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

Good morning, ladies and gentlemen. It's now just after 12, and it's a pleasure to welcome you to the New Zealand Rural Land Company Limited 2024 Annual Meeting through our virtual meeting platform provided by our share registrar MUFG Corporate Markets, formerly Link Market Services. My name is Rob Campbell, and I will chair today's meeting. We're holding a virtual meeting, which provides the opportunity for a larger number of shareholders from throughout the country and overseas, to participate and engage with us on a cost-effective basis. You can vote and ask questions online. I'll provide you with further instructions on that as we progress through the meeting. If you do encounter any issues, please refer to the virtual annual meeting online portal guide or you can phone the helpline on 0800 200 220. I would encourage you to send through your questions as soon as you can. That will allow us to answer these questions at the appropriate time in the meeting. Please note that in order to provide all shareholders with an opportunity to participate, we do reserve the right to limit questions from any individual shareholder. With me on the meeting platform today are my fellow directors. Chris Swasbrook is traveling overseas and will join us when he is able. I have Sarah Kennedy and Tia Greenaway here with me. Also on the platform are Richard Milsom from our manager, New Zealand Rural Land Management; and our Company Secretary, Ross O'Neill. I'd also like to acknowledge the presence of the company's auditor, Darren Wright, from William Buck. I confirm that there is a quorum present as we have with us at least 3 shareholders in person or by proxy and accordingly, I declare the meeting open. The Notice of Meeting and explanatory notes were dispatched to shareholders on the 2nd of April 2024 in compliance with the company's constitution and NZX listing rules, and I propose to take those as read. Immediately prior to the meeting, we had received valid proxies in respect of 46,336,972 shares, representing 33.14% of total issued shares. We would, of course, expect some shareholders who have not lodged proxies to vote during the meeting. Where discretionary proxies have been provided to my fellow directors and me, we intend to vote them in favor of the resolutions as set out in the Notice of Meeting. The financial statements and the reports of the directors and auditors for the 2023 financial year are set out in the company's 2023 annual report for that period. The annual report was sent to shareholders on the 27th of March 2024 and is also available on the company's website. Turning to today's business. Before the formal business of the meeting, I will provide a brief introduction, followed by a more detailed presentation from Richard Milsom. We will take questions from shareholders via the online platform after his addresses, and then we will move straight to the formal business of the meeting. The company recorded a net profit after tax of $10.9 million in the 2023 financial year, and adjusted funds from operations or AFFO of $6 million, including earnings from properties with put/call arrangements in place. The company has amended its dividend policy targets to a payout of between 60% and 90% of AFFO, with an interim deferred dividend to be paid in early October 2024. In addition, the company continues to maintain a selective on-market share buyback program. In April 2023, we acquired 2 forestry assets, totaling 3,137 hectares. The purchase was funded with NZL's inaugural Green Loan via Rabobank of $25.2 million, the proceeds of the pro-rata rights issue and a $12 million convertible note. In February 2024, subsequent to the financial year '23 year-end, the company sold a 25% equity interest in its planned portfolio to Roc Partners for $44.2 million in cash. The company used the proceeds to repay the convertible note and fund the acquisition of land supporting 3 apple orchards located in Hawke's Bay and a forestry block located in close proximity to its existing Whanganui estates for a total cost of approximately $27.6 million. The balance was retained as working capital as other opportunities are investigated. The company now owns 16,063 hectares of rural land, 25% of which is owned by Roc. This represents an 8.4% increase in total owned land, a 9.5% increase in weighted average lease term, WALT, and continued growth in the scale and diversity of asset and tenant base. Our strategy is to own quality, rural land in New Zealand, growing a diverse portfolio while delivering attractive risk-adjusted returns as a ground lessor. We generate shareholder value through a combination of asset value appreciation and the cash flow from long-term leases. Post the most recent acquisitions and the Roc transaction, the company forecasts financial year 2024 AFFO of between $7 million and $7.5 million, excluding earnings from the properties with put/call arrangements in place. From April 2024, NZL will start to see the positive impact of rental growth with approximately half of its portfolio by lease income due for CPI reviews. This includes 100% of our forestry leases and 53% of our pastoral leases. NZL remains excited by its future opportunities, which are augmented by the strategic partnership we have with Roc Partners, and the company is positioned well to continue to grow shareholder value. We will now move to Richard Milsom's presentation. Over to you, Richard.

Thank you, Rob. We'll start on Slide 4, and I won't labor the slides. They've been well canvassed in our market announcements and year-end presentation along with the Chair's address that he's just finished. A summary of our FY '23 result and subsequent events, as Rob mentioned, net profit before tax (sic) [ net profit after tax ] of $10.9 million and AFFO of $6 million. NAV per share has grown from $1.25 at listing to $1.602 as at the 31st of December, total returns have been 9.9% compounding annual growth, which is cash and in asset value returns. The portfolio quality rural assets that we own materially increase both in terms of diversification by asset class with the introduction of forestry and apple land alongside the diversity of tenants, which has continued into 2024. We've reinstated our dividend with a policy of paying out between 60% and 90% of AFFO, which will provide the company's some flexibility. The on-market share buyback program continues and Roc Partners have bought a 25% shareholding in the asset portfolio. If we move to the next slide, this is a portfolio overview as at the 24th of May 2024, you can see that there is a wide diversity of both geographical landholdings alongside diversity of assets that we own, horticulture, forestry, pastoral farms, support farms. We have 8 tenants. We have a 12.7 year weighted average lease term, which is up from 11.7, and we have 100% occupancy, and that's one of the sort of unique characteristics of rural assets as they tend to remain 100% occupied. So if we move on to the next slide. This gives an overview of the Roc Partners transaction, which has been well canvassed, both by ourselves and by the media. But Roc Partners purchased 25% of the Rural Land Company portfolio in January 2024. The benefits of doing so were to recycle capital at a premium to share price and redeployed into some slightly higher-yielding assets. That improve the financial position of the company, able to repay its convertible note and capitalize on opportunities that are NAV and AFFO accretive, and it brings them a strategic partner that has extensive experience in rural property and conduct extensive due diligence as part of the transaction and was pleased with what they found. If we move to the next slide, it covers off the new acquisitions that have been made in early 2024. The 2 properties or the 2 estates that Rob has already mentioned are the apple orchard in Hawke's Bay and the forestry very close to our existing estate in Manawatu-Whanganui region. On the right-hand side of the slide, you can see the impact that it's had on our portfolio. Diversity is increased by tenant and by type of asset. Our weighted average lease term has extended out further. So there's a longer -- there's a greater degree of certainty we have about cash flows into the future. Every time a weighted average lease term grows by a year, it's a longer period of time. We have certainty about lease income and our gearing, our borrowing as a percentage of assets has lowered from 36.2% to 32.9%. If we move on to the next slide, which goes back even further to talk about what we did in FY '23, which has certainly been well canvas. We announced it at the time, talked about year-end results. 2023 was the year that we bought 2,400 hectares of forestry. This was our first large forestry deal. We drew down our inaugural Green Loan with support from Rabobank, and we upgraded our earnings at our AFFO guidance that year as well. We suspended our full year dividend in favor of a share buyback because the shares were -- was so materially undervalued. The company thought it was a good use of funds. We've reinstated our dividend subsequently and provided a range that we can pay for AFFO to provide the company some flexibility. If we move to the next slide. As mentioned, we have reinstated our dividend alongside amending our dividend policy. So the interim dividend will be based on results spanning the period the 1st of January 2024 to the 30th of June 2024. The dividend policy targets a payout ratio of 60% to 90% of AFFO. Share buyback program. We have a share buyback program in place to be opportunistic and buy back shares when they represent very accretive and good value for the company. We've currently bought back 664,411 shares or approximately half of the company's total shares on issue. If we move to the next slide, which is outlook in 2024 forecast. This is the year where we first start to see some of our CPI-based rent increases come through. So approximately 55% of our pastoral farm portfolio is up for review at the start of June. It's our first year of annual forestry lease increases that we've already seen come through in April 2024. We've got hedging arrangements in place for 64% of our total borrowings as of today's date, and we still retain some cash from the Roc Partners transaction. Our guidance for the FY '24 year is between $7 million and $7.5 million of AFFO and FFO per share of between $0.05 and $0.0538 per share. This is based on 139,295,000 shares on issue in our dividend payout ratios and keeping with our new policy of 60% to 90% of our AFFO. If we move on to the next slide, which is resolutions. I'll use that as a juncture to hand back over to our Chair.

Thank you, Richard. Before we move to the formal business of the meeting, we will take questions from shareholders on the Link Online platform on today's address and presentation and including in that the 31 December 2023 annual report.

Have we received any questions online, Ross?

There's only one question. It's actually a compliment in relation to the photos in the presentation and asking whether they are, in fact, photos of our asset holders.

Yes, they are, and they're not enhanced or AI generated. So yes.

Yes, that's the only -- hang on. Another question just come on, sorry. From a shareholder, Andrew, doesn't have a last name. Presentation mentions review of leases on 1 June 2024, does this mean the date the leases will increase by CPI or when the conversion will be had? And secondly, how close to finalizing the increased rents is the company? And how confident is management on getting the CPI increases?

So the increases have started to flow, but Richard can probably maybe answer in more detail on that. But the Board has reviewed, as you'd expect, the potential for the increases to be paid, and we are very highly confident that we will get all of the increases paid. Richard, do you have anything to add to that?

Just simply on the technical side of it, the rent hike is effective from the 1st of June. So it's not when the conversations had or the conversion is done, it is the cumulative CPI hike from the 1st of June 2021 until the 1st of June 2024. So 3 years with a cumulative CPI effective from the 1st of June. And we're confident we'll see those [ when I explain through ].

Thank you, Richard. I hope that clarifies that question. Does that complete it, Ross?

That's all for the meantime. Rob?

Thank you. Appreciate that. If there are no further questions, we'll move to the formal business of the meeting, and Slide 12 could go up, please. Today, we will put resolutions to the meeting relating to the reappointment of directors and auditor remuneration. Each resolution set out is set out in the Notice of Meeting is to be considered as an ordinary resolution, and as such, must be approved by a simple majority of the votes cast by shareholders entitled to vote and voting on the resolution. As I mentioned, shareholders are able to cast their vote using the electronic voting card received when online registration is validated. To vote within the online platform, you will need to follow 4 steps: one, click get voting card; two, into your shareholder or proxy number to validate; three, mark your voting card by clicking for, against or abstain; and four, then click submit vote on the bottom of the card. Please refer to the virtual meeting online portal guide or use the help line specified if you do require assistance. Voting will remain open until 5 minutes after the conclusion of the meeting. Moving now to resolution 1, reelection of Tia Greenaway as a Director. The first item of business is the resolution for the election of Tia as a director. Tia was appointed as a director in September 2021, and pursuant to NZX Listing Rule 2.7.1 is required to offer herself for reelection. There are biographical notes on Tia in the Notice of Meeting. Accordingly, resolution 1 is that Tia Greenaway, who retires as a director in accordance with the NZX Listing Rule 2.7.1 and NZL's constitution and being eligible, be reelected as a Director of NZL. I now would like Tia to say a few words before we proceed to discuss the resolution. Tia?

Thanks, Rob. [Foreign Language] I remember being especially excited when I was elected to the Board because I thought it was a great fit for my background in finance, forestry, farming and climate change. It kind of ticked all my boxes, but I knew then I could really add value in this space and over the years, I believe I have. We're all aware of the significant economic, environmental and social challenges that are presented over the past few years. And during this time, I'm really proud of the way we'll collectively have navigated these challenges and achieved positive results, all while remaining committed to growth, diversification and sustainability. So for me, it's a real privilege to be part of this team. We get to support the way [ raw land in primary industries ] are sustained in our economy, which are super important to me because of how critical they are to our collective and to generational well-being. So I'm committed to do my best to keep adding value to NZL and would appreciate your support to continue on this journey going forward. Thanks.

Thank you, Tia. Have we received any questions online regarding this resolution?

No. No questions, Rob.

If there are none on the matter, I'll now move to for voting on it. Could you please select either for, against or abstain for resolution 1 on the voting card. [Voting]

We'll move straight to resolution 2, auditor remuneration. Resolution 2 relates to the requirement to authorize the auditor's remuneration for the ensuing year and reads as follows: that the Board be authorized to fix the fees and expenses of the company's auditors. Have we received any questions online regarding this resolution?

No. No questions, Rob.

Thank you, Ross. If there are no further -- or no questions on this matter from shareholders, we'll ask you now to vote again either for, against or abstain for resolution 2 on the voting card. [Voting]

That concludes the formal part of the meeting and just a reminder, please do submit your votes if you haven't done so already. The results of the poll will be announced on the NZX website after the conclusion of the meeting. We'll now give shareholders one more opportunity to ask questions, whether related to the presentations on the annual report or the management of the company. Have we received any additional questions, Ross?

There are a couple of questions here, Rob. The first one is from Andrew David, could you please address the current share price discount to NAV?

Thank you. I guess we're all deeply concerned about that, and the Board addresses that. I can assure you on every occasion we get together. We believe that the share price is an unjustified discount to the asset value and the genuine equity value of the company. And so that is a disappointment to us. We believe that we are doing what are the appropriate things to address that with the way in which the balance sheet of the company is being operated by continuously addressing the nature of the assets that we hold and looking for ways in which to improve those through the share buyback program and through the efforts we're making to tell the company story to shareholders and to potential shareholders. We think it will. Unfortunately, it takes some time for the market to appreciate the genuine value in this business, the risk-adjusted returns that are available from the assets that we have are very strong, and we think that this is simply not well understood. So we tried to express that as well as we can and to operate the business as well as we can. One would think that as the increases in rents do flow through that people will become more adjusted and in terms of their understanding of the nature of this business and that, that gap will close. But there is no magic wand that we can wave about it. I would ask if Richard has anything to add or other directors have anything to add to that. It's clearly the biggest concern we have as a business at the moment.

I don't have anything to add. I mirror those concerns. It provides an opportunity for the company in some instances to buy back shares inexpensively, but we'd all like the share price to be trading at or above NAV. I think it will just continue to be a journey to get there. Continue to see increases in free cash flow, properties holding values [ into the new program ], the business model, and I think that over time that the gravity of those things should have a positive influence on the share price you tend to close towards NAV. We'd all like to see it happening sooner rather than later.

Thank you, Richard. Ross, I think you said there was another question there.

There's another question here. What are the plans for the unspent monies from the Roc deal?

The additional funds that we have at the present time are not sort of burning a hole in our pocket, but we do have other relatively small acquisitions under investigation at the present time. But there's no real reason to -- as I say, have that money being a hole in the pocket. And when we do make acquisitions, they will be value and earnings accretive. Are there any further questions, Ross?

Yes. There was just a question related to the technical presentation at shareholder separately. So no, there's no other questions.

Okay. Thank you. If there aren't, then I declare the meeting closed, and thank you all for your participation and for your continued interest in New Zealand Rural Land Company. Thank you.