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

Good afternoon, everybody. Thank you for joining us for this presentation on our annual results for 2025. My name is Rob Campbell. I'm the Chair of New Zealand Rural Land Co. And I have with me Richard Milsom, who is our Chief Executive; and also first time at one of these occasions, our Chief Financial Officer, working through New Zealand Rural Land Management, Stephen Reid. Stephen, welcome. Appreciate in the interest that you've shown in our results. I'll give a very brief introduction and then hand the presentation over to Richard. What I'd just like to say is this, we had another very satisfactory New Zealand Rural Landers. It's never intended to be an exciting moonshot of an investment. We're a very conservative operation, doing relatively conservative things in the early building years. We've, I think, made good progress with the capital that we've had, and we're now in a very much a consolidated phase of the company and the year reflects that. We're not a company that's looking to produce big upside surprises in any particular period. But equally, we have a very strong risk management perspective and the nature of the assets that we're invested in and the leases that we hold should produce steady results, and we regard this as a reasonably satisfactory one. Always looking for better, of course, but reasonably satisfactory. So thank you for the support that we've had from our shareholders during the year. And Richard, I'll hand over to you to run us through the results presentation. There will be time for questions at the conclusion of Richard's presentation.

Thank you very much, Rob, and welcome, everyone. Today, we're presenting NZL's results for the year ending 31 December 2025, our fifth and full year as a listed company. It's been a year of consolidation and disciplined capital management and some important strategic decisions. We'll run through the results, give you a look at the outlook for FY '26 and leave some time for questions at the end. So 5 headline messages for the year, and these will be the themes that you hear throughout. We've recycled 2 pastoral properties at above their most recent valuation into a high-yielding Canterbury dairy farm, completed an independent capital review with KPMG and adopted a revised dividend policy, targeting between 90% and 100% of AFFO paid out quarterly as a dividend. Our interest rate hedging has moved from 65% to 96%. Our AFFO per share has grown 9.9% to $0.0543 per share, and we're guiding a further 7.1% growth next year. Gearing has tightened to 29.4%, and a final dividend has been declared equivalent to 100% of AFFO for the second half of the year or 90.5% of FY '25 total AFFO. In terms of financial highlights and metrics, our total assets are $452 million. Our net asset value is $235 million and our net asset value per share is $1.609. Since IPO, NAV has grown -- NAV has experienced growth of 28.8%, adding dividends, total returns of 40.4%. CPI-linked rent reviews this year. We've seen 13.8% increases flow through on a meaningful portion of the dairy portfolio in June and a further 32.3% of the portfolio saw a 2.5% uplift in the year. We consider that the portfolio and the income is doing as it's designed, inflation protected income growing year-on-year. Year-on-year AFFO growth. So this is a chart that tells our story reasonably clearly. Since FY '22, total AFFO on a per share basis is up 77.5%. Every year since listing, AFFO has grown in both absolute and per share terms, and FY '26 guidance points to another step-up. In terms of corporate actions in the FY '25 year, it was deliberately a consolidation year, one small acquisition completed, sold 2 farms at a 10.9% premium to their purchase price and at a premium to their most recent valuation, redeployed proceeds into a high-yielding, highly productive dairy farm in Canterbury. The transaction was accretive to both AFFO per share and weighted average lease term, and that's the capital recycling model working as it's intended. In terms of our financial result from the year just been, AFFO is one of our key earning metrics, strips out noncash items to give a true proxy for free cash flow. We saw consolidated AFFO of $11 million with NZL's attributable share at $7.9 million or $0.0543 per share. Again, with growth on last year of 9.9%. In terms of our profit and loss, gross rental income grew to $22.3 million from $19.9 million, and that's both the CPI reviews and the Canterbury acquisition. Net finance costs improved significantly. They went down from $8.3 million to $5.4 million, driven by the hedging program and driven by a reduction slightly in our gearing. In terms of our balance sheet, it's a reasonably clean balance sheet, total assets of $452 million, investment property being the dominant asset of $416 million. Net assets of $235 million and net asset value share of $1.609 per share. Key movements we've seen are assets held for sale have been reduced to 0. These were the 2 properties that we sold in [ March ]. Our debt summary, debt drawn is $132.7 million. Gearing sits at about 29.4%. It's within our target range and it's down from last year. Hedging has moved from 65% to 96%. Our weighted average cost of debt is down from 5.9% to 5.3%. Our interest coverage ratio has improved to 2.96x from 2.38x. This is quite a meaningful improvement and also provide some headroom. And we've renewed a $46 million tranche of debt in May 2025 that we extended to June 2028, and there are 2 further tranches to renew in the first half of this year. We're well advanced on those conversations, and we'll update the market in due course. In terms of total returns, net asset value per share has grown 5.2% on a compounding annual growth rate since IPO. AFFO per share has grown at a compounding annual growth rate of just above 30% since FY '22, and dividends have grown at a compounded annual growth rate of 25%. The FY '26 dividend guidance is between $0.0536 and $0.0569 per share, and that's based on 95% of forecast AFFO paid quarterly. We think these charts show reasonably consistent growing and predictable income, and that's what our revised and announced policy continues to strive to deliver. We have a quick look at our FY '25 sustainability highlights. Despite the proposed legislative changes that would exempt us from mandatory climate reporting, we've committed to continuing our annual climate-related disclosure report. The FY '25 report captured full value chain emissions for the first time, including downstream leased assets. We ran scenario analysis across 1.5-, 2- and 3-degree increases in average temperature pathways and the conclusion was geographic and land use diversification is genuinely protective in our instance. Our sustainability program is available on our website and remains -- and we encourage investors to read it. In terms of the outlook, the outlook and the financial landscape for New Zealand dairy farmers is dairy represents about 61% of our portfolio approximately. So it's an important part of the market. Fonterra's final FY '25 Farmgate Milk Price was just above $10. This is the highest in 15 years. FY '26 is forecast to be between $9 and $10, which would be the second highest on record. Tenant debt-to-asset ratios are declining steadily, and stronger balance sheets only look better from a tenant health point of view. In terms of the most recent NZ ETS changes or Emissions Trading Scheme changes. Now the government's November 2025 announcement, which basically decoupled the ETS from the Paris Agreement commitments caused some NZU price volatility. Our view was that we think the market reaction was disproportionate to the actual policy change. What hasn't changed is our domestic emissions budget remains legally binding with the Zero Carbon Act and the supply of carbon units or NZUs remains tight. The Climate Change Commission forecasts the current surplus to be completely drawn down and into a deficit between the end of 2026 and the beginning of 2027. It's important to remember for NZL specifically, we own the land, not the carbon units. Our income's lease payments, stable inflation linked and insulated from carbon price swings. If we have a look at horticulture and the outlook for the 2026 apple season, industry participants are describing 2026 as potentially the best average fruit season in 20 years. There's been minimal spring frost damage and spring frost is the single biggest yield risk for apple crops. Asian markets are very firm. China conditions remain positive and the India Free Trade Agreement is a genuine medium-term opportunity. Our orchards in Hawke's Bay and Central Otago are well positioned for a good year. Coming now to the capital review that was commissioned by the Board. So at our 5-year mark, NZL's Board commissioned KPMG for an independent capital review. The key findings were that the market primarily values NZL on a cash yield, the sustainability and reliability of distribution [indiscernible]. The board's positioned [indiscernible] dividend policy to pay out between 90% and 100% of AFFO on a quarterly basis. Buybacks and alternative capital uses will be assessed on a yield-based framework, and this just represents a sharpening of focus in the same direction that we've always been going in the business continue to do what it was designed to do. Our dividend in terms of touching on a dividend share buyback program, we have touched on the dividend for this year, our revised 90% to 100% of AFFO dividend policy. We remain -- in terms of share buyback program, we remain open to selective on-market buybacks if there are very compelling reasons to do so and would assess it on a yield-based framework. In terms of an outlook and FY '26 forecast, 61% of our leases by value-based CPI-linked reviews in FY '26, these contractual and uncapped increases. The FY '26 AFFO guidance in aggregate is between $8.25 million and $8.75 million or $0.0565 to $0.0599 per share. At a midpoint, that's a 7.1% growth in AFFO per share versus this year, having seen a 9.9% growth year-on-year from last year. The pipeline for potential further accretive acquisitions remains active. We continue to look at opportunities that meet our yield and wealth thresholds, and we've got a conservatively positioned balance sheet as it stands. In closing, I would say AFFO continues to grow, cost of debt is down, capital management continues to be disciplined, tenants are healthy and the outlook for the key markets that we -- that our tenants are exposed to look [indiscernible]

Thank you. Thank you, Richard. We'll move to any questions that you have, which will be picked up some perhaps by me, some by Richard and Stephen may contribute on that too. So we'll move to any questions. Stephen is guiding this. So he's currently manipulating the screen for this purpose. So the first question there is what are the key influences on the dividend guidance range? We've -- as Richard has said, we've paid out 100% in this last part of the '25 year. That was to bring us within technically in terms of what we decided to do. We didn't need to do that. We thought it was desirable that we made a dividend that took us within the range that we projected for the '26 year. So we have the cash to do it. And so we've done that. I think it's best to think about it as being about the 95% range. We still wish to grow this business, and we will be looking for opportunities to do that, either recycling assets or new assets as time goes on. So it doesn't make sense to continually, I think, be paying out 100%, but our intent, as I say, is to stay in that range. And it's best to assume that we hit around about the middle of it at 95%. Nothing to add to that, Richard?

If there's an element of the question, which is actually what are the key influences on your forecast for next year?

On the actual.

I do know. It could be interpreted both ways. But if the question is what's going to influence your guidance for this year, it would probably be three things: where CPI actually lands, although for some of the pastoral 3-year catch-ups we've already got through to the bank; the interest rate on the unhedged part of our debt, which is quite small; and actual costs or any unseen costs around the business, which don't tend to crop up too much. So there's not a lot of things would wildly swing it. I would describe it as more slight influences around the edges.

Yes. I think these -- the business as it's currently structured should produce a very predictable dividend flow. It's a good -- I didn't see the second question there, Richard, but it makes sense. Yes. Are there any other questions?

It doesn't appear to be any other questions -- sorry. There's a question, what is the cap rate of valuation? That differs on a per...

Asset.

Per asset and asset class type basis. We can add that to -- we've added a breakdown of leases and properties and tenants and things in our annual report. We can continue to add that. But you'll also find the answers to those on the -- in the financial.

[indiscernible] we can obviously clarify that and go into detail.

Absolutely. But most of the accounts still exist. There's a portfolio schedule that's been added to the [indiscernible] and we're happy to get further into it.

If you want to cut through all the notes, et cetera, I'm sure the team can provide a specific answer to a specific asset valuation. Next question is...

Is the DRP taking place on the upcoming dividend? No. How active are the markets for your assets? Where are similar assets trading? They are very active markets for our assets. We make up about 1% or 2% of lands traded each year. Where are similar assets trading? That all depends on whether we're talking about pastoral farms.

We certainly got no reason to be concerned about asset values. We don't have -- we're not actively looking to sell particular assets, but we do get offers on assets from time to time. We've certainly had no reason from our point of view to question the valuations of our assets, if that's kind of the level of the question. We're highly confident we could trade at the levels that we're talking about.

Absolutely. And what we're seeing is we're seeing quite an active market, especially in apples and pastoral farms. It's very healthy. What are the reasons to stay invested in NZL instead of, say, other property investments? I would probably direct you to our website where we have a breakdown of strategic and differences of NZL versus other commercial property vehicles.

I think the main thing I would say there is there are arguments for each type of asset. And obviously, we strongly believe that we land as an asset has some inherent advantages. But the structure and the assets that we're invested in from a risk-adjusted point of view, from a diversification point of view is a very strong argument for anyone who wants to hold property assets to be involved in this. That's my view.

Well, we don't seem to have any more questions.

If there are no more questions, we will close the session. Thank you again for your interest in the business and in the stock. Is that another question coming through there, right? About the return opportunities available. We were always -- the team is always looking at assets, and Richard and Steve may want to add to this, but we're always looking at assets. And we do see assets that have very competitive returns with what we currently hold. We want to be convinced about that, not just on an immediate sense, but on a long term that the return opportunities are available there for us. We don't want to be sort of busy fools trading for our own sake just because there's a marginal opportunity somewhere. But we will be recycling assets from time to time when we're convinced that there's a better opportunity. And these do arise. There are genuine cycles in rural land asset prices and values, and it makes sense for us to take advantage of those when we see them. So they do occur, no question.

Absolutely.

Are there any other questions? I'm not wanting to cut this off if there are. If anything does occur to you though, after this session, you can always, of course, come back to us. The team will be very happy to answer any questions about the annual accounts when you have the opportunity to absorb them in more detail. So please do come back to us. Thank you for your attention to us today and for participating with us, and I wish you all the best of the weekend.

Thanks, everyone.

Thank you.