QUANTACAST Episode 9 | September 2024

Join us for this episode of the Quantacast, where our team reflects on their recent visit to Mackay to explore an exciting new investment opportunity.

COO Tim MacKinley is joined by CEO Stacey Jones and Head of Property Investments Chris Carrigan as they explore the essential details of this investment opportunity. Situated in the heart of the Mackay CBD with frontage on Tennyson Street, the property is a modern office building constructed in 2008, offering 1,778 sqm of office space across two levels and three tenancies, along with 36 parking bays.

The building is fully occupied, with the State Government on Level 1 and Pentacon along with NYSE-listed Caterpillar Inc. on the ground floor. Recently, a $2 million upgrade was completed to enhance the building’s standard, ensuring it meets the specialised, long-term operational needs of the Mackay Child Safety Service Centre.

Tune in as Tim, Stacey, and Chris provide the metrics and details of this opportunity including a compelling 8.65% 5-year average distribution (8.25% year 1 – paid monthly).

Transcript

00:00:19:15
Tim MacKinley:
Welcome everybody to our latest Quantacast. My name is Tim MacKinley, I’m the COO here. On my left, I’ve got Chris Carrigan, our Head of Property Investments. Welcome Chris. And on my right, as always, I’ve got Stacey Jones, our CEO. How are you, Stacey?
00:00:28:44

Stacey Jones:
Good.

00:00:30:00
Tim MacKinley:
We are here to talk about 9 Tennison Street in Mackay. It’s a two-level office building and Chris, we inspected it – I’ve got to tell you – I really love this building. It’s very modern, fully tenanted, and in a great location in the Mackay CBD. But over to you – tell us why we’re going to put this out to our investors.

00:00:49:64
Chris Carrigan:
Yeah, definitely Tim. One of the best buildings in Mackay. It’s got three tenants. It’s fully leased, as you mentioned. State government, a multinational, and a large Queensland-based corporate tenant with multiple locations. We’ll get into those tenants shortly. High yielding, so we’re offering investors a high distribution underpinned by some really strong tenants.

00:01:21:68
Tim MacKinley:
Thanks Chris. So, the three of us inspected this property in the last few weeks, we have knowledge of who the builder is, and we know that the builder originally built this for themselves. They built this in around 2008 and have held the building for that long. But we looked at the building, immediately saw the quality of build, and then when you go inside – particularly the state government tenant on level one – the fitout is very, very high spec, specialist use.

We were a little bit overwhelmed by how well that fitout had been done, and again, by the builder who built the building. So, talk to us a little bit, Stacey, about the use for the government tenant.

00:02:00:04
Stacey Jones:
That’s the Mackay Child Safety Centre. Unfortunately, a very necessary service – and even more unfortunate that the demand for those types of services grows – and that’s what brought the tenancy to this building in the first place. They expanded from where they were. A significant amount of work was done to accommodate the specialised need and the people who frequent the building, from a safety perspective.

All that work’s been done, you mentioned, by the original builder to an incredibly high standard. The tenant is extremely happy there, and as you mentioned, it was a very impressive fitout. They have a lot of staff in that building, they provide a very, very important service, and they look quite at home in there.

00:02:47:84
Tim MacKinley:
Yeah, look, I think there’s about 100 staff in about a 900 square metre plate – is that right?

00:02:52:96
Chris Carrigan:
Yes.

00:02:53:50
Tim MacKinley:
Which, you know, is hard to find sometimes in Mackay, particularly at that spec. Chris, talk to us a little bit about the other two tenants that make up the fully leased building.

00:02:57:12
Chris Carrigan:
Yeah. So, the other two tenants – multinational tenant, Caterpillar. So obviously they make engines for marine, agriculture, trucks, and that’s a major regional location for Caterpillar.

Pentacon Engineering Services – based out of Brisbane – they provide engineering services to the mining industry up there. Very good company, and have been around for a significant period of time.

00:03:33:32
Tim MacKinley:
So we’ve got a two-level office building, fully leased. We’re looking at about a $6.625 million purchase price. Chris, we’re going to return 8.25% year one, and there’s a 4.7-year WALE (Weighted Average Lease Expiry) on the property, which is terrific for any office in any area. Some 2.5% to 4% increases built into annual reviews across the various tenants there.

And we’ve calculated this property to be 30% below replacement cost.

00:04:06:56
Chris Carrigan:
Yeah.

00:04:07:00
Tim MacKinley:
I’ll let you talk a little bit about why that particular building is really attractive to the tenants we’ve got in there at the moment.

00:04:11:60
Chris Carrigan:
Yeah. So, you spoke about a 4.7-year WALE. For the investors at home, that means the average lease duration over the property is five years. So very good tenants there for five years.

The largest tenant there is the state government. What we really like about that is – they’ve got the longest lease, they’re going to be a very sticky tenant because this building (you can refer to the photos in the IM when you read that) not every building can cater to what this tenant needs.

So, this building is very uniquely positioned to accommodate that tenant. Most buildings in Mackay are not going to be able to accommodate that tenant.
And thirdly, highly specialised fitout. Not only just for the functions they do there – in terms of security and separation – but also to cater for their workforce, which has unique requirements in itself.

So, for that reason, we think it’s a really sticky tenant. If this tenant needs to grow, we’re going to have flexibility in the future. Whilst there are other tenants currently occupying that space, if they need more space, we’ll prioritise the state government and make sure they’re catered for so they can grow as that service grows.

That will make their income profile even more robust. Upon exit, it’ll be a state-government-leased building, which will attract firmer sale metrics. So, we think that’s a good asset strategy in regard to that tenant.

00:06:01:84
Tim MacKinley:
Thanks Chris. Just on the property as well – it’s an off-market deal for us, so there was a little bit of to and fro when we went through the negotiation to keep it off market. I think we’ve done a good job with that, which will benefit our investors.

It does really present very modern and presents really well, particularly in the CBD of Mackay. It’s got great car parking, great street appeal.

There’s been some work done to that car park as well – Chris?

00:06:29:60
Chris Carrigan:
Yeah. So, I mentioned earlier about the specialised usage in accommodating the requirements of the tenant. This car park is configured in a way that meets the requirements of the state government in terms of security and separation again.
So, it’s just another reason why this building’s particularly suitable to the state government.

00:06:54:00
Tim MacKinley:
You can see they love their property. When we talk to the owner – we actually met the owner on-site along with the agent – they knew everything about the asset, knew all about the fitout that’s been done, which is reasonably new.

And Chris, just on the fitout on level one – it’s only probably about 18 months old?

00:07:09:08
Chris Carrigan:
That’s an 8-year term.

00:07:10:00
Tim MacKinley:
That’s an 8-year sure. So, you can see that they’re really in touch with the property, which we always like because you get to know the ins and outs which we always like, because you, you know, you get to know the ins and outs. But you can see that they’re very across what’s happening there and it’s been very well maintained, which is great.
So, Stacey, talk to me about where you think the investor demand will be for a property like this.

00:07:26:92
Stacey Jones:
Yeah, we like to stay in touch with the mandate of our investors – and that changes from time to time.

And we know from recent survey results that our investors are looking for secure income, which we’ve definitely found here with the array of tenants in this building – and high yielding.

8.25% – that’s a fantastic return in the current climate, and they’re very familiar and very comfortable with office assets.

00:07:52:60
Tim MacKinley:
Yeah, agreed Stacey. Particularly with a fully leased building with the state government – 8.25% is fantastic for our investors and we hope they take that up quickly.

Mind you, at a purchase price of $6.6 million, it is a relatively low raise, small raise. So, based on the feedback we’ve got of the returns that investors are chasing, we do expect that one to go pretty quickly.
00:08:19:60

Stacey Jones:
Yeah, yeah. If it lasts more than a day or two, I’d be very surprised.

00:08:24:88
Tim MacKinley:
Look, again – thanks for coming in today, Stacey, and sharing your view.

00:08:27:28
Tim MacKinley:
Thanks, Chris, for being here again – and we look forward to bringing you another Quantacast.