Capital Properties Half Year Result

Capital Properties New Zealand Limited

Half Year Report

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2004

Chairman and Chief Executive’s Report

Results

We are pleased to report a net surplus after tax of $9,089,000 for the six months ended 30 September 2004. This represents an increase of 25.7% compared to the net surplus after tax of $7.2 million for the same period last year.

The improved net surplus after tax for the period under review is due mainly to lower interest costs following the one-for-three pro-rata rights issue to shareholders last year together with the reversal of previous non cash provisioning of $0.9 million (pre tax) for net interest costs on interest rate swap contracts for which there was no matching debt as at 31 March 2004.

Earnings per share for the six months rose to 4.74 cents per share (3.82c tax paid) compared to 4.38 cents (3.59c tax paid) for the previous corresponding period, representing an increase of 8%.

The company expects the net operating surplus after tax for the full year to 31 March 2005 to be in line with the half year result.

Dividend

The Company announced a second quarterly gross dividend of 2.25 cents per share made up of 1.90 cents cash and 0.35 cents imputation credits with a record date of 26 November, payable 10 December. This results in a gross dividend for the six months ended 30 September 2004 of 4.50 cents comprising cash of 3.80 cents and imputation credits of 0.70 cents.

Gross Dividends for the full year to 31 March 2005 are expected to be maintained at 9.0 cents per share, as previously forecast.

Leasing Activity

Highlights during the first six months of the current financial period included:

• Leasing progress in the National Bank Centre in Auckland has resulted in vacancy in that building reducing from 6.4% to 3.5% in the last 6 months.

• Recent leasing activity in University of Otago House in Auckland has resulted in the building now being fully leased with Spark Media taking level 7. University of Otago and Symantec have also exercised rights of renewal extending their lease terms for 3 and 5 years respectively.

• A new six year lease term for 8,025 square metres of space with the Ministry of Health in the William Clayton Building in Thorndon, Wellington has been agreed. The Ministry of Health occupies all of the William Clayton Building and has exercised its right under the existing lease to renew for a further term of six years from 1 March 2005.

• A new six year lease term for 4,925 square metres of space with the Ministry of Justice (MOJ) in Charles Fergusson Tower Building in Thorndon, Wellington has been agreed. The lease is for a term of six years from 1 July 2004 and incorporates the renewal of the existing lease. MOJ occupy six of the 16 floors or 38.8% of the building.

• The increase in market rents across the portfolio have resulted in some notable recent rent reviews being concluded at levels 14-22% higher than when previously reviewed 3 years ago.

The vacancy rate for the portfolio has reduced to 2% as at 30 September 2003, and the weighted average lease term has improved to 4.8 years.

Treasury

The Company has put in place new bank funding facilities with the ANZ National Bank and with the Bank of New Zealand which have resulted in a reduction in the Company’s borrowing margins. These facilities total $230 million with maturities of 3 – 5 years, and replace the existing $115 million facilities due to expire next year.

The Company is considering the option to use part of the additional facilities to repay a portion of the capital notes maturing on 1 April 2005. In this way the Company can implement a capital structure close to its recently adopted policy designed to maintain shareholders funds at approximately 50%, bank debt at 35% and capital notes at 15% of total assets. This capital structure will reduce the Company’s total interest costs.

A new treasury policy has also been formalised which is designed to ensure the continuation of the Company‘s prudent and cost effective management of its interest rate risk.

Investment Strategy & Portfolio Composition

The majority of Capital Properties rental income is derived from government tenants, who as at the end of March 2004 contributed 52% of total rental revenue. Nearly all of these are located in Wellington . This high government sector weighting is a unique strength of the Company’s property portfolio, providing strong underlying income security.

The Company continues to focus on the Wellington government office sector as its main area of investment, development and leasing activity. The Company remains committed to increasing its exposure and market share in that sector. Current activities that evidence this focus are highlighted below:

• New Development: Construction is now proceeding at pace on the New Defence Building in Thorndon, Wellington , with practical completion programmed for September 2006. In addition to this, management are refining proposals for the Company’s two other development sites in Thorndon, plus pursuing opportunities as they arise to acquire other development sites in Thorndon.

• Refurbishment: Work continues on a refurbishment proposal for Defence House in Wellington , programmed for early 2007. Preliminary design concepts have been prepared and discussions are underway with a number of potential tenants. The Company is also underway with a fire protection upgrade programme to be carried out over the next 3 years on the Charles Fergusson, Freyberg, Vogel and Bowen State buildings. These initiatives are part of a wider plan to ensure that the Company’s Thorndon buildings continue to meet government office accommodation standards.

• Rent Reviews: Substantial rental increases have been secured following recent rent reviews to market levels.

• Servicing Tenant Requirements: Management are in dialogue with a number of government sector tenants about future accommodation needs.

The next largest portfolio component is private sector office, accounting for approximately 35% of the portfolio’s rental income. Most of this (approximately 80%) is located in Auckland . The Company remains comfortable with its exposure to private sector office through its existing office building investments in both Wellington and Auckland . In both regions, management have enjoyed recent success in reducing vacancy rates, retaining existing tenants on extended terms and in securing rental growth at rent review and on new leasings. The Company recently investigated the purchase of the Finance Centre in the Auckland CBD but concluded at the end of due diligence investigations that it did not meet the Company’s criteria. The Company will continue to investigate opportunities to acquire large floorplate, good B grade quality office buildings that are well located and supported by good carparking.

As at the end of March 2004, the Company derived 8% of its rental revenue from retail with its investments in CBD retail on Lambton Quay in Wellington . This has increased to 15% as a result of the acquisition of Centre City Shopping Centre in New Plymouth. This acquisition does not represent a change of investment strategy that lessens management’s focus on the core government sector, nor does it represent a new commitment by Capital Properties to achieve, at any cost, a higher weighting in the retail sector. The Company’s investment strategy in the retail sector is to investigate opportunities to invest in assets that have the ability to secure rental & value growth by dominating their retail spending catchments, thus providing superior medium to long term investment returns. However by virtue of the fact that desirable retail assets are tightly held and seldom come on to the market, such acquisition opportunities are expected to be infrequent and the company will only be able to consider them on an opportunistic basis.

Finally the Company derives 5% of its rental income from Auckland CBD carparking through its investments in the Kitchener Street and Oracle Tower carparks managed by Wilson Parking. This sector also has the ability to provide superior investment performance because new supply in a CBD context is often heavily constrained by local council planning restrictions. However, like retail, such acquisition opportunities will be infrequent and the Company will only be able to consider them on an opportunistic basis.

The directors believe that the Company’s investment strategy will continue to provide investors with a low risk, quarterly income return at an attractive level compared to alternative sharemarket or fixed rate investments.

Kiwi Income Property Trust

On 19 November 04, Kiwi Income Property Trust acquired a 19.9% shareholding in the Company, at a cost of $53.4 million. The shares were acquired at a cash price of $1.15 per Capital Properties share and are subject to a 12 month escalation clause.

Chairman Colin Beyer congratulated Kiwi on their purchase commenting that it was pleasing to note Kiwi’s recognition of the inherent value in Capital Properties shares in the $1.15 price paid per share. Mr. Beyer commented that Capital Properties were looking forward to Kiwi clarifying their future intentions and that ‘constructive dialogue’ would be welcomed by Capital Properties.

Mr Beyer also confirmed that Capital Properties board remained committed to upholding the interests of Capital Properties remaining shareholders.

Management Rights

The Capital Properties board are of the view that the value of the Company’s management rights, as distinct from the value of its property assets, are not properly recognised by the market.

Accordingly, the Company is seeking proposals for the purchase of the management rights over the Company’s property assets. If the board considers, following receipt of proposals, that it will be in the best interests of shareholders to sell the management rights then it is likely that the proceeds of the sale will be distributed to shareholders as a return of capital on a tax free basis.

The board acknowledge that the proposed course of action is a departure from the Company’s previous internal management philosophy. However the Company expects that disadvantages commonly associated with external management contracts can be reduced by structuring arrangements to align the managers interest with shareholders’ interests as far as possible and by maintaining an independent board (representing shareholders) to overview the activities of the manager.

Outlook

A lift in market rents has given rise to rent review increases which will progressively flow through to much of the Company’s portfolio as future rent reviews fall due. This has two direct results. Firstly, the value of the Company’s properties will increase because of their higher net rental income performance. Secondly this will result in higher net profits and thus higher earnings per share from which dividends can be paid.

The Company is undertaking a revaluation of its property portfolio, which will recognise both the lift in market rents experienced and the movement in capitalisation rates precipitated by Australian property investors now active in New Zealand . The Board expects the revaluation to show that the value of the Company’s property assets (before inclusion of Centre City Shopping Centre) has increased by more than $30 million (or 7%), compared with the last valuation undertaken as at 31 March 2004. This is expected to increase the net assets per share from the current level of $0.94 to in excess of $1.07.

The Company has also revised its projections of earnings per share to recognise both the recent rental growth in the portfolio and the future rental growth that can be expected as a result. These projections indicate that pre-tax earnings per share will gradually increase from the current level of 9 cents, to 10-11 cents per share for the following 2 years. This income is from net rents and excludes development margins from new buildings such as the new Defence Headquarters as such margins are only recognised in annual revaluations under present accounting policies.

Conclusion

The Company is performing well and the Directors are confident that increased earnings per share will flow through to higher dividends per share in the year commencing 1 April 2005.

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