2 2
Portfolio
Management
Cash Flows
Managing cash fows is crucial to TGH.
They are reported on and managed
weekly. The ability to do this successfully
has a cascading effect on the timing of
debt draw downs, and therefore interest
rate exposure. As a high proportion of
income is derived from property rental,
cash infows are regular with very little
deviation. Cash outfows may spike
according to the various development
projects requiring funding, but otherwise
operating outfows also remain at
consistent levels.
Sustainability and quality of cash fows
are essential components of TGH’s
business. They must withstand market
fuctuations, and service not only
operating costs but also the dividend to
our Shareholder and debt requirements.
Through its tenancy profle, TGH is
provided with stable, long-term, high
quality tenants such as Genesis, Waikato
Institute of Technology, University of
Waikato, Kiwi Income Property Trust
and Crown agencies. In 2011, these
tenants generated the bulk of investment
property cash infow. In 2012, with the
completion of
, this reduced from
39% to 29%, meaning TGH’s rental cash
fows are now predominantly from retail
tenants. TGH’s increased exposure to the
retail sector prompts a more hands-on
approach to debt collection and tenant
relationship management. This will
become increasingly important as TGH
navigates through what is expected
to be a sluggish period for the New
Zealand retail sector.
A careful and considered approach is
applied to property development. Before
any property development is approved,
its feasibility is analysed to ensure that
the project’s cash fows meet internally
developed risk-adjusted hurdle rates.
The most signifcant development
undertaken in TGH’s history was the
construction of
at
. The
development was broken into multiple
stages, so TGH received rental revenue
as each stage was completed, allowing
debt to be serviced accordingly. Before
commencing each stage, a committed
leasing threshold also had to be met to
provide surety of cash infows.
In July 2011, TGH sold its 4.5%
shareholding in NZX listed company,
. The
divestment of the
shares allowed
TGH to pay down a signifcant portion
of the company’s debt, and beneft from
subsequent savings in interest costs.
EconomicValue Added and
Sector Reporting
TGH’s market is as wide and varied as
the business TGH operates. However, the
nature of the core business does place
TGH in the investment property sector.
Largely based in Waikato, TGH owns
a signifcant footprint in the Hamilton
area where competitors are commercial
landlords, retail operators and residential
and commercial property developers.
TGH periodically compares its
performance to market standards to
assess returns on investments. The
balance sheet consists mostly of tangible
assets that are reported at market value,
and so an Economic Value Added (EVA)
analysis is suited to TGH’s business.
TGH has evolved its EVA reporting
to allow for the review of the sectors
for which it has signifcant investment
in. These are: investment property
(commercial, retail, government and
rural), development property, hotels,
agriculture and fshing.
For each sector, TGH has developed
risk adjusted hurdle rates using public
information to access its balance sheet
profle. These rates are used as a basis
to assess potential future investment in
these sectors, as well as benchmarks for
reviewing current or historic performance.
The nature of sector reporting allows
TGH to ‘drill down’ into individual assets
if required to assess performance and
therefore make decisions to either
dispose of or improve the asset.
Treasury Management
TGH has a similar challenge to
companies operating a
co-operative structure, in that it is
dependent on debt to fuel growth. TGH
has not issued capital to anyone other
than its Shareholder. This dependence
on debt, by necessity, requires TGH to
take a pragmatic approach in managing
liquidity and risk exposure by:
Utilising relationships with banks,
•
business partners and advisors;
Building sound internal treasury
•
competencies;
Employing technology to provide
•
current market information; and
Developing and adhering to practical
•
liquidity, debt, and hedging policies.
Management reports each month to
the Board on TGH’s compliance with
policies governing hedging profles,
debt durations, and overall risk
exposure. Any compliance deviation is
reported, explained fully, and corrective
action taken as necessary.
Debt Duration
TGH forecasts its debt monthly, on a
12 month rolling basis for operational
purposes, but a longer term view of
capital expenditure is taken to provide
future funding requirements.
In July 2011 TGH increased its core debt
facilities (excluding debt associated with
the Novotel Auckland Airport hotel) by
$50 million to $250 million in anticipation
of longer term projects. The company
also restructured its facilities, with a focus
on tenor (debt duration) and balancing
the associated pricing. The restructure
provided greater security around future
liquidity requirements and means
that TGH does not need to constantly
refnance its debt every year, which
usually comes at considerable cost.
With a commitment to fnishing what it
started at
, TGH will continue
the development of the currently
undeveloped area of land adjacent to
, and existing large format retail.
This, in addition to some comparatively
OPERATIONAL REVIEW