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

Good morning, everyone, and welcome to the New Zealand Rural Land Company First Half Financial Year '23 Report. For those of you that don't know me, my name is Chris Swasbrook, I'm Director of New Zealand Rural Land Company. And to my right is Richard Milsom, the Managing Director of New Zealand Rural Land Management, the manager of New Zealand Rural Land Company. Now actually, we'll take you through what is a short first half result presentation this morning, and we will both open up to questions once Richard finishes that presentation. So Richard, over to you.

Thanks, Chris. Good morning, everyone, and thanks for joining us. I'll share my screen, which is a copy of our first half presentation that's been released to the stock exchange this morning. So the highlights of our results are that NAV has continued to grow from IPO now sits at approximately $1.53. Our share price is trading at a discount to net asset value. You'll see on the -- you'll see further in the presentation that we continue to be an active buyer of shares on market. The first half of this year saw us complete a forestry acquisition, which has built diversification in our portfolio by way of rural land class, by way of tenancy, and by way of geographies. As I said, the buyback -- the share buyback continues. Our AFFO per share continues to grow and is -- as we're reaffirming guidance and it's forecast to grow further. We drew down an inaugural green loan which we used to fund the forestry acquisition, add some proceeds are earmarked for planting a small out of marginal land around our properties. We've launched and started reporting on our Enduring Land for Life program. This has been in action since the business started and what we've been working on is how we articulate it to investors. And we've begun some native planting and some other initiatives we'll touch on later in our presentation. So the financial highlights for FY -- for the half year FY '23. I touched on those total returns and including dividends that have been paid have been just under 15% compounded annual growth rate and a total return of nearly 41%. Shares continue to trade at a significant discount to net asset value and -- which is why our share buyback remains ongoing. We're reaffirming our increased AFFO per share guidance for FY '24, which will be the first full year of our forestry earnings. In terms of operational updates, we drew down the green line. We have launched our Enduring Land for Life program, and there's details of that on our website, but it's really 5 key areas that we believe are critical to ensuring that our business, our land, our tenants are enduring over the extreme long term. And then the sixth area is strong and diverse governance, which holds that all together. Then we've got special projects. And so some of that is planted on marginal areas planned, 2 of those properties are earmarked for planting this year. They're not large areas. It's covered in our forecast R&M budget. There is a reasonable return from that planting as well by way of carbon credits and it increases both land stability, and therefore, decreased erosion and also increases biodiversity. And then there's a couple of other special projects that we've undertaken this year. We've had -- we've contributed a small amount of land near a river. They have a solar pump replace a big diesel pump. We've improved some effluent systems on some of our farms, which we plan to do when we purchase them. And this large-scale native regeneration and predator control project with one of our partners in the forestry estate that we own with them. In terms of key financial metrics. Just over $360 million worth of assets, a net asset value for the company of $214.5 million. Net asset value per share is $1.53. The AFFO or free cash flow per share from FY '22 through our forecast '23 and '24 results, we'll see just under [ 32% ] compounding growth rate and gearing sits at around 37%. In terms of summarizing our acquisitions and our corporate actions, I won't labor these points. These have been well communicated to the market, and they are effectively our forestry acquisition and our dividend suspension in favor of a buyback and paying down our convertible note. In terms of a bit of an update on the timber, carbon and dairy markets. So the carbon market or the Emissions Trading Scheme has seen quite a bit of volatility recently. We've seen a price go -- carbon price or NZU price recently go from $90 to $35 and then back up to $65. This is a product of uncertainty in the market associated with later or much earlier in the year, late last year, the government ignoring some Climate Change Commission advice. They then retrospectively adopted that advice and the market saw some stability come to it. We think is tailwinds for both timber forestry and carbon over the long term. And I think the short-term volatility is just a good reminder about tenant selection and the nice way of being insulated from some of that activity by being a landlord and not being exposed in the short to medium term operationally. I'm sure that some of our investors will have read about the current milk price, the midpoint of which is $6.75 Fonterra announced that a week ago. So that $6.75, this is lower than some farmers in the country's cost of production. So we're checking in with our tenants for our dairy farms. We're offering support where we can. We've offered to utilize some of that guy's sensitivity analysis that they pushed through. We got some quite -- we got a big bench of farm consultants. But our tenants have been through it before, the tenants [indiscernible]. The theme that we're consistently getting back from tenants is it's tough. We're okay. We're cutting our costs to the environment that we're operating in. All of our leases continue to be current, and we are monitoring and offering how -- where we can. In terms of the financials themselves. So for this half year, which is a slightly off 2 reasons. The shares on issue at the end of the period were higher than shares on issue at the start of the period, and we picked up a small amount of forestry income at the tail end of the period. This next half year will have to be a whole half year with forestry income. So with that, we saw $0.0212 per share funds from operations of FFO and $0.0196 per share of adjusted funds from operations or AFFO. We're reaffirming FY '23 AFFO per share, which we're forecasting to be between $0.042 and $0.046 per share for the year. And FY '24 AFFO, which we're forecasting to be between $0.057 and $0.06 per share. In terms of the profit and loss statement with the acquisition of forestry we've seen an end. We've seen 45.2% increase in rental income. Net profit after tax was $6.85 million and earnings per share at $0.0192 per share. I think that net profit after tax number is actually a mistake, the $2.492 million is the right number. So I'll have to get that corrected and reissue that presentation to NZX, my apologies. In terms of the balance sheet. $362.7 million of total assets and $214.5 million of total equity. It's been a 12.4% increase in NAV. In terms of gearing, 37.1% geared. Weighted average cost of debt is 6.42%. You can see our expiry -- debt expiry profile below, and we're currently 53% hedged. In terms of total returns, an usual slide that we'll keep in participations going forward. You can see that NAV growth per share, even in the face of issuing some shares, has been 8.5% compounded annual growth rate in terms of AFFO growth per share taken from FY '22 to FY '24 because '21 was such a low base, lower the number, that's a 31.4% compound annual growth rate of AFFO. And you can see dividends there with the FY '23 dividend suspended. Our portfolio continues to increase its diversification geographically and by asset class and by tenant. You can see the sub -- rural sub segment breakdown in the top left-hand side. That's broken down by way of productive [ hectares ]. So that's 21%, 32% and 46%. So 46% dairy, 32% support. In terms of tenant concentration and lease profile. You can see that the lease expiry profile, the tenant diversification and our WALT will continue to spread and grow, which is leasing from a portfolio diversity point of view. And in terms of an operational update, I've touched on these 3 themes, which is we'll do a little bit of planting for biodiversity and carbon sequestration and erosion control in 2 of our properties this year. We've had [indiscernible] projects take place, and we've released our framework for our Enduring Land for Life program, which is the 5 pillars that are underpinned by governance strength and we'll report a balanced dashboard on our year-end results. In terms of outlook. Just a reminder that we have leases incorporate regular, uncapped CPI reviews. So accordingly by inflation will result in rental growth. We've touched on our AFFO forecast for this year in FY '24. We talked about our hedging and our banking arrangements in terms of our investment properties. These are valued annually. So they are valued at December '22. The REINZ All Farm Price Index for the first 6 months of this year has declined 2.4% in round numbers. And we think that's largely immaterial and demonstrates the resilience of Rural Land [indiscernible] operating conditions. And just a summary of NZL. In general, we have been included in another index, which is the MSCI World Micro Cap Index. And that's the half year presentation.

I think just a nice foreign ownership in the company is across currently 21.89% at the moment. So other than that a small typo, which will get corrected, I think Richard has covered it. Just for a recap, the company recorded a net profit after tax of $2.5 million for the period and adjusted funds from operation of $2.7 million. So we remain on track with our forecast guidance and [indiscernible] guidance out to FY '24 is the company currently stands. In terms of what is in the pipeline. There is -- we are clearly constrained on the size and discount on to net asset value. So they have been concerned about [indiscernible] basis because we are very focused on the share price, and buy back shares makes much more sense than doing anything else at the moment despite the fact that there are really compelling opportunities out there that are coming to us. [indiscernible] yields what on ground leases and would provide further diversification. So there is still no shortage of opportunities but rest assured that the Board is focused on closing the size of the discount of the net asset value.

And quite frankly, it's not been [indiscernible] month, but you do -- you shine a lot [indiscernible] but if the market's going to sell shares to us for a discount, we move on.

And so that's what we're focused on. But look, there's not a lot of activity in the market that we would expect during these times. Prices do start to shift and there's still opportunities out there but nothing for us to do at the moment. So just please rest assured on that because I know some of you have been concerned about our appetite to continue to acquire. And our only efforts like that at the moment is to acquire our own shares.

There's no hands up, and I see here no open questions and so [ Nick ] can open, he's raised the hand.

Well, I guess, just checking if you can hear me? Can you hear me? Okay.

I can't hear you without speaking so I will just [indiscernible] chance. Sorry, Nick. I can't hear you. We take one question coming -- are there opportunities to reduce the interest though by looking at longer-term debt rates? So we do look at balancing our debt both by tenure or length of our debt and our hedging arrangements by hedging more than we currently have, and we're well over 50% hedged. We think that, that would take the balance too far one way and so we're quite happy with our balance of hedging at the moment. There is a chart that interest rates do start to come back. It just is a matter of timing. Now in terms of total amounts, '23 and '24 AFFO guidance is unchanged. However, when looked at on a per security basis, FY '23 AFFO guidance has gone down at a midpoint whereas FY '24 has gone up. Would it be possible to outline our thinking as to why this has changed since May? I have to look at the specifics of that. I suspect it will be the amount of securities that actually got issued at the very end of the capital raise. There was still some late placement to European investors. And so it might be a product of changing of the number of securities ownership, but I can circle back and check that. In terms of actual AFFO and the business itself, nothing has changed since May. I've mentioned that the milk price is low and sometimes cost of -- and it's lower than sometimes cost of production, what kind of support are we offering apart from advice and access to operations support experts, none. That's the extent of the assistance. I mean it is -- this -- a lower milk price was inevitable at some stage, especially as a long-term rural landlord and that's what makes tenant selection so important. If the milk price is still providing headwinds to farmer's operations next year, it seems it would be a risk of delinquency, a few attendants that they have by round numbers [ 13 ], ,increase in rental cost from 1 July as a result of the uncapped CPI increases. [indiscernible] in the same sense that farmers lease farms, they also have interest bills and when they went from 2% interest to 4% interest, they were able to -- that was a 100% increase in their financing costs and going to 6% was another 100% increase on the 2% basis. So they are able to swallow some growth in cost of leasing farms, capital cost of being on those farms. And so at the moment, we don't see an issue. They are just cutting their cloth accordingly, and we are seeing some farm input costs by way of fuel, fertilizer rates and fees starting to come back because on farm, cost inflation was a big piece of the cost of people's production there. And I would say from net process as well, New Zealand has got the lowest cost of production in the world. If our cost of production is getting towards where the milk price is, the rest of the world, Australia or America, the milk producers are on a substantial pressure in terms of the costs of production. So we will, at some stage, it's just a matter of when you see a reaction.

I think just from even -- these guys have had some good years leading up to this. So they are in the business of [ wood framing ] and have done so successfully in the cases of many of our tenants for decades now and dealt with this kind of volatility. So they are used to it.

Another question. Can you please comment on your distribution policy going forward beyond the already announced H1 suspension? Look, we've said that we intend to be a dividend paying company over the long term, but we'd -- it would be remiss in our duties if we just totally ignored a very accretive opportunity to buy back shares as we now try and when they are trading where they have been. But no, we, over the long-term plan to be a [indiscernible].

And I should say the Board hasn't made a decision of the second half dividend. But with the share price where it is, and again, I'm not speaking for the Board, I'm speaking for myself as a Director. You get to think that the most accretive thing we can do for shareholders is to continue to buy back shares and continue to pay [indiscernible]. Now that's just the reality of the situation, but we'll update the market on where our banking sit and [indiscernible] based on current pricing, you would have to think that's a reasonable conclusion to draw.

I've got another question. Given the current dairy payout, the revision to asset value seems likely to come down. If they came down 10% to 20%, are there covenants that sort of trigger from your end? What are the terms related to the nearly $20 million loan receivable. We have credit sites. So there are 2 parts to that. If asset values came down to 20%, that would be across the Board in New Zealand. I have to say, I think that's very unlikely. We haven't really seen that. What tends to happen in New Zealand, and globally with rural land, as you see peaks and plateaus, if that makes sense. And so in times of tough, people sort of go to ground. It's not a lot of activity, but you don't see big declines in asset values. They climb when things are going well and they tend to plateau when they aren't. And so our asset value is likely to come back. They may, but they haven't really moved around a lot in the past when there's been tight payout times, and that won't last forever. And in terms of the question around $20 million loan receivable. So in actual fact, those are properties that we own. So because those properties have a call option associated with them, i.e., tenants can give us notice and call those properties back for us, they're classified as a loan. But the $20 million loan receivable is actually about $25 million worth of property and tenants are paying us approximately 10% a year on -- by way of lease rental, and they can call back the ownership should they wish to. So the accounting treatment classifies that as a loan whereas in practice we own the farms. We own a title. We lease them out. The tenant just has right to call them back. So another question. Just to confirm with regards to planting on your properties as part of your sustainability program, who gets the carbon credits? We as the land will get the carbon credits. What is your target gearing ratio? Are there any covenants around your level of gearing. Our banking covenant is a 40% LVR and our internal ratio is between 30% and 40%, and we'd like to see it creep a little bit lower over time, which is likely to. Okay, everyone. I think that's worked for all the questions. Thank you very much for joining us this morning. Please feel free to reach out to Chris or I. Our e-mails are in the presentations along with our phone numbers. And so if anyone has got any further questions, really happy to chat with you. But otherwise, thank you very much, and see you again.