Our final Q&A is with Jack Revill, asset manager of Provincia property fund. Jack found the property that’s given investors this opportunity to invest…
Learn how he buys properties and what he looks for.
Q. As asset manager, what do you actually do?
I find the properties, negotiate the sale & purchase, analyse the deal and carry out due diligence, manage the properties, manage the leases and tenants, and renegotiate leases.
Q. What do you look for in a potential property for Provincia?
First of all it’s got to have rock solid tenants, because the most important thing is security of income.
Secondly, I like vanilla industrial buildings that suit a multitude of tenants, so we shouldn’t ever have to struggle to find a new tenant if one moves on.
Third, it’s got to be able to provide a reliable yield of 6% or more.
And lastly, it’s got to get me excited. What excites me most is finding something with the potential to add value. Every building I’ve bought so far has had an instant add-value component, and some also have additional value that is going to be realised over the coming years.
Q. In what ways have you been able to add value?
The first building we bought in Richard Pearce Drive near the airport had no Code of Compliance Certificate, needed some refurbishment, had a short-term lease on the front tenancy, and there were some difficult people we had to deal with. That’s why it had been on the market for so long.
I negotiated an extended 6-year lease on the front tenancy, a discount on the purchase price to cover the cost of bringing it up to standard, did the refurb, and got the CCC issued. That was the instant add-value.
The delayed add-value was the warehouse at the back. It was on a long-term lease to Early Settler Group and heavily under-rented. The going rate was $125/m2 but they were only paying $85 with no opportunity to get it up because they were on a CPI-only lease. So we had to wait until the lease expired, and that was the future add-value opportunity.
But then, in a stroke of luck, they gave notice they wouldn’t be renewing. They were very apologetic but I was stoked. We had tenants fighting over it and it’s now leased to Store Rite Logistics who took over the day after Early Settler’s lease finished, so we had no vacancy period at all. I bought that property for $4.8 million and with all the work and new leases it’s now worth $6.45 million, so that’s $1.65 million of value added to the fund right there.
Q. That’s a really good example. What about the second property?
Yes, the second property we bought was Arwen Place in East Tamaki. There were four things I really liked about that property. The first was East Tamaki – it’s a rock solid industrial location that’s in high demand. It’s like the dress circle of industrial locations in Auckland.
Second was the tenant – Northpower. They’re a rock solid tenant and heavily entrenched in the property, and their head office is just up the road.
Third was the opportunity to add instant value by addressing the poor IEP [earthquake] rating. It was only 30% and had scared a lot of potential buyers off, so I was able to get it under contract at a good price. I got our earthquake engineer through and found out why the IEP was so low. Three roller doors had been cut into the side of the building and in the process the cross-bracing had been removed. All we had to do was spend $40k to get new cross-bracing put in and the IEP is now 100% of new building standard.
We bought the property for $6.1 million and it was revalued at $6.3 million after we’d done the work, so $200k instant value added.
Last was the long-term opportunity to add value. The property has a huge yard with so many ways we can add value. I’m currently in the process of doing some works in the yard for Northpower, and confirming a lease extension. The completion value will be circa $7.1 million, so by that stage it’ll be worth a million more than we paid for it. And that goes straight through to the investors.
Q. Wow, that’s amazing. What about property number 3?
There were four things I really liked about this property.
It’s in Penrose, so another rock solid location.
It’s leased to Goodman Fielder, so another rock solid tenant.
It’s a food-grade refrigerated distribution centre, and this type of property has the lowest vacancy rate of all, so if we ever had to find a new tenant we’d have no problems.
And it has three ways to potentially add value. One is to negotiate a lease extension of 10 years. Another is some improvements that can be made to the site. And one is to potentially reinstate the rail link at the back of the property if a tenant wanted it. Of course, we wouldn’t do that unless there was a benefit in the rental income – and the trains were on time! [laughs]
Q. And property number 4?
It’s in Tidal Road, Mangere, so another really good industrial location. It’s a good split-risk investment because there are six tenants. I got it valued before we went unconditional and it came in $6.85 million, which was $100k more than the purchase price, so instant add-value.
And longer term there’s the opportunity to get the rents up to market rates. They’re only on inflation-based increases at the moment, but there’s not long to go until I can negotiate market reviews, so there’s a lot more upside in that property.
Q. And you’ve got property number 5 under contract now?
Yes, we’ve actually gone unconditional on that now and most of the capital raising is done. We’ve only got a small number of shares left for investors and that won’t take long to fill.
It’s our second East Tamaki property, in Kerwyn Ave this time. We got it at a 6.2% yield for $3.4 million and had it valued while I was doing due diligence. It came in at $3.6 million, so $200k instant value added for investors.
It’s another split-risk investment. We have two tenants, both in the food industry. One makes frozen meals and supplies Progressive and Foodstuffs. The other one makes snack food and does contract packaging.
Both leases are new 6-year leases, both have bank guarantees in place, and they’re on hard ratchet rent reviews too [rent can never do down, only up], so they’re nice and secure.
There are 2% annual rent increases plus market rent reviews every 3 years on one lease, and annual CPI [inflation-based] increases plus market rent reviews every 3 years on the other one.
The buildings have 7 roller doors, so we could split it into smaller tenancies in the future if we wanted to.
Q. How is the add-value passed through to investors?
We get a registered valuation on every property we buy and any increases over what we paid are reflected in the share price. We also get annual revaluations on the whole portfolio, also done by a registered valuer, and any increases are reflected in the share price.
So that’s the capital gain component for our investors. In the first year the value of the fund went up by 33% and that was reflected in the share price, which went from $1.00 to $1.33. If any investors wanted to sell their shares, they’d get a 33% capital gain.
But rather than selling, a lot of our investors have been putting more money in because they know there’s a lot more to be made over the next 5-10 years.
The second way is that dividends are paid at a rate of 6% p.a. on the current share price, not on what an investor paid for their shares. So as long as the value of the fund keeps going up, the dividend will keep going up too. Our foundation shareholders started off getting 6% on their $1.00 shares. They’re now getting 6% of $1.33. That’s 8 cents per share, or 8% ROI. It’s really hard to get that sort of return on a secure investment that’s rated as low to medium risk.
Q. Who pays for maintenance?
That’s one of the big benefits of commercial property investment compared to residential – the tenant pays for repairs and maintenance. They pay rates and water and insurance and all the other outgoings too. Our only responsibility is any replacement of exterior cladding or roofing, which we fund out of our sinking fund.
Q. What happens if an unexpected expense comes up?
Yeah, some investors worry that they’ll have to cough up extra money if something unexpected comes up but it’s not like that at all. We have a maintenance fund that builds up over time, so there should be more than enough to cover anything unexpected.
But there shouldn’t really be anything unexpected. I’m super detailed and super thorough in my due diligence. If there are any gnarly issues or things to worry about, I want to know about them before I decide to push the go button and go unconditional. I’ve even uncovered issues the current owner doesn’t know about.
And for every building we buy, there’s another 10 I’ve analysed and decided against for various reasons. I’m very cautious about what I pursue because we’re in this for the long term. When your strategy is buy and hold, you don’t want lemons; you want to know you’re holding gold. That’s what I look for – gold, and no nasty surprises.
Q. What about an Act of God; how would you cover that?
We wouldn’t have to, that’s what insurance is for! We’re also covered for two years loss of rent.
Q. How confident are you in Provincia’s future?
Super confident! So confident I’ve invested my own money into the fund, so I have a real vested interest in seeing it do well. It’s already been a real winner for our investors and I know with the add-value opportunities I’ve got locked over the next 5 years there’s a lot more where that came from.
The current share price is still $1.33 but it’s about to be revalued, so it’s the perfect time for investors to come in at the current rate. That’s why some of our current investors have been topping up too. There’s only a small number of shares left so get in while you can!
Q. Where can I get more information on Provincia?
- Visit our Provincia property fund page
- Phone +64 9 522-4936 » (click to call)
- Freephone 0800 522-222 » (click to call)
- Email firstname.lastname@example.org
- Or complete the online form below…