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

Hey, everyone, and welcome to the NZL Annual Results Call. I've got with me the Chairman of New Zealand Rural Land Company, Rob Campbell.

Yes. Well, good morning, and thank you for participating in this call. Just a few comments from me is Chair of NZL before I hand over to Richard for on behalf of our manager. First, I just want to thank our equity and debt partners in the business for their support during the period, for their on going support. I'd also like to acknowledge the contribution of course, that our lessees make towards the success of this business, and they're very much partners with us in this endeavor. And finally, to thank the team at New Zealand Rural Land Management for their handling of the company's detailed fees. The Board is not happy with the share price of the business, and we believe that it is fundamentally undervalued, but we focus as we have been doing on the implementation of the business and our business plan. And I have to say that the '23 results were pretty [indiscernible] satisfying in terms of the effect that they meet the objectives that we set out for the business, is performing exactly as we anticipated that it would. We have opportunities to grow and improve our business cycle, investors are going to see during this year as planned rental committed and's rental increases flow through improvements in the earnings of the business again exactly as we intended at the beginning, and we have members of this Board to be changing the strategy that we -- for sure. We believe that if we continue to pursue the strategy alongside our new partner Roc Partners in the [indiscernible] partnership. It's excited to touch on in more detail. Alongside that, we continue to have very good opportunities ahead to increase the value of this business, and we'll touch on those opportunities as we proceed. Thank you for joining us, and I'll hand over to Richard for the detailed presentation.

Thanks very much, Rob, and thank you, everyone, for joining us on the call this morning. I've got a brief presentation that we'll touch on both the financial results as at the end of our financial year being the 31st of December 2023, and we'll touch on some subsequent to the meters that's happened in the earlier part of the FY '24 year which is the last couple of months, January and February '24. I'll share my screen. Bear with me, so a summary of the FY '23 results and subsequent events for FY '24. So FY '23 finished with a net profit after tax of $10.9 million and AFFO of $6 million. We've seen net asset value per share growth from $1.25 at listing to $1.62 (sic) [ $1.602 ] at the end of December 2023 -- $1.602 as of the 31st of December 2023, total returns for the business that include net growth in dividends paid have been 32.6% in total or 9.9% compounding annually. AFFO has grown from $0.0413 per share in FY '22 to $0.0435 per share at the end of FY '23, and we're forecasting an AFFO per share of $0.0503 to $0.0538 per share in the FY '24 year. And so we've seen some reasonably consistent growth, which we expect to continue and free cash flow per share. Our gearing ended the FY '23 year at 36.2% is lower to 32.9% post the Roc transaction and subsequent acquisitions. We've seen our rural land portfolio materially increases diversification for around FY '23 and the start of FY '22 -- FY '24 with forestry acquisitions and further horticultural acquisitions. The company has reinstated its dividend with an amended dividend policy targeting a payout ratio of 60% to 90% of AFFO, which gives the company flexibility to ensure that it has the flexibility to be able to deploy some free cash flow or operating earnings in the most accretive way that it deems possible. The On-market Share Buyback Program continues, and we've seen Roc Partners purchased 25% of the NZL portfolio, that both validates the strategy that we set out as a business [indiscernible] and partnering [indiscernible] for future growth opportunities. In terms of the Roc Partners transaction that happened post balance date, i.e., early in FY '24. It has been announced to market. And [indiscernible] later at the point that a 25% equity interest has been sold to Roc Partners in the NZL Rural Land portfolio that was sold for $44.2 million in cash. NZL's used the proceeds to repay its $11.8 million convertible note and spend a further $20.7 million without any debt to fund orchard and forestry land acquisitions. The benefit of the transaction was capital recycling at a substantial premium to the market capitalization or the market share price of equity at the time that improve the financial position of the company and provided the company with some flexibility and ability of take part further opportunity, and it also gives us a long-term strategic partner, a very experienced and very much similar asset classes. In terms of the future, in terms of the further acquisitions that were undertaken in early FY '24, the company has purchased via its limited partnerships, and bear in mind that Roc has a 25% interest in the rural land portfolio has bought some apple orchard land only in Hawke's Bay and some forestry land and the Manawatu-Whanganui region. These purchases have seen the diversity in the portfolio increase at single weighted average lease term of the portfolio increased materially, and it's seem the gearing of the company lowered by just under 10%. In terms of outlook, the dividend has been reinstated with an effective date of the 1st of January 24. So the company will pay a dividend of between 60% and 90% of its AFFO or free cash flow per share based on the first half of this financial year, and the company continues with its share buyback program if it's [indiscernible] accretive value and shares on market. In terms of the company's outlook and our FY '24 forecast this year sees a number of CPI increases on its leases that we'll see 100% of its forestry assets, experienced a CPI increase this year. It will see 54% of its pastoral leases up for a rental increase on 1st of June '24. In terms of NZL's hedging on its borrowing 64% of its total borrowing is hedged. It still retains -- NZL's still repaying some cash on hand from Roc Partners, which is currently investigating options for deploying this cash in a way which best serve shareholders and NZL's forecasting 7% to 7.5% -- $7 million to $7.5 million of total -- for FY '24. This excludes just over $1 million of earnings from put/call arrangements as well, which brings us to an AFFO forecast of between $0.0503 and $0.0538 per share for the FY '24 year. And just a reminder that the new dividend policy ratio is to pay out between 60% and 90% of AFFO. I've included in here a chart that was developed by Craigs Investment Partners. It demonstrates quite an important point. We think when we're looking at listed property vehicles and listed on the NZX and future growth opportunities for free cash flow per share. What this chart shows is, current yield in dark green and Craig's forecast growth in yield and the light green by FY '27 and what the combination of the current plus future forecast yield is likely to be the companies to give investors an idea of the potential future growth that may exist in certain listed property vehicles and you'll see on the right-hand side that NZL is forecast to experience some material growth in its free cash flow per share. I would say that on the back of the type of assets that are also being rural land being -- in our view a reasonably or relatively lower risk type of asset that -- that's some growth in earnings and free cash flow per share is a reasonably positive thing against that risk backdrop. In terms of our FY '23 results, the highlights our total returns, which I've touched on earlier, are net asset value growth of $1.25 per share IPO to $1.602 per share as of the end of 31st of December 2023, gives total returns, which is this NAV plus dividends of 32.6% in total or 9.9% compounded, which is, we believe, for the type of asset and the environment we've been operating in, a satisfactory result. AFFO has increased again in FY '23, and we are forecasting for it to increase again in FY '24. In terms of high level total numbers, the assets, the total assets of the business are $369.8 million. Net asset value was $223.1 million. Net asset value per share is $1.602 per share and gearing at the end of the financial year was 36.2%, but as I touched on this is lower to 32.9% subsequent to the Roc transaction. We've seen further and meaningful diversification of the portfolio, both by tenant and by sector. In FY '23, as we've touched on, we saw the acquisition of the forestry estates that was funded with just over $25 million of Green Loan supported Rabobank and the convertible note and the process of a capital raise. During the year, AFFO guidance was lifted. The dividend was suspended because of the unnaturally low share price. So the repurchase of shares and repayment of convertible notes deemed by the company to be a very accretive use of free cash flow for shareholders. Obviously, that dividend has been reinstated. In terms of specific financials, the financial year saw free funds per share of $0.0474 per share and AFFO of $0.0435 per share and net profit after tax of $10.85 million and earnings per share of $0.806 per share. Again, total assets of $369.8 million and total equity over net asset value of $223.1 million. Debt ended the year at just over 36%, gearing got down 32.9%, gearing post Roc transaction. So our weighted average interest cost is 5.8%. Our weighted average term to expiry is 2.3 years, and we're currently 64% hedged. Total returns for the business since listing have seen an 8.6% compounded annual growth rate of net asset value. It's seen AFFO per share grow at 24% per year. We haven't included the FY '21 year in this because there were some rent holidays in the first year if you include the FY '21 year in this calculation the compounding annual growth rate would be 70.3% but we don't for an accurate reflection. And we've seen dividends per share based on the midpoint of FY '24 forecast grow at 32.5% compounded annual growth rate. In terms of our sustainability programe, we continue to work by amending our current portfolio to look for marginal land that can be used for carbon sequestration and/or some of the sediment control or planting trees around the edges. We've initiated work on several projects across our portfolio. We've released to the market our sustainability program with our 5 pillars with governance being the sixth pillar that ties the all together.. Highlights of this program for the year is that we've grown our Land for Life program across our portfolio with our tenants. We continue to implement [indiscernible] our Green Loan, and we've seen planting and other initiatives approved and started actioning on the 2 properties. I won't run you throughout -- through the appendices but that you'll find [indiscernible] to-date, is the recent summary a further breakdown of our portfolio as at today. A profile tenant lease concentration alongside of this [indiscernible] carbon and dairy markets and key people foreign ownership rules and levels and index inclusions and broker research coverage. With that, I will open up for questions.

I've got some hands up here. Arie, you held your hand up first.

The benefit of sitting at the front of the class Thanks, Richard, and good to see you, Rob. First question, I guess, just in terms of the sourcing of assets, I mean, you guys have clearly been very successful on that front and don't seem to be having issues there. You've now got a partner sort of on board as well. And there's a bit more capacity left in the balance sheet as well, which is great. But I mean how are you thinking about, I guess, the prerequisites, I'm thinking about share price in particular versus sort of, I guess, your NTA in there or, I guess, raising capital at some point again in time to grow? And how are you also thinking about allocating the capital or the capacity that you've got between sort of growing the portfolio, which is obviously on strategy, but also the option around buyback.

We've left ourself some ongoing capacity with AFFO payout if -- we are still a small company, and there aren't a lot of shares to trade day-to-day. We have left ourselves some capacity within our free cash flow that we produce each year to return cash to shareholders via dividend buyback if shares provide enough value. Obviously, I think that most of the core degree growing the company is important as well, but we need to be very careful and slow and thoughtful about the way we deploy any capital, be it product proceeds, free cash flow each year, and you're right, between shares offering value, any purchases offering value, we need to be reasonably judicious about that. Your point on raising capital with the share price where it is, we wouldn't have been looking to raise capital. We simply don't have any intentions of doing so in the near to medium future. And we have we just have to make an assessment of buy back -- buying back versus buying other assets based on what we think is going to add the most long term value to shareholders. Bear in mind that we've left ourselves some flexibility over the long term to be able to deploy some free cash flow if the opportunity looks attractive.

Arie, we continue to see attractive opportunities that we would, in an ideal world, take advantage of Richard's quite right. From the Board's point of view, we will not be approaching the market to raise additional capital in relationship to the current share price. That's simply would be wrong to do so, and we won't be doing it. We do have some limited capacity with current cash resources and the flexibility we have around dividend. But frankly, this year is not really a growth year for this business. It's a consolidation year that we're -- the first time so far as the rural management company [indiscernible].

We've got plenty of capacity, and we're happy with where we are heading and with where we are.

No, no, that's great. And then in terms of catalysts for the share price re-write and obviously, I guess a good thing, the direction of the market is obviously difficult. But obviously, a clear one, and you've got very good guidance out there in terms of growth for this year. But the catalyst for realizing that and sort of confidence, one of them is the step up in that first circa half of the pass-through leases. I guess when will NZL be making the announcement to the market sort of confirming that successful rollover of the lease and on the -- with the ratcheted up CPI, when can we expect you to confirm that for the market?

We won't do that until we get the sort of headwinds, but we are -- we could not be more confident. As you would imagine, we have intensively reviewed the financials as the business is concerned, and we have absolutely no reason to think that we do not get that cash. We strongly believe that will. We'll consider when we could.

That's right. And plus alongside our own [indiscernible] with an external party coming over to take a look at same thing.

Yes. So -- yes, and I understand that, but so is that an announcement that like -- confirmation of that be sort of in April or May?

No, the leases don't rollover until June, so probably in July. That will be due on the 20th of July, and we'll announce when we see the money in the bank.

Okay. That's perfect. And then just last question. Just on the accounting going forward, will NZL be proportionately accounting for its interest in the LP going forward?

We're just setting some guidance on that at the moment. It's a typical accounting issue about where we consolidate or report an asset then back up another interest or report the 75% in the limited partnership. I'm told by the technical accounting guys that -- some issues that's being invested and gone beyond the HRD Board. And so may believe that it's consolidated, but we're just seeking final analysis on that. We've made a note about that in our account. We're just seeking final verification.

Yes. Arie from the Board point of view, we don't see any commercial issue either way on that. And I think it's quite likely that will -- we will report in full compliance from the accounting conventions. It may well be that, we need too in our presentations [indiscernible]. So there's absolute commercial clarity about...

Yes. [indiscernible] but we just -- it's a typical accounting issue that they're analyzing at the moment.

And also just for the record -- and congratulations on that Roc deal and sort of getting that across the line.

Thank you. Nick Hill?

Can you hear me?

Sure can.

Just following on from Arie. Congratulations on the deal with Roc Partners. That was great to see. Start off, following from where Arie left off and asking about some technical accounting questions. Just on the AFFO guidance that included the put/call -- or it exclude the put/call income, the noncash component. Going forward, would your reported AFFO also exclude this noncash put/call income?

I didn't hear the last part, will our?

Will your future reported AFFO figures also exclude this noncash put/call income component?

Correct.

Correct. And then just looking at your revaluations, you reported a positive $7.4 million revaluation gain for the period. Just looking into the details, there were negative revaluations across the board apart from Manawatu-Whanganui, so the forestry estates.

It's the only place we own forestry. So what we really saw was sort of negative 3% or 4% on some dairy assets, which were, in our view, semi -- were particularly material and saw slight revaluation upwards on $70 million worth of -- of forestry assets. One of the forestry assets was a bare land block that got planted out, and there's quite a bit of development margin in doing that because foreigners aren't able to.

Okay. So it was basically done on the planting. It wasn't said to do with the policy you turn on NZ emission trading scheme at the end of 2023 or anything, was it?

NZUs have a big impact on the value of the property. So the -- there are a couple of things. So if you take a really unproductive seed [indiscernible] add trees to it and can't produce the NZUs of it. The forward look of the NZUs has a big impact on the value order. So the outward looking -- the outward look for NZUs is really favorable. And you can see in our financials, we sort of take a midpoint between 2 different growth parts. And there's a big range between those. And so we need to understand that. Secondly, because there's quite high demand for forestry, especially in forests estates from foreigners, the issue that foreigners are facing is they cannot plant, bear land blocks. And so by the time you actually have a bare land block plant and trees. There is substantially more value associated with that than just the cost of buying the land and planting trees because of that development margin. And so forestry was up for us, dairy was flat to down very slightly, but not materially.

Nick, it is an issue for us that the valuation techniques which applied to pastoral land and that applied to forestry land are quite different. So not only is the market experience of [indiscernible] and we'll find that with orchard as well. But for particular, that Richard referred is the techniques in terms of how the assets are valued, they're quite differently values.

Okay. That was really helpful. I wasn't aware of the difference between the 2 subsectors Yes. I guess just sort of thinking about future acquisitions, you got the recent acquisitions, lease rates of 7.5%, 8.5%, and these were funded by cash flow earnings accretive. You've got some balance sheet capacity. So assuming you do that back of the envelope calc suggests a 7.7% marginal cost of debt plus 50 bps of management fees, at least a target return of 8.2%. Is that what you're sort of like looking for and sort of say, like more orchard acquisitions? And do you think you can find that?

No, I don't think we'll be able to find stuff that is that high, but between 7.5% and 8% starting year with an uncapped growing CPI rental versus a debt curve that's -- we take -- especially for orchards, we take a 20- to 30-year view, which is often the life span of some of those leases. And so beyond '25 with the debt curve looking negative versus a starting rate of 7.5%, 7.75%, 8% sort of thing trending upwards, we set that around those levels that they are [indiscernible] over the long term basis.

Yes, Nick, Board -- the Board is not [indiscernible] tenants we will buy [indiscernible] opportunities available within our current balance sheet capacity, but we have to weigh that and hence bring value to shareholders of buyback and the conservatism, which is probably appropriate right now in terms of leverage. So you can expect the Board to be quite conservative in this period about acquisitions. Some of the questions here...

Yes, we've got some other questions here. So Shane Solly has asked, can you discuss in detail our hedging strategy. We -- our ongoing hedging strategy is to have -- is to have between 40% and 70% of debt hedged at any given time, which is our current policy. Bear in mind that policies can change. But this does allow us enough flex while still having a range that we're targeting. Obviously, it's 64% hedged at the moment. We're right in the middle towards the end of this range. We will look to have probably or recently continue to have a reasonably high degree of hedging going forward, and we'll roll a regular program, so we're not [indiscernible] and weighing too much.

Yes. Shane, just to add to that, we -- obviously, that's [indiscernible] something you view pretty much continuously. But with the Roc partnership on board, we are currently undertaking a review with Roc what our hedging policy might be on the portfolio going with more comprehensive review.

The second question, what is the opportunity will look like deploying capital in higher sectors, what churn ranges would you expect from this deployment. We touched on that a little bit with Nick's questions. The opportunity set looking forward, there is reasonable opportunity in the horticultural space. There's a little bit of [indiscernible] in kiwi fruit. There's no [indiscernible] but reasonable buying in -- at all type orchards, bearing in mind that when we look to acquire, we don't really have appetite for any biological assets. We look to get a ground [indiscernible] or something, but not vines and biological assets that would be on the land primarily landed improvements basis with nothing biological. We think that on a risk-adjusted basis of the -- those type of ground based assets at sort of a very much lower end of the risk curve, we think we can achieve well over 7% to sort of 8%. There's also some forestry type assets floating around, especially with the development margin that being a domestic buyer of unproductive land and being able to -- and that will take the carbon sequestration [indiscernible] provides us [indiscernible]. So we'll continue to look at those like we do all time that that's probably the opportunity set and the range that we're looking at, at the moment. Some questions here from Craig Tyson. How is the revaluation of forestry? I think so significant -- Craig I hope we've answered that question. It's largely development margin are across the board of -- it's writing a lease slightly above market, 8% is slightly higher than market leasing -- outlook has improved over the course of the year and its development margin on planting bare land blocks. And AFFO [indiscernible] denominator for the performance fee, yes, each year when performance fees issue that increases the shares on [indiscernible] and the AFFO increases that denominator -- the AFFO denominator [indiscernible] concentration is increasing into forest leasing [indiscernible] there's a catch. We'll continue to look at this from a risk -- from a risk management point of view, we certainly would have seen coming 50% of our [indiscernible] or anything like that. We do consider a strong consideration process, how is our tenant. And so we will look to have a diversified tenant month and portfolio type mix and geographical mix, the relative part of that is New Zealand forest leasing is a very large business with over $1 billion of equity. And so having them guarantee leases versus some small businesses does provide a lot of comfort as well. So we will be managing that against a core metrics we look at with a tenant, which is needing to have a certain amount of equity to guarantee at least based on the tenure of the lease, so 6x for 10 year lease, 12x for 20-year less, et cetera, and maintain them at all times, plus with certain tenants, we have [indiscernible] cover as well and some negative pledges of their ability to grow and sell assets if they weren't going to make financial covenants with us. I hope that's...

Craig, I'd just add to that. We haven't determined that level as a cap from a Board point of view, but I wouldn't expect to see it increase significantly anyway.

Not at all significantly. If there are no other questions -- thank you, everyone, very much for coming today. I appreciate that it's [indiscernible] so a number of you will be busy. So thank you very much, everybody.

Yes. I appreciate the participation and if there are other questions. Obviously, of course, we're very happy to answer those as best we can.

Thank you.

See you. Bye.