Anzo signals lower earnings in 2012

The nation's largest listed investor in prime and A-grade commercial office property AMP NZ Office Ltd (Anzo), says its earnings will drop significantly next year.

Earnings for the 2011 financial year are expected to be between 5.9 and 6.1 cents per share (cps), but in the 2012 year they will range between $50.9 million and $53.8 million, equivalent to 5.1 cps and 5.4 cps.

The company said today that it had been hit by removal of building depreciation as a tax deduction, higher cost of debt following refinancing, market rent reviews and Westpac vacating the PricewaterhouseCoopers Tower in Wellington.

It is spending $76 million re-developing Auckland's ANZ Centre at 151 Queen Street which could ultimately lead to improved earnings, but in the short-term some areas would be unavailable to earn revenue.

Directors also announced a new dividend policy, in the wake of Anzo's corporatisation from a unit trust into a company last year. They will align dividends with operating cash flows.

Anzo will pay out about 90 percent of distributable income as dividends, with the retained earnings being used to fund capital spending on its property portfolio.

The 2012 and 2013 financial years will have higher vacancy rates due to the Westpac departure and the ANZ redevelopment, so the revised policy will be phased in over the next three years. There will be a payout of about 95 percent in the 2012 and 2013 years, moving to 90 percent for the 2014 year, the company said.

The third and fourth quarter dividend for the 2011 year will be based on the expected 2012 dividend.

Anzo chairman Craig Stobo said directors were balancing investors' desire for a high yield with a prudent and sustainable dividend policy.

"Dividends will be paid entirely out of cash generated from the portfolio without requiring additional borrowings," he said.

But the company will borrow from banks to fund the redevelopment of the AND Centre, where the ANZ National Bank (ANZ) has agreed to remain a tenant. It will sign a new 15 year lease starting in January 2014, and will occupy 17,700 square metres in the re-furbished building.

The redevelopment will include a new pavilion lobby and entrance as well as the provision of new building services on a floor-by-floor basis, which AMP said could re-position the high-rise as one of Auckland's premier office towers. AMP will pay for the redevelopment with bank loans, lifting Anzo's committed gearing to 29 percent.

The building at 151 Queen Street will be valued at $233m in 2014, according to AMP.

ANZ will become AMP's biggest tenant, and the new lease is expected to increase Anzo's portfolio weighted average lease term by 1.2 years to 5.8 years, up from 4.6 years at the end of December.

The lease provided a mid-lease review to market.