Kermadec portfolio hit in tough market

Mark Francis. Photo / Supplied

NZX-listed Kermadec Property Fund is facing tough times, with shareholders hearing about the challenging real estate market this week.

The fund, which had assets valued at $134.5 million last year, now has property valued at just $120.1 million after asset sales and portfolio devaluations.

Market capitalisation stood yesterday at $38 million, reflecting the big discount Kermadec shares are trading at to net tangible assets backing.

Kermadec, listed in 2006, is the smallest of a group of NZX real estate specialist businesses, many of which are trusts.

Shareholders met at the Northern Club on Monday to hear of diminishing values and falling rent rolls.

Rent income last year of $10.6 million fell to $9.2 million this year and interest expenses rose from $4.1 million to $4.8 million.

Distributable profit last year of $5.1 million fell to $3.5 million this year.

Mark Francis, a director of August Funds Management which manages Kermadec, told how occupancy of the fund's buildings stood at 88 per cent, down from 94 per cent at March 31.

Two big leases had expired, he said. Vacancies were costing the business about $1.2 million or 1.5 cents per share, Francis said.

The Finance Centre, at 25 Victoria St West in Auckland, is the fund's most valuable property with 450 carparks, office and retail space. The centre, worth almost $4 million less in March than a year ago, had been "hurt by a large office/retail lease expiry in July", Francis told investors.

A large portion of income from the property was underpinned by long leases to carpark tenants and Lollipops Educare.

Rents in Brookfields House, at 19 Victoria St in Auckland, were competitively priced from $180/sq m to $245/sq m annually.

He attributed a valuation cut in this property to a large ground-floor retail tenant failing in March and said some tower office floors were also available.

Empty areas in this building were a lost opportunity cost of $500,000 annually, he said.

Rents in Idata House at 7 City Rd on the fringe of Auckland's CBD were also competitive at $150-$220/sq m annually, Francis said. This building has no empty space and its 151 basement carparks are fully let.

Kermadec's office park at 17 Lambie Drive in Manukau City was also fully let with rents in the $180-$210/sq m range. Four buildings in the complex had a spread of tenants and the 201 carparks were fully let.

A Palmerston North industrial warehouse property had been split into three titles and two of those had been sold. Net vacancy costs in this property were about $310,000 annually.

Kermadec had its properties valued by Colliers International but has switched to CB Richard Ellis as the primary valuer.

"The property market remains challenging. However, recovery seems to be taking hold.

"The company has reduced gearing to healthy levels around 32 per cent through divestments of non-core assets, rather than a large and dilutive equity raising."

Augusta holds about 17 per cent of Kermadec, which "strongly aligns the manager's interests with those of the shareholders".

"Kermadec has a solid foundation of core property holdings from which it can add value and grow shareholder value."

Kermadec, with a 52-week high of 55c, was trading yesterday above its annual low of 43c at 46c.