Property For Industry Limited (PFI.NZ) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to Property for Industry FY '25 Annual Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mr. Simon Woodhams, Chief Executive Officer of PFI. Please go ahead, sir.

Good morning, and welcome to PFI's FY '25 Annual Results Briefing. Alongside me today is Craig Peirce, our Chief Finance and Operating Officer. Before we get into the results, we just wanted to point out the following. The FY '25 annual results till 30 June 2025 have been compared to the results for the 12-month period from 1 July 2023 to 30th June 2024, referred to as the prior comparable period or PCP. This differs from financial statements, which presents FP '24 as the comparative period for FY '25 in accordance with applicable accounting standards. So, if you turn to Slide 3. This morning, Craig and I will speak to the topics outlined here. I will begin by reviewing the highlights for the year and then give an overview of the portfolio and its performance. Craig is then going to take you through the annual results and the section on capital management before giving an update on sustainability. I'll then give an update on the market before reviewing our priorities. I'll then close the presentation, after which there'll be an opportunity for participants on the call to ask questions they may have. So, if we turn to Page 5 of the presentation, headed highlights. We're very pleased to report a strong result, reflecting PFI's strategic positioning and the resilience of our core industrial portfolio. Highlights that I'll expand on throughout the presentation with Craig include the positive momentum has continued across our $2.17 billion industrial property portfolio with fair value gains of $70.7 million or 3.4% at the 30 June valuation. Core assets have delivered annualized rental growth of 5.3% across the $73.2 million of contract rent that was reviewed during the period. $12.3 million of stabilized contract rent was leased during the year with rents being agreed on $7.9 million of contract rent at an average of 20.1% above previous contract rents. We're happy to report that our occupancy remains high, continuing to be almost 100% occupied at the end of the year. Our Green Star development pipeline has been bolstered with Stage 2 of the redevelopment of 78 Springs Road tracking under budget and ahead of program, along with the advancement of development plans at both 92-98 Harris Road and the Spedding Road industrial estate. Our balance sheet also remains in great shape. We've refinanced or established $700 million of facilities since June 2024, leaving us with about $320 million of available liquidity, while gearing remains well within our target range at 32.6%. This activity has combined to deliver a strong annual result with profit after tax of $106 million for the period, which is up $152 million on the prior comparable period. We've also announced the fourth quarter final cash dividend of $0.025 per share. This takes full year FY '25 dividends to $0.086 per share, an increase of 3.6% on annualized FP '24 dividends. We now turn to Slide 7, headed Portfolio Snapshot. The portfolio has continued to benefit from strong re-leasing outcomes and structured rental growth, supported by the company's newly completed developments. Here, we have a summary of the statistics as at 30 June. You can see that the company continues to own a portfolio of 91 properties leased to 126 tenants. The portfolio is 99.9% occupied, reflecting the high quality of both our properties and the tenants in the portfolio. The period's activity has also delivered significant increase in contract rent, which has risen from $99.7 million at the end of June 2024 to $112.3 million at the end of June 2025. And the company's weighted average lease term or WALT has risen from 5.07 years to 5.47 years over that same period. During the year, we recorded an increase in the value of our portfolio from independent valuations of $70.7 million or 3.4% to $2.17 billion. Around half of the valuation outcome came from firming market capitalization rates with the balance attributable to realized rental growth. As a result of portfolio and valuation activity and excluding the company's brownfield development properties, PFI's passing yield increased by 9 basis points to 5.23%, while the portfolio market cap rate [ firmed ] 14 basis points to 5.75%. An independent market rental assessment of the entire portfolio was completed as part of the valuation process. This assessment estimates that PFI's portfolio is around 11.5% under-rented. Turning to Slide 9. During the financial year, the team completed leases on over 148,000 square meters of area or 19.2% of the portfolio by rent for an average lease term of 8.8 years. A total of $21.6 million of contract rent was secured in FY '25 with $9.3 million of this contract rent relating to newly developed or acquired properties. Of the remaining $12.3 million of stabilized contract rent, rents were agreed on $7.9 million of this, with rent settling 20.1% above previous contract rents. The remaining $4.4 million of stabilized contract rent secured during FY '25 is subject to market review on renewal. After factoring in review caps, those 6 leases have been assessed as being approximately 14% under-rented at the end of June 2025, with a weighted average review date of December 2026. If we move through to Slide 10. As I mentioned earlier, the portfolio is essentially fully occupied at 99.9%, and the near-term expiries are very manageable. As the graph on the left-hand side illustrates, we only have 1.2% of contract rent due to expire during FY '26. The largest expiry in the next 12 months is just 0.5% of contract rent. And lastly, post balance date, we've agreed an early lease surrender with GrainCorp at 92-98 Harris Road in East Tamaki. So, this lease has been excluded from any expiry's analysis. This is now an attractive development project. If you could turn to Slide 11. 110 rent reviews were completed during the financial year, resulting in an average uplift of 6.2% or 5.3% annualized on $73.2 million of contract rent. $17.6 million of contract rent or around 15.6% of the portfolio is subject to a market rent review in FY '25, and those market reviews are about 13% under-rented as at June 2025 after factoring in review caps. Around 88% of our portfolio is subject to some form of lease event during FY '26, providing further opportunities for contract rental growth. If you turn to Slide 12. As we have mentioned already, PFI's core portfolio continues to deliver growth by structure rental growth and capturing re-leasing spreads. PFI's portfolio was 16.2% under-rented as at June 30 2024. Market rents continue to grow over there by 1.7% on a like-for-like basis. However, we achieved a 6.9% growth in the same rate rents. As a result, PFI's portfolio under-renting gap closed by approximately 4.7% to 11.5% as at 30 June 2025. This under-renting gap of almost 12% provides further tailwinds to our earnings, noting that market reversions continue to be settled in excess of valuer assessed market rents. Assuming market rents remain flat on 30 June 2025, PFI expects its portfolio under-renting gap to close by a similar amount over FY '26. I'm now going to hand over to Craig, who's going to speak to several topics, including a review of the annual results. Craig?

Thanks, Simon, and good morning, everyone. Thanks for tuning in today as we share with you PFI's FY '25 annual results. As Simon mentioned on the highlights slide, profit after tax of $100.6 million (sic) [ $106 million ] was up $152 million on the prior comparable period, incorporating fair value gains on properties of $70.7 million as compared to fair value losses of $90 million in the prior comparable period. Funds from operations were up 5.4% on the prior period to $0.1069 per share and adjusted funds from operations were up 8.1% to $0.959 per share, with both measures reflecting strong growth in income tempered by increased interest and tax. With a return to full year dividends after the short FP '24 period, cash dividends for FY '25 of $0.086 per share have been declared, representing an increase of 3.6% on annualized FP '24 dividends. So, let's dig into those numbers a bit. Please turn to Slide 14. On this slide, we look at net rental income, which at $108 million is up $12.1 million or 12.7% on the prior comparable period. The completion of 3 significant 5 Green Star facilities at Bowden and Springs Road have contributed an increase in rent of $6.3 million, with positive leasing activity across the portfolio contributing a further $8.6 million and the acquisition of 316 Neilson Street, providing a small contribution of $0.2 million. Current and prior period divestment activity as well as vacancy together contributed a decrease of $3 million. Moving to Slide 15. On this slide, we see how the year's activity translated into adjusted funds from operations or AFFO. On the positive side, AFFO level net rental income was up $10.3 million or $0.0205 per share on the PCP and maintenance CapEx was down $2.6 million or $0.052 per share. The largest offsetting factors were a $0.079 per share increase in tax, driven by the removal of depreciation on building structures as well as an additional $3.8 million or $0.76 per share in interest expense, reflecting higher debt levels and the loss of capitalized interest adjustments as developments completed. If you could please now turn to Slide 16. Turning our attention to dividends. The PFI Board has today resolved to pay a fourth quarter dividend of $0.025 per share, with the dividend reinvestment scheme not operating. This fourth quarter dividend will take cash dividends for FY '25 to $0.086 per share, an increase of 3.6% on annualized FP '24 dividends. Dividends of $0.086 per share result in a 1-year FFO payout ratio of 80% and a 1-year AFFO payout ratio of 90%. The dividend payout ratio based on PFI's dividend policy is 91% of AFFO on a rolling 3-year historic average basis. Looking ahead to FY '26, at the beginning of August this year, we guided to FY '26 dividends of at least $0.089 per share, which we expect to sit below the lower bound of our dividend policy at around 85% of AFFO or 88% after normalizing the early lease surrender payment at Harris Road. Acknowledging that this guidance is below our policy, we note that there is scope for further increases in FY '26 dividends, but any decision to pay above $0.089 per share will depend on several factors which are under review, including leasing progress for the remainder of Stage 2 Springs Road, clarity on development plans and timings for Harris Road and progress on material FY '27 lease expires. Turning to Slide 17. Looking now at the balance sheet. Here, we provide more detail on the value of PFI's investment properties, which ended the year at $2.17 billion. increase from the end of -- sorry, the increase from June '24 was largely driven by the $70.7 million valuation gain that Simon talked about earlier as well as deploying $36.1 million of CapEx with the vast majority being spent on the company's Green Star development projects at Bowden and Springs Road. Adding to these increases are movements on lease incentives, fees and fixed rental income adjustments as well as the acquisition of 316 Neilson Street, Penrose, which settled in February 2025. This was somewhat offset by the divestment of 44 Mandeville Street in Christchurch, which settled in December 2024. So turning now to Slide 18, where we look at net tangible assets. NTA per share increased by $0.129 per share or 4.7% with the increase being the result of that positive property valuation outcome and retained earnings, offset by a small amount from the fair value of swaps. So, moving now to capital management. FY '25 saw us refinance or establish $700 million worth of facilities, including the issue of $150 million PFI030 bonds. We also successfully disposed of the company's property at Mandeville Street in December 2024 and recycled those proceeds into development projects. Gearing remains comfortable at 32.6% at the end of FY '25. When accounting for our committed projects being the settlement of the Spedding Road land, the build-out of Stage 2 of the redevelopment in the Springs Road and the acquisition of 11C Norris Ave as well as the demolition of 92-98 Harris Road, we see gearing lifting to around 34.8%, excluding any development margin. Thinking next about interest rates, we have, of course, welcomed the 250 basis points of OCR cuts during the period, which has resulted in a significant decrease to our cost of debt. And looking over the page on Slide 21, the lower chart illustrates our hedging profile, which shows that interest rate hedging provides for an average of around 76% of the company's debt to be hedged at an average fixed rate of 3.08% during FY '26. Turning now to Slide 23 for an update on sustainability. The team at PFI has continued to deliver on our sustainability strategy during FY '25. Highlights for the year include: achieving Green Star design ratings for the completed new buildings at Bowden and Springs Road; commencing construction of a 5 Green Star building at Stage 2 Springs Road; installing solar at a further 3 buildings and achieving our solar installation target; achieving Green Star performance certification on a portfolio of 4 buildings for the first time, with Green Star performance being a rating tool for existing buildings as opposed to new buildings; and finally, achieving our target to have power metering and monitoring installed at 90% of our properties. Turning now to Slide 24. With all that excellent progress made meeting our solar and metering targets, we've completed a refresh of our sustainability strategy and targets for the year and our new targets are set out on this slide. We'll continue to target 5 Green Star certification for our significant new buildings, and we'll aim to double our solar capacity across the portfolio in the next 2 years. We're also introducing new targets to increase the LED lighting in our portfolio with a view to increasing the energy efficiency of that core portfolio. We'll be releasing our full sustainability and climate report in September, which will include further information on our sustainability strategy and initiatives. That's all from me for now. I'll hand you back to Simon, and I'll be around for questions at the end. Simon?

Thanks, Craig. I'm now on Slide 26, just a really brief touch on current market conditions. As you can see on this slide, we have continued to deliver significant re-leasing spreads of approximately 20% over FY '25 as leases reset to market via rent reviews and renewals with FY '26 expiries and the market reviews currently sitting at 13% under-rented. After the unprecedented growth of industrial rents over the past few years, CBRE expect modest levels of growth over FY '26 before returning to more normalized growth from FY '27 through to FY '29. Our leasing profile has effectively no vacancy and very low levels of expiries in the next 12 months with the return of more normal levels of expiries through FY '27, FY '29 expected to coincide with increasing market rents. If you turn to Slide 28. As many of you on the call today will already know, when we look at our portfolio, we split it into 4 categories or buckets. During FY '25, we refreshed our strategic allocations to better reflect how we think about our portfolio. This update was not just cosmetic. It was a deliberate move to align our categorization with the evolving nature of our assets and the way we manage them. You'll notice that some of the category names have changed, and there's been a bit of movement between categories. These shifts are a natural part of our portfolio's evolution. We expect allocations to continue to move around. For example, the completion of Stage 2 at Springs Road will create a new core generic holding, whilst the settlement of the Spedding Road land acquisition will increase development opportunities. Over the next few slides, I'll take you through some of the key priorities for the company, including how these strategic allocations support our broader goals around capital deployment, earnings growth and sustainability. Turning now to Page 29. On this slide, we provide some color on our development strategy, specifically the strategic rationale behind it and why it remains a compelling investment case for the business. Taking it clockwise from the top, development projects are currently targeting initial yield on cost of around 6.5%, which compares favorably to the low to mid-5% cap rate seen in the direct acquisition market. This makes development a more attractive use of capital in the current environment. Feasibility models across the pipeline are showing healthy development margins in the range of 15% to 20%, helping to support gearing efficiency and long-term earnings growth. We remain disciplined in our approach with development opportunities typically representing between 5% and 15% of the portfolio. These rightsized, well-managed projects allow us to regenerate the portfolio while maintaining balance sheet strength. While development does carry risk, our experienced in-house team and strong network of relationships gives us the capability and the confidence to deliver successful outcomes. And finally, we see a growing opportunity in the sustainable industrial space. Recent research shows that only 16% of space occupied by the largest prime industrial tenants meet sustainability standards, highlighting a clear demand for the types of 5 Green Star rated facilities we are looking to deliver. If you move on to Slide 30. On the horizon, we have several near-term development opportunities. Following the successful delivery of Stage 1 of the redevelopment of 78 Springs Road in October 2025, Stage 2 is well underway and is tracking under budget and ahead of program. The balance of the site being Stage 3 could see the development of an additional 17,500 square meters of warehouse space with Stage 3 likely to be tenant led. The early lease surrender at 92-98 Harris Road in East Tamaki has unlocked and accelerated access to a site long earmarked for development. The prime 2.63-hectare site with currently only 20% site coverage provides an opportunity to build approximately 18,000 square meters of 5 Green Star rated industrial area and demolition of the existing structure is planned for the first half of FY '26. Titles for the 5.8 hectares of greenfield land at Spedding Road are expected to be delivered in H1 FY '26. PFI's land at Spedding Road provides us with the opportunity to invest approximately $130 million into a new industrial estate. Stage 1 has an estimated total incremental cost of about $40 million, including land and may commence in Q3 FY '26 without any current tenant commitment. Commencement of this project would lift committed gearing to approximately 35.6%. Moving on to Slide 31, a little bit more detail. You can see a render for the plans at Stage 2 of 78 Springs Road, along with some of the key development metrics. Stage 2 commenced in January. And as previously announced, we have secured MiTek on a 12-year lease, over 6,500 square meters of warehouse and around 2,500 square meters of Breezeway Canopy, underpinning the second stage of the redevelopment of the site. Tenant commitment on the balance of the build has been sought during the construction phase. Turning to Slide 32. On this slide, we've given some visibility on the key development metrics for Stage 1 at Spedding Road. The project has an estimated total cost of $40 million, including land and is targeting a return on cost of around 6.5%. On completion, we expect the development to generate approximately $2.5 million in annual rent. The design includes around 10,800 square meters of 5 Green Star rated industrial space. We expect to commence the project in Q3 of FY '26 without any tenant commitment at this point in time. The flexible multi-unit layout is designed to appeal to a broad range of occupiers, particularly those seeking smaller, high-quality warehouse space. With construction costs down around 20% from their peaks and demand expected to strengthen over the delivery period, this project positions us well to capture value in a recovering market. If you move on to Slide 33. We highlight the transition underway at 92-98 Harris Road. The existing tenant vacated the site in early August, following our agreement to surrender their lease. With the building now obsolete and the site underutilized, we'll be moving ahead with demolition shortly. The site itself is large, well located and has long been earmarked for redevelopment. While we're still working through the design and the feasibility options, early concepts suggest it could support 14,500 square meters of warehouse. For now, the site will be cleared and secured, and we'll continue progressing plans in the background. Moving on to Slide 34. We currently have 11 planned projects across Auckland's key industrial precincts, representing around $350 million of committed and potential capital investment. That figure excludes the value of land already owned. These projects are expected to deliver embedded value progressively over the next 3 to 5 years as they reach completion and leasing activity captures market-leading rents and development margins. Since the start of 2024, we have completed over 55,000 square meters of 5 Green Star rated industrial space, all delivered on time and on budget, a strong track record we intend to build on. Moving on to Slide 35. Another key lever for us has been the completion of bolt-on acquisitions, targeting properties adjacent to our existing properties. In line with this strategy, we have acquired 11C Norris Avenue, which sits adjacent to 558 Te Rapa Road in Hamilton. As part of this acquisition, we were able to secure a new 3-year lease with our existing tenant, DEC Pharmaceutical. The acquisition provides drive-through access to the combined site, unlocking greater development options and increasing re-leasability. If you move through to the final slide, #37. So, to summarize, we're very pleased to deliver the set of -- strong set of results, reflective of the successful execution of our strategy and the strength of our portfolio. We've delivered earnings and dividend growth, supported by an uplift in valuations while bolstering our Green Star development pipeline and maintaining a strong capital position. With the operating environment improving, PFI enters FY '26 well placed to harness its $350 million development runway, driving long-term value and growing investor returns for investors. Thank you. That now concludes the presentation. We welcome any questions you may have.

[Operator Instructions] We will now take our first question from the line of Nicholas Hill from Craigs Investment Partners.

Congratulations on the result. Just a couple from me. What does your FY '27 lease expiry profile look like? Would it be possible to give us a breakdown?

So, we've got a graph there on page -- Slide 10. Looking there.

We haven't provided a breakdown of the material expiries in that pack there, Nick.

No, we haven't done that.

I guess, Simon, there are a couple that we could perhaps talk to in terms of the more material ones because there are some quite sort of large.

Yes. Off the top of my head, probably the 3 largest is one in -- just off Rosebank Road to Southern Spars. So, the address of that Craig is 15 Jomac Place. So, the rent there is about $1.8 million. We're expecting that to renew. They've got a 12-month notice period, so by the end of the year. The other large one is a property in Vestey Drive leased to DHL. That's got an expiry towards the end of 2027. And then the third other one is one with Iron Mountain, who are around the corner in Mount Richmond Road. And again, that's sort of circa $1.5 million. So, these are 3 quite large ones. All 3 of them, obviously, and you can see from our track record, we try to get ahead of these, sort of 2 to 3 years' ahead, we've been working with all 3 tenants. So, we expect to sort of have results on those in the next 6 to 12 months is how we're doing it.

Okay. And then, looking at the fixed lease events for FY '26, you say that the average increase was 5%. That seems quite high for a fixed rent review. Is this simply due to the particular leases being reviewed? Or is this something reflective of your wider portfolio?

So, included in that number, Nick, will be leases where we might have agreed a rent as part of a renegotiation of the lease or the like, but it [ steps ] to that rent during that period there. So, typically, as you know, I guess, a pure fixed rent review would be between, say, 2.5% and 3.5%. But the way we, I guess, record it in our results is that if someone is going up 10%, for example, as part of a lease renegotiation as they click into that new period, then we call that a fixed event. And so that gets counted as part of those statistics. So that's, I guess, the nuance that sits in those numbers there.

Our next question comes from Vishal Bhula from Jarden.

Congrats on the strong result and thanks for a really detailed presentation. Just a couple of quick ones from me. You've given a lot of color on the development strategy, and it seems like it will be a greater focus from you, given the material higher yields than direct acquisitions. Could you just talk to your sentiments and how you feel about spec developments now versus maybe 6, 12 months ago?

Yes. I guess the big difference between 6 to 12 months ago, obviously, is construction numbers falling. So, we're seeing sort of anywhere from 15 -- depending on the project, 15% to 20% reduction in that construction number. If you look at our specific portfolio, a lot of our development is in this redevelopment or brownfield stuff where we've owned the properties for a long time. So, they tend to be very well located, but probably older and more obsolete buildings. So, we see an opportunity there. And also, there's probably a couple of areas where we think, in Auckland, where there's been an undersupply and will be an undersupply in product, particularly in West Auckland, Rosebank Road and through Penrose, Onehunga, where we've got projects coming up in the next 3 to 5 years. East Tamaki, obviously, the Harris Road lease surrender with GrainCorp, we're pretty confident on that as well. So, yes, I mean, it's been a -- we haven't just turned the light on with development in the last 6 months. It's probably the last 3 years really that we've been building up experience internally, confidence in the team and the market being forecast to get better over the next 1, 2, 3 years. We think we're in a really good spot to deliver some good product and capture some of that growth as the market climbs out.

That's great. And then just on 686 Rosebank Road, I did note that the estimated project start date was before the current lease expiry.

So, there's a number of different properties in there. So that's not a redevelopment of the whole site, Vishal. There's one particular part of it, it is the Bunzl one we're talking about here. There's a couple of smaller, older units there, which we've either got to the end of their lease expiry or they're coming to the end of the lease expiry. And that project is an extension of an existing warehouse that's there over those 2 smaller units, which are rolling through their expiry.

We've got an estate at Rosebank Road, which is approximately 8 hectares in size. So it will be an ongoing improvement project over the next 3 to 10 years really.

Cool. Perfect. And then just the last one for me. Could you maybe just provide some commentary on what you're seeing in the market around leasing incentives and stuff like that? Just FY '25 could come in a bit higher [indiscernible].

Well, look, there's no doubt in the Auckland market, in particular, when I'm referring to the vacancy has ticked up from the previous 24 months really. I saw a Jones Lang report recently a couple of weeks ago, we're almost at 3% in terms of vacancy. So, still very, very low from a historical point of view. But with vacancy, incentives do tick up, and we're seeing that there. There's a little bit of competition in certain areas that I think will drive incentives further. I look at the [ wary ] precinct in Auckland. There's a lot of new build stuff coming on there. There's a lot of development activity down there. So, I would expect incentives down there to tick up. But I think we're probably getting back to a more normalized stage of the market. If you went back 5, 6, 7 years and you're writing a 6- to 10-year lease, you would expect to give away half a month of incentive or a month of incentive for each year of a new lease. So, yes, 2025, I thought we did pretty well on the lease incentives.

Yes. I mean you can see on Slide 9, Vishal, a very high proportion of the deals that we did were renewals. We've come to a stabilized portfolio. So, we manage a very low level of incentive when we roll someone through on a renewal. It's 0.2 months average incentive per year of term. So, we'll obviously continue to be very focused on renewing people and appropriately being able to get away with a sort of lower level of incentive there.