ‘real capital’.
This allows uri to see whether our asset base is keeping up with inflation and population growth.
Our initial capital escalated for population and general inflation is our real capital.
Retained earnings above this we call ‘economic reserves’; and represent the true surplus-retained earnings, which in turn becomes a good indicator of inter-generational equity. These calculations are detailed below.
Another year of high inflation has eaten further into our reserves. At year end economic reserves totalled $0.6m. This reduction is not ideal, but it is also not unexpected.
Returns and portfolio growth are not linear year to year. We know that strong years can be followed by weak ones. The reserving policy is meant to show discipline over the longer term. It is difficult in periods of high inflation, however, as our hurdle rate tends to rise before flowing into our revenue via e.g. higher rents.
The Year Ahead
The outlook remains challenging for New Zealand:
• Cost increases may have slowed but remain high in many consumer areas and that depresses confidence
• Local rates are becoming an almost uneconomic burden on most households and this in turn damages prosperity
• Domestic and inbound tourism is below 2019 levels
• China’s growth remains underwhelming, and we expect ongoing difficulty for sectors and companies directly linked to the Chinese export market. The China slowdown is also starting to flow into the Australian economy which has a high commodities dependency.
We expect however for relief to come in interest rates before the end of the 2024 calendar year. This should energise most sectors, and we look forward to it, like most of the country. This should be reflected in valuations at Hapai and Tai Hekenga. We’re grateful for the steady cash flow.
We will continue to drive forward with our property programme, especially housing. We will also be realigning our managed funds and expect to keep at least $15m invested in this area over the medium term.
Overall, we don’t have the most optimistic outlook for FY25, but we are confident in our strategy, our asset allocation and our execution and believe we can continue to weather any difficulty.
We have committed to a distribution of $2.8m to Te Kāhui this year.
Conclusion
I wish to thank the Holdings directors for their contributions through the year, Tania, Nadia, Whare, Mark and Marama for their support, and the Te Kāhui trustees for their faith in us.
Thank you for this opportunity to undertake the exciting work of building the commercial assets of Taranaki Iwi.
He taketake mounga, he taketake tangata.
Andy Knight - Chair
Iwi Holdings LP Taranaki Iwi Fisheries Ltd
