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

Good morning, everyone, and welcome to the NZL FY 2024 Investor Webinar. Thanks very much for joining us this morning. You will have likely seen on the NZX we've released this presentation that I'm sharing with you; and our unaudited financial results for the year ended December 31, 2024, which is also our financial year 2024. This morning, I'd like to walk you through this presentation. I won't labor every slide, but it is available on our website and on the NZX. And I'll be taking questions at the end. So the key messages from our FY '24 year, and this has been well canvassed. Roc Partners purchased 25% of the NZL portfolio, which validated the strategy, and partnered with NZL for growth. Portfolio diversification and rental yield materially increased with further forestry and horticultural acquisitions. We partnered with New Zealand Forest Leasing to execute on native regeneration throughout NZL's forestry properties. AFFO grew to $0.0494 per share in FY '24, which was a 13.6% growth on the previous year. Gearing has been lowered to just under 30%. And a total dividend declared of $0.04 per share net, equivalent to 80% of our full year AFFO. In terms of financial highlights and metrics, we've seen an 18.6% CPI hike on just under 40% of our portfolio, which took effect in mid-2024. So we'll see the full effect of that next year. AFFO has increased to $7.1 million or $0.0494 per share. You will see that net asset value per share has grown from $1.25 at IPO to $1.603 per share as at 31 December 2024. And the dividend is being resumed, for a total dividend of $0.04 net per share, which is 80% of AFFO for this year. We've seen very consistent AFFO growth year-on-year since listing, and we expect the same again next year. In terms of our operating overview for the FY '24 year. What we saw was 4 acquisitions which were both AFFO and weighted average lease term accretive. We acquired horticultural land in Twyford Hawke's Bay. We acquired 2 forestry estates and some further horticultural land in Otago. We saw our gearing lowered from 36.2% to 29.6%. We saw our weighted average lease term increase from 11.6 years to 12.5 years. And we saw further diversity increase across the whole portfolio. In terms of the highlights from our unaudited financial results, we saw an increase in FFO; and increase in AFFO, a 14% increase in AFFO. We've seen net profit after tax reach $23.08 million, which is a record profit for NZL. And we've seen earnings per share reach a record number as well. The balance sheet has had a just under 20% growth in assets and growth in total equity. In terms of our debt summary, as mentioned, we are just under 30% geared at 29.6%. Our weighted average interest cost is 5.9%. We're 65% hedged. And what we've seen this year is the entrance of Bank of China into our banking syndicate. In terms of total returns. So to summarize where we've landed this year and how that compares to since inception and where we're looking for next year. Our net asset value per share has grown from $1.25 to $1.603 per share. We've delivered AFFO this -- in the '24 year of $7.1 million in aggregate or $0.0494 per share. We're forecasting AFFO next financial year, FY '25, the year we're in at the moment, which is 31 December 2025, of between $7.5 million and $8 million in aggregate, the midpoint of which is $7.75 million. And dividends per share. We've issued a record dividend this year of $0.04 per share as a net dividend. And we're forecasting a full year dividend for FY '25 of between $0.042 per share and $0.045 per share, which represents 80% of our forecast AFFO. In terms of our sustainability program, we continue to implement our "enduring land for life" program, which investors will be familiar with. And more details are available on our website. It focuses on the 5 pillars: environment, economic, social, animal welfare and mana whenua; and the oversight and management of which is the governance pillar. What we've seen this year is 2 further forestry land acquisitions. We -- our partnership with New Zealand Forest Leasing continues to grow, which has a large nationwide carbon sequestration and native regeneration project underway. This involves using the pine trees as a nurse crop and a variety of quite intensive methods to ensure long-term native regeneration underneath, and we look forward to keeping you updated on these projects. In terms of dividend and outlook, the financial landscape for New Zealand dairy farmers and pastoral farms make up a large part of our portfolio. The outlook is positive. Farmers are making record cash profitability. We're seeing declining debt levels in the sector. And we think that this looks positive from both a tenant serviceability point of view and for pastoral land prices. The Roc Partners transaction, which investors will be familiar with, was the 25% sale of the portfolio of Roc Partners. It allowed us to recycle some capital at a premium to market value. It improved the company's financial position and allowed us to rotate some assets into higher-yielding and further diverse assets. And it's a strategic partner for growth in the future. The dividend is obviously $0.04 final net dividend for the FY '24 year. We continue to target a payout ratio of 60% to 90% of AFFO. Our share buyback program is maintained. And during the period, we repurchased a total of 88,804 shares, bringing our total bought back to 710,131 shares, at an average price of $0.89 per share. In terms of the outlook for FY '25. Our leases all incorporate regular uncapped CPI reviews, and so accordingly, inflation will result in further rental growth. We're reasonably insulated from inflation-impacted on-farm costs because we own the land. We don't participate in any of the on-farm operations. 31% of our pastoral leases are subject to review in 2025. We expect this to be around a 13% rental growth mark. 100% of our forestry assets will be subject to rent review in the first half of 2025. And the CPI accumulated since the last rent review is expected to be just more than 2%. What that does for the AFFO predictions in aggregate for FY '25, puts it between $7.5 million and $8 million in aggregate and an AFFO per share of between $0.0525 and $0.056 per share. Obviously, our dividend policy remains in that 60% to 90% of AFFO range. We've seen further positive outlook for the dairy market and the carbon market in New Zealand, which bodes well for tenants and asset prices. And we think that, as a company and a reasonably unique and -- offering on the NZX and particularly in the listed property vehicle space, we continue to offer an attractive yield and forecast growth across the sector. What I'd like to do now is open up for questions, if anybody has any.

Nick?

Can you hear me?

Yes, I can hear you.

Would it be possible to talk what was behind the fair value movements of your investment properties? Those -- it wasn't just the forestry assets, wasn't it? It -- was it pastoral as well as the other, say, orchards?

So the orchards when -- so the fair value increases for orchards are a product of 2 things: buying the land well. It was part of a portfolio that was being broken up and an asset that we've been working on for quite some time to acquire attractively. The outlook for productive horticultural land, especially in Twyford and certain parts of Otago, is positive. And so we have seen the market for that type of land increase in the last 24 months. Additionally, we were able to command reasonably healthy leases. And so there is a value associated with a slightly above-market rental yield on those properties. In terms of forestry, since this time last year, the carbon market has firmed. And the outlook is increasingly positive, and so we have seen an increase in value in forestry properties. And the dairy market continues to look strong. And we've started to see market transactions that are above last year. And the -- also the CPI nature of our rent hikes occasionally will exceed a market movement. And so our rental -- the net present value of our rentals can sometimes be slightly more favorable than market.

So to be clear: The revaluation for the pastoral dairy assets was based on transactions in the market and having a better-than-otherwise rental growth outlook -- or rental income outlook from the CPI-based leases...

That has -- and that's really the case, that's the case across the asset group.

And it's not much to do with the farm gate milk price being revised upwards.

That's the sentiment and the profitability that drives the increase in the land prices.

Okay, so it's more of a sentiment thing than near-term farm gate milk price...

[indiscernible] profitability thing. There's a chart in the presentation that talks to farmers are experiencing record cash profitability levels...

Yes, yes. I was just wondering. We can talk about this later. I was just wondering about sort of the short-term volatility in farm gate milk prices versus long-term outlook. I just noticed your -- the notes of your annual report. There's been a series of asset and lease transactions quite a bit going on. You're acquiring an asset for $15.5 million. And in terms of paying it, you're funding it with a sale of a $11.4 million asset and cash...

Yes. Can -- I can summarize that. So 2 of our slightly hillier dairy farms are located next to some of -- one of our tenants' owned dairy farms. This particular tenant has got a very blue chip property that's isolated from his other farms, but it's very attractive to us, in Ashburton, so what we've done is we've said, "We will sell you 2 of our less-attractive dairy farms, as far as our total portfolio goes, plus some cash your way; and acquire your blue chip, large, productive dairy farm in Ashburton." I would note that these farms, the dairy farms that we're selling, are being sold for just slightly above their vacant possession value.

Okay. And then in terms of the acquisition, what's the cap rate for that or the yield on cost?

5.9%. We're swapping like-for-like.

And then with regards to the transferring several leases with the tenants, why are you granting them a call option to buy $60 million worth of properties? And which properties are these? And I guess, what are the strike prices? I'm just trying to understand...

So the strike prices are at a slight premium to valuation plus a CPI growth year-on-year. The tenant wanted the call options because it's their desire to invest a bunch of CapEx in those properties, so from our point of view, we wanted to give them the confidence to continue to improve both from a profitability and value and environmental standpoint. If they didn't come up with the money to purchase the properties, we'd have someone else invest a whole bunch of money in development that we get the benefit of. If they do come up with the money to purchase the properties, it's at an above-market valuation price, which we're happy with. And so to facilitate the transaction and also, either way the option went, provide a positive outcome for NZL, we agreed.

And the $2 million in capital project commitments, what are they for? And how are you treating the spends? Would this be included in or reflected in your FY '25 AFFO guidance as part of, say, maintenance CapEx and incentives?

Yes. So this is all part of our normal R&M/maintenance CapEx budget. They're all rentalized projects and they're all value accretive to the land. So a little bit of it is irrigation. A little bit of it is water storage. A little bit of it is tree planting.

And I guess, last one for me before I hand to someone else. You previously commented that FY '24 was going to be a year of consolidation and relatively quiet compared to earlier years. What would you say FY '25 looks like to you? Would it be fair to expect a greater level of transaction activity?

I think FY '25 -- it's difficult. It's always difficult to speak to what the year holds, but we've got this asset swap that's taking place at the moment, which is really swapping some dairy farms for others. We don't have anything in the immediate future that we have any transactions that we're looking to do or anything like that. We'd like to continue to execute on what we've got in front of us. And so yes, I mean, if we'd call that consolidation or just business, I would more describe it as business as usual.

Cool. That's all from me.

I've got some questions here which I will read out and then answer, one question from [ AJ Machis ]. In the last 6 months, AFFO was $0.03 a share; excluding the put-call options, going from $1.94 per share. The midpoint of the forecast for FY '25 is approximately $0.054 per share. "Why are you forecasting what is a drop in AFFO growth, when you've mentioned FY '25 forecast includes upside with CPI, high-yield horticultural acquisitions and increased rent from the post-period acquisitions?" We are still experiencing AFFO growth in the first half of last year. So the last half of this year, we've seen the impact of the high-yielding assets, so in that 6-month period. And then what we'd expect to see is that same high yield in the first 6 months of next year plus the CPI growth from properties -- from the properties that are experiencing CPI growth. And so we're not going to see the same growth as the first half of '24 to the second half of '24 because we're not going to see the growth of CPI hikes and the rotation of the portfolio, but we will continue to see growth from an already high-yielding portfolio plus CPI growth. There's another question, from [ Rowan ]. "Are you looking at any opportunities at present? What sectors are you focusing on? Does the large discount to NAV inhibit the purchases of further assets? And any other comments on share price would be useful." So we're continually looking at opportunities. We don't have anything in the imminent future that we're looking at. The slightly higher-yielding sectors where we think there is opportunity at the moment tend to be in the horticultural, forestry, potentially some solar space. And so -- but none of those are on the immediate horizon. FY -- there's a question from [ Tina ]. FY '24 AFFO is slightly below previous provided guidance. "Can you talk through how much was because of the dilution of shares from the Southern Orchards transaction?" So the AFFO that we guided to in aggregate is exactly on guidance; per share, just marginally lower, for the issue of shares for the Southern Orchards transaction. I would note that Southern Orchards were purchased with shares issued at net asset value, not at the current share price. So quite an accretive way to use shares as currency for shareholders to acquire land. There's a question about the interest rate hedge and when it expires, from [ Tina ]. So details on the hedging expiry are on NZX and on our website. We have a tailing-off expiry. So 65% of our interest rate hedging is through to next year. Slightly lower is the year beyond, at approximately 50%; and slightly lower again at 30%. We run an active hedging policy, which means that, as hedges roll off, we'll continue to look at them and roll hedges on. There's a question about, "Good interest rates you're getting on debt, but for the past 2 years, you've made over a $2 million losses on derivative instruments, which is considerable. What are the derivative instruments? Who are they with? And what situations would enable these losses to become profitable?" So those are simply a mark to market on our interest rate swaps, which are with Rabobank, so whenever we take out a hedge on our interest rates, those are carried as a derivative in our books. If the prevailing interest rate in the market becomes higher than what you've hedged at, those derivatives are in the money. If the prevailing interest rate becomes lower than what you've hedged at, those are out of the money, so you would expect to see a mark to market on our interest rate swaps on our balance sheet. They don't impact from a cash perspective because you have locked in your interest rates and those are the current or the present value of your future [ under notice ] versus a market rate. Now I believe that has answered all the questions I've got in Q&A. Does anyone else have their hand up or any further questions? I'm very happy to take e-mails and calls later today or the rest of the week, if anyone would like to get in touch. Otherwise, thank you all very much for coming this morning. Okay, thanks all. Bye.