New Zealand Rural Land Company Limited (NZL.NZ) Earnings Call Transcript & Summary

Well, welcome, everybody. Thank you for joining our call for our report on the 6 months ending 30 June. We really appreciate the support and interest that's being shown in our activities. The proceedings will be I'll hand over to Richard, who will run us through the presentation, and there will be ample opportunity for questions for Richard, the manager or myself on behalf of the Board when that's completed. So Richard, I'll hand over to you.

Thank you all. Welcome, everyone. For those of you who are joining us for the first time, I'm Richard Milsom. And with me in the room, I've got Xavier Lynch. We're going to run through a quick presentation for the results for the 6 months ending the 30th of June 2025. And I am here to take questions at the end. So the key take aways from the 6 months ending 30th of June was that we acquired a high-yielding highly productive dairy farm, which increased annual total rent by close to $300,000. We sold 2 pastoral properties at above the most recent valuation, which was a December -- 31 December '24 valuation. Our interest rate hedging increased to 81%, up from 65% at the same time last year. Importantly, AFFO per share or free cash flow per share has grown nearly 40% versus the same time last year. Gearing has been lowered slightly from 30.5% to 29.8% and there's been a dividend declared of $0.0216 per share, which is the equivalent of 80% of the half year AFFO. Financial highlights and metrics. The key points here are that there's been CPI-linked rental increases of just under 14% on approximately 16% of NZL's portfolio, which took effect in June 2025. As you know, all of our properties have uncapped half ratcheted CPI-linked rental growth. Total assets of the company are $445.2 million. Net asset value is $230.5 million. Net asset value per share is $1.589 and gearing is at 29.8% as I mentioned. In terms of an operating review, we've been through the fact that we bought a highly productive dairy farm and we sold two pastoral farms at most recent valuation. We're keeping a time line of properties sold and transactions since inception that revolve around net asset value per share and farms versus their valuation. In terms of the outlook and the FY '25 forecast, as most of you will be aware, our leases incorporate regular uncapped CPI growth and accordingly, inflation will result in rental growth. And furthermore, because -- land ownership and not a participant in operations, we are insulated largely from inflation on -- relating to on-farm costs. We're forecasting full year AFFO of between $7.5 million and $8 million in aggregate. And this excludes cash. This excludes further income from properties with put/call arrangements in place, which are largely capitalized. This is AFFO per share of 5.17% to $5.52%. Our dividend payout ratio in keeping with NZL's policy is 60% to 90% of AFFO. And you can see below the chart below shows that AFFO per share has grown at a compound annual growth rate of 20.4% since FY '22. In terms of NZL's cash yield growth, AFFO has increased on an absolute per share basis, since listing it was forecast and continued to do so. We've said that we're forecasting aggregate AFFO of between $7.5 million and $8 million in FY '25, which is a 9.8% increase in 2024, and we're targeting minimum AFFO growth of 5% per annum, but believe we can do slightly better than that. If we walk through our financial results for the half year ended 30 June '25, we've seen FFO grow 25% per share and AFFO grow 39% per share. We've seen a profit loss -- we've seen net profit after tax of $3.48 million and earnings per share of $2.42 million. The balance sheet has total assets of $445.2 million and net asset value or total equity of $230.5 million per share, that's $1.5891 per share. In terms of the debt summary, we've seen gearing come back ever so slightly from just over 30% to a touch under 30%. The weighted average interest cost is 5.6%, 81% is hedged. And you can see that there's a debt facility expiry profile there. And as we spoke about at our last result, we bought Bank of China into our banking syndicate. We've got [ 3 charts ] on total returns, which we'll continue to update as the company goes along. Net asset value per share has grown 4.9% compound annual growth rate since inception. AFFO per share has grown at a compound annual growth rate of 20.4% and dividends per share has grown at a rate of $20.8 per share, although in FY '23, we suspended the dividend. In terms of our sustainability program, we released our annual climate change disclosures on the 29th of April. The report really represent a significant step in deepening our understanding of how climate change may affect our business and supports the development of our internal strategies to enhance the resilience of our portfolio. We've got a very deep model that overlays data forecasting of which areas are likely to be the most affected and can feed into long-term decision-making properties with relative longevity to others. At the heart of this is the New Zealand Earth System Model, which is a cutting-edge data-driven simulation platform, which is often referred to as the ultimate crystal ball. And it uses vast datasets and complex algorithms, but it really is a world-leading tool in terms of insight and much like a modeling in terms of where climate change is going to affect the world and particularly New Zealand and in particular rural countries. As to the sustainability program it's still enduring land for life. It remains the same. Here's the reminder of the framework of 5 pillars. One of the highlights is our native forest regeneration. So we partner with our team at New Zealand Forest Leasing and take a particularly active management initiative approach to encourage native regeneration, which includes fire management, large-scale intensive pest animal control, pest plant control and forest health monitoring to ensure that the pine trees to act as nurse crops, incubating a very lively and healthy native regeneration. In terms of the outlook for dairy farmers in New Zealand, which make up a material part of our portfolio. Overall, we're seeing record lows since 2018 of debt levels in the sector. We're seeing record high cash profits and increasingly positive bottom lines, which bodes well for tenant sustainability, viability and cash in the system. As you can see on the left-hand side, the dairy payout is at record highs and the carbon price continues to hold steady. In terms of our dividend and share buyback program, we've resolved to pay an interim dividend of $0.0216 per share, which is 80% of our half year AFFO. Our dividend policy remains to pay out 60% to 90% of AFFO, and we maintain our dividend reinvestment plan. In terms of share buyback program, we continue to have a live and active share buyback program. We haven't repurchased any shares in this half year because that hasn't hit target pricing. This is a slide from Investment Partners that demonstrates their outlook on growth, yield and forecast growth across different property vehicles, which has NZL in there. And I think on that note, what I'd like to do is pause for a moment and invite people to ask any questions of Rob or myself or Xavier.

Okay. Thank you, Richard. We have some questions that have come in already. Shall we, I think, work through those first just in order that they popped up on my screen. First from Shane, can we talk about the opportunities for NZL to continue to deploy capital? What do you look for in an investment? I'll get Richard to comment specifically, but in general, the opportunity set that we have is really good. We are finding potential assets for acquisition across a wide range of primary sector land assets. We get some bought to us and some we find. We're not at the stage of being able to make any commitments or announcements about that, but it's an active process for our manager. What we look for an investment is quality assets with the potential to return through the lease as sustainable and attractive rental returns and we're still looking for increasing diversifications in the assets that we focus on. But Richard, anything more specific you want to say about this?

I think you've covered it pretty well, Rob. We look for high quality assets. We look to buy them well, and we're looking for the best of the assets in a particular sector at a time where there's an opportunity to buy them well and an asset that's going to be able to return above average -- that we think is going to return above average cash flow and asset value growth over the long term.

So the next question again comes from Shane that follows on pretty logically from there. NZL has benefited from some solid structural rental increases on the past year. What does the structured rental growth look like for the next year, Richard, I'll get you to answer that.

So we're expecting to see -- we've got -- our forestry properties have annual rent increases. So we've seen just above 2% CPI for this for -- since last year on those forestry properties. Our horticultural properties close to 3% and our dairy farms in South, which are due for their 3 year are just under 10%.

Thank you. Let's then move on to Shane's next question. Given the improvement in dairy and hort industry profitability, how does NZL's current rents compare to market rents? You're unlikely to get a Chairman to confess that our rents are widely different, Shane, than the market, but you can probably comment more specifically on that, Richard.

They're at the upper end of market. We're not wildly outside. We're definitely not below. We're probably in the upper bracket of market.

Moving on next question from Nicholas Hill, looking at the split of AFFO between the Land Trust and NZL as well as the movement in redeemable partnership units on the P&L, it looks like the Land Trust has been buying more partnership units over half 1H '25. Is that correct? If it does, does your current F '25 AFFO per share guidance reflect this, Richard or maybe even Xavier can comment on that?

No, we haven't been buying any partnership units of late.

No, I can't quite understand maybe that's something that we could have a look at. Why the numbers are suggesting that? It's not something that occurred to me, Richard or Xavier, unless you can comment on why the numbers suggest we might have?

It's probably because there are additional costs at NZL that don't exist at a land partnership, particularly to do with being listed. And so there's not necessarily a 75-25 split when you aggregate the numbers up.

Yes. Possibly just have a look at that afterwards and go back to Nicholas in more detail, but that seems quite likely, doesn't it. Next question also from Nicholas. What are the assumptions underpinning your longer-term minimum in FY '25 AFFO target of $9.4 million i.e., any acquisitions, major re-leasing events, interest rate assumptions? How does your hedging look like beyond financial year '26? We can probably give you a live fairly general answer on that, Nicholas. I'll ask the guys to do so now, but it may be that that's a question that needs some follow-up answer. But Richard, over to you.

It's a very easy answer. We forecast the granular detail to the end of FY '25. And later this year, we'll put out a granular forecast at the end of FY '26. Beyond that, what we've done is accrue growth of 5%, which is our minimum target growth of AFFO. It's not necessarily a granular forecast with CPI and interest rate assumptions in it. It's to show what AFFO per share would look like at a minimum target as opposed to a granular forecast out to FY '25 and '30.

Thanks. Next question also from Nicholas. What's the rationale for maintaining a DRP. You don't seem to be in a position where debt is putting pressure on your balance sheet or earnings, raising equity at current prices is somewhat expensive and does not appear to be needed. Nicholas, we did have quite some debate about the DRP. We're concerned primarily to be a consistent -- to have consistent behavior from the company about what we offer to shareholders. And so we were forced to, on one occasion, not maintain the dividend and then obviously reinstated it when we were able to do so. We think that has caused some doubts and concerns amongst shareholders and potential investors in the business. Having instituted a DRP, we think it's important to maintain continuity on that because some shareholders do value it quite highly. We are a business which is still intent on growing, and we will be making further acquisitions as we move ahead and as we're able to do so. It's certainly true that raising equity at current prices is not cheap, but we have limited opportunities to do this. And as I say, it's primarily regarded by us as a service to investors who do value that opportunity. Richard, you can add to that perhaps, but that's Nicholas is the explanation for why we've maintained it at this point. It will, of course, be something that will be addressed during the capital review, which we are going to be commencing quite soon.