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

Good morning, ladies and gentlemen. It's just gone past 11:00 a.m., and I'd like to call the meeting to order. My name is Anthony Beverley, and I'm the Chairman of the Board of Directors of PFI. Welcome to the 26th Annual Meeting of PFI. We have a quorum present, so let's get underway. Given the restrictions on gatherings in place due to COVID-19 pandemic, this meeting is a little different to our usual annual meeting, being our first-ever virtual meeting actually, and we are sorry that we cannot meet with you like we normally do. In order for this virtual meeting to run smoothly, we will need to do a few things a little differently, namely questions and answers and voting. First, let's deal with the procedure around questions and answers. Any shareholder or appointed proxy is eligible to ask questions. If you would like to ask a question, press the Questions button on your computer, tablet or mobile, and then type and submit your question. It will then be sent to the Board for an answer. We will try to get to as many of the questions as possible, but not all questions may be able to be answered during the meeting. And in this case, questions will be followed up after the meeting. The second change is to how voting works. We will open the poll now to give you plenty of time to vote. The ability to vote will appear on your screen, and from here, the resolution and voting choices will be displayed. To vote, simply select your voting choice from the options shown on the screen. You can change your vote at any time up until when the poll is closed. Prior to the poll closing, simply select another voting choice to change your vote. Here is the agenda. I will start with a short presentation, and then our CEO, Simon Woodhams, will do likewise. You will then have the opportunity to ask questions or to make comments about those presentations or the financial statements and auditor's report. Then, as you've seen in the notice of meeting, we have 3 resolutions we would like you to approve today. Following those resolutions, we will finish with a further opportunity for questions and answers when we get to general business. Despite the virtual nature of the meeting today, we have the management team and Board in person here in Auckland or on the line. Let me start by reintroducing them: Simon Woodhams, Chief Executive Officer; Craig Peirce, Chief Finance and Operating Officer; David Thomson, Independent Director; Dean Bracewell, Independent Director, who was appointed to the Board in November last year and is up for election by shareholders today; Greg Reidy, Nonexecutive Director; Susan Peterson, Independent Director; and finally, Humphry Rolleston, Independent Director. Just speaking of Humphry, we noted at last year's annual meeting that Humphry had advised the Board that he wouldn't be seeking reelection this year and will therefore retire as a Director of PFI. In doing so, Humphry is calling time on what can only be described as an incredibly successful 26 years with the company. Humphry has served on PFI's Board since July 1994, and later that year, the company was listed on the stock exchange. The June 1995 annual report records PFI as having 20 properties valued at $74 million at that time. Since then, the portfolio has grown to 93 properties valued at around $1.5 billion. I know Humphry is extremely proud, not just of PFI's growth, but that this growth has always been focused on delivering strong, stable returns to shareholders. Since listing and Humphry's appointment to the Board, PFI has delivered an average annual return to shareholders of around 11%. Humphry, I wondered if you'd like to say a few words.

Thank you, Anthony, for your kind words and the opportunity to make a few observations. When the founding individuals dreamt up PFI in Wellington, the collective wisdom then was the company should be listed, that our investments should be in the industrial property sector, that debt should be restricted to 30% of asset values, that dividend should be paid out on a regular basis, that the company must only employ skilled and competent property managers to run the business and that a small Board of independently minded Directors be appointed to oversee the delivery of the vision. I think these objectives have been continuously adhered to, and in my view, this is a key reason why PFI has been such a successful company and business over the years. Today, we have our own highly competent management team in charge. Thank you for the professional way you go about your tasks. In addition, the company has very supportive shareholders. Thank you, Anthony, for your excellent chairmanship and Directors for your professionalism and good company around the Board table. And thank you, shareholders, for your support over the years. It has been a privilege to be part of such an enterprise. Thank you, Anthony.

Okay. Look, thank you very much, Humphry. And look, the Board and the management team would very much like to acknowledge and thank Humphry for his outstanding contribution to the company and to wish him the very best for the future. We turn now to the Board and management team presentations. I am sure that you'll all be keen to hear more about how the COVID-19 pandemic is impacting PFI, and we will come to this in a moment. But before we do, I think it’s important that we reflect on the key achievements in 2019 and to look at 2019 and the impact of the COVID-19 pandemic in the context of PFI's 26 years of history. Turning this to the key achievements in 2019. Our team had another busy year working closely with our tenants. Nearly 100,000 square meters, or 17% of the portfolio, was leased during the year to 24 tenants. In addition, rent reviews were completed on more than 100 leases, and those reviews delivered an average annual uplift of 4.6%. At the same time, we made significant progress on our journey to becoming a pure-play industrial listed property vehicle. Four Auckland industrial opportunities totaling $106 million were secured and $40 million of nonindustrial divestments were contracted during the year. We also committed to or completed $26 million of value-add initiatives. These activities, combined with a strong market, in fact, a very strong market, generated record annual results. Profit after tax was $176 million and adjusted funds from operations or AFFO earnings were up 4.4% to $0.0779 per share. This allowed us to pay cash dividends of $0.076 per share. And importantly, those cash dividends were more than covered by AFFO earnings. We also ended the year with a strong balance sheet. Net tangible assets rose 15.6% to $2.06 per share and we refinanced $300 million of bank facilities. Gearing was just 28.2% at the end of the year. 2019 was also a year of significant share price performance. PFI's total returns were almost 40%, in excess of both the average for the company's peer group and also the NZX50. And whilst we are very pleased with that result, we think it is best considered in the context of the company's history and the performance since the end of last year. The graph on the screen now tracks PFI's total returns, that is dividends received and the change in share price, since listing in December 1994, a moment I'm sure Humphry remembers well. Another way to express the measures presented in this graph is the average annual return to shareholders since inception, which, as noted on this slide, are around 11%. Both this graph and that number actually highlight 3 key things. First, it highlights that 2019 was a very good year for PFI's share price, as mentioned earlier. Total returns were almost 40%. But we must keep in mind that this is an unusually high return for a company like PFI. Our focus has always been on delivering strong, stable returns from our industrial property portfolio. That being the case, we should not expect to return 40% a year, year-after-year, from a company like PFI. Second, given the breadth of the impact of the COVID-19 pandemic, I'm sure nobody at this meeting needs to be told that we have experienced a high level of volatility in recent months. As shown on this graph, recent events have seen our share price go as low as $1.61 per share before recovering to around $2.42 per share at the end of May. But again, to put that into context, exactly 1 year ago, PFI's shares closed at $2.03 per share. And so over the course of the year, including the period where the COVID-19 pandemic has unfolded, despite these uncertain times, PFI's shareholders have seen an increase in the value of their shares of $0.39 and dividends of $0.076 per share, a total return of around 23%. We believe that this highlights that industrial property is a favored asset class. But the third and perhaps the most important point I wanted to make today was to put recent events into the context of the many storms that PFI has weathered in its 26-year history. A quick search on the internet will tell you that there have been around a dozen major economic crises since PFI was formed, the GFC being the most recent downturn prior to the current COVID-19 health and economic crisis. Looking closer at the GFC, during that downturn, PFI's share price fell by around 1/3, from around $1.50 to under $1.00 and dividends fell from around $0.072 per share to $0.066 per share. In all of these crises or storms, there are a number of characteristics that have served PFI well then and will serve PFI well now as we weather this latest storm. Firstly, we aim to own the right industrial properties in the right locations and fill them with quality tenants. Second, we have an experienced and dedicated team working alongside those tenants. Third, we keep our gearing low, accepting that low gearing results in slightly lower returns in good times, but knowing that low gearing will serve us well in times of crisis. And lastly, our dividends reflect what we earn, so we don't increase our gearing by paying out more than that which we earn from our tenants. No doubt, there'll be some very challenging times ahead, but PFI has weathered many storms, and we believe that we are well placed to respond to these latest challenges and indeed any opportunities that may arise from them. There will be the opportunity for questions and comments later in the meeting. But for now, I'd like to hand over to our CEO, Simon, for his presentation. Simon?

Thanks, Ant, and good morning, everyone. This is a bit different. It's a shame we can't all be in the room together, but we are in unique times, so we'll just have to push on and make do. Over the next few slides, I'm going to give you a brief update on the progress we made with our strategy last year before I then talk about COVID-19, our response and our plans for the future. During 2019, we made excellent progress on the priorities laid out at the beginning of the year. In addition to the significant asset management activity which Ant touched on earlier, these priorities included the replacement of PFI's nonindustrial assets with quality industrial properties in sought-after areas. To that end, $106 million was committed during the year to 4 prime Auckland industrial opportunities. 12-year leases were secured at 3 of the 4 sites with tenant commitment to be secured by our leasing team at the fourth property in Tidal Road whilst the property is under construction. Across these transactions, the return to PFI is estimated to be around 5.6%. Significant progress was also made in divesting PFI's nonindustrial properties with $40 million of transactions contracted during the year. Nonindustrial properties now account for just 10% of our portfolio. Finally, value-add strategies within the existing portfolio also formed an important part of last year's activities. We spent almost $15 million during the year on those initiatives and committed a further $21 million to 4 new significant projects. As we began 2020, we were continuing on our pathway to becoming a pure-play industrial listed property vehicle. But we, of course, had to turn our attention to the impact of the COVID-19 pandemic on ours and our tenants' businesses. Over the next few slides, I'll spend some time outlining our response to the pandemic. For the purpose of the meeting today, we have broken our thoughts on COVID-19 and its impact on PFI and our operating environment into 3 phases. First, what was our immediate response? Second, how are we responding to it now? And thirdly, how are we thinking about the pandemic looking forward? So moving on to our immediate response. In early March, as we watched the pandemic unfold offshore, we recognized that the timing of our capital commitments and divestments of our remaining nonindustrial properties might be impacted. So we took the proactive step of securing an additional $50 million of bank funding or liquidity from one of our key banking partners, the Commonwealth Bank of Australia. As we then moved into lockdown, we instigated our business continuity plans by closing the office and reestablishing our team to work from home. At the same time, we began working with our tenants whose businesses were impacted in a wide range of ways from the lockdown with some continuing as essential services, whilst others were forced to close. We also spent significant time as a Board and management team reviewing different scenarios that might play out, ensuring that we are both prepared and resilient across a wide range of outcomes. This led us to examine our costs, both capital and operating in nature, and making cuts to and deferrals of expenditure, where appropriate. As we've moved through the various levels of lockdown and the country has begun to start back up, our focus is on ensuring our tenants are able to perform well going forward. To that end, we have been and are continuing to work closely with our tenants. On a case-by-case basis, a range of solutions have been agreed with a number of tenants to share the impact between the tenant and PFI. These solutions include abatement of a proportion of rent for several of PFI's tenants who have been significantly affected by the lockdown. Rent deferrals have been agreed with some other tenants, and in some cases, these agreements have been combined into wider lease discussions. To put all of this into perspective, over April and May, we have collected around 90% of all rental and OpEx due. And to date, we have agreed 45 abatement and deferral deals over approximately 1.2% of our annual rental, with those deals split evenly between abatement and deferral. Another way that the COVID-19 pandemic is impacting us at the moment is that we have had to put the divestment of our nonindustrial properties on hold for now. We will look to continue with those divestments once the market starts to function normally again. Looking forward, we expect discussions with our tenants to continue throughout much of 2020. As I mentioned earlier, in those discussions, our aim is to ensure our tenants are in a good position to perform well into the future. We will also look to divest those remaining nonindustrial properties when the time is right. But as Ant mentioned earlier, PFI has weathered many storms, and we believe we are well placed, not only to respond to these latest challenges, but also to capitalize on any opportunities that will arise out the other side. Our low gearing and diversified funding mix leave us in a good position to pursue the acquisition of additional quality industrial properties. As is our custom, we will continue to target properties that will improve the company's overall portfolio, and we believe we will start to see the right kind of opportunities emerge soon. The final slide of my presentation shows the trajectory PFI has been on. 26 years ago, PFI started out with a portfolio valued at just $74 million. At the end of 2019, PFI's portfolio was valued at around $1.5 billion. And as we have mentioned a number of times already, shareholders have enjoyed a total average annual return of around 11% from inception until today. We've been focused on that trajectory and on those strong, stable returns for a long time now, and this Board and management team are both committed to and excited about continuing that focus through good times like last year and more challenging times like those we are in now. We look forward to sharing more of our progress with you in the months and years ahead. I'll now hand the meeting back to Ant. Thank you.

Okay. Thank you very much, Simon. There is now an opportunity for questions or comments on the presentations or on the financial statements and auditor's report, which you can find on Page 62 of the annual report. If you would like to ask a question, press the Question button on your computer, tablet or mobile, and then type and submit your question. We will give shareholders a moment to submit questions.

Okay. So we have the first question here, and that says, to what extent, as a percentage, have you had to reduce rental income by way of relief during COVID? And how much of this is a permanent reduction and/or subject to new re-leasing of the space involved? Simon, I wonder if you could answer that one.

Thanks, Craig. As we mentioned in the presentation, we've been working closely with a lot of our tenants. When we first went into the lockdown, we approximately had 2/3 of our tenants get in touch with us and discuss options around their rents going forward. As it's played out and people have got their heads around operating and lockdown environments, et cetera, we've ended up transacting or completing 45 deals on about 1.2% of our annual rental, so about $1 million of annual rental, of which 50% is what we call abatement, so that's money that does not need to be repaid. So that's with tenants that have been very adversely affected by the lockdown, FAs, small businesses, et cetera. And then the other 50% was by way of what we call a deferral, so $500,000 which is required to be paid back by a variety of tenants over the coming months. So all things being held equal, very low levels of abatement, which is pleasing and probably speaks to the quality of the tenants that we have within the portfolio.

All right. Look, we'll give shareholders a few moments just to submit any further questions. Okay. Thank you very much for your questions. As there are no further questions on the financial statements and auditor's report, we will now consider the financial statements and auditor's report to have been received.

Before we move to the resolutions, I'd like to provide an update on the Board's succession plans. As outlined last year, some time ago, it became clear that whilst the Board had remained stable for a number of years, changes were afoot for some of our long-standing Directors. And with this in mind, we set out on a review of Board composition and began succession planning. We wanted to be careful about the plan as the composition and the stability of the Board has served PFI very well over the years. The Board's succession plan reflects what we believe the Board needs in terms of the type and combination of Directors going forward, both the technical skills and background, but also importantly, maintaining a Board with strong practical commercial capability and experience. The Board is also conscious that regulatory and market changes call for different kinds of technical and specialist governance skills, and the composition of the Board is responding to these changes over time, too. Susan Peterson was appointed to the Board in 2016 as the first appointment under our succession plan, and David Thomson's deployment followed in 2018. The Board evolved further in 2018 with Peter Masfen's retirement. Dean Bracewell, whom the Board appointed late last year, is the latest Director to be appointed under our succession plans, and you will hear from Dean shortly. And as outlined earlier today, Humphry Rolleston is today retiring from the Board. Board composition and succession planning is an ongoing focus for us, though. And we anticipate that our Board will see further changes in the next 12 to 24 months. On that note, having been on the Board for a considerable time now, I want to let you know that I do not intend to stand for a further term after today's election and will therefore retire from the Board in the next 12-or-so months. In the interim, the Board will obviously consider its options for replacement Chair and any announcements on this will be made as and when appropriate. Now to the resolutions themselves. Craig advises me that the 355 shareholders, representing 128,838,486 shares or 25.78% of the company's shares on issue, are represented by proxies today. Voting for the resolutions will be conducted by poll. For the purposes of the poll, I appoint the company's registrar, Computershare, to carry out the poll. The procedure for the conduct of the poll is as outlined earlier. The poll is open to vote now to give you plenty of time to vote. The resolutions and voting choices are displayed on your screens, and to vote, simply select your voting choice from the options shown on the screen. You can change your vote at any time up until when the poll is closed. To change your vote, simply select another voting choice. The results of the poll will be announced via NZX as soon as they are available. Please note that the Board recommends that you vote in favor of each of the 3 ordinary resolutions. We will now provide an opportunity for you to ask questions on all 3 resolutions. If you would like to ask a question, press the Question button on your computer, tablet or mobile, and then type and submit your question. All right. Thank you. There are no questions on the resolutions in particular. As the next resolution is in respect of my reelection, I would like to call upon our Nominations and Remuneration Committee Chair, Dean Bracewell, to chair the meeting. Dean, thank you.

Thank you, Anthony. The first resolution is that Anthony Beverley, who retires and is eligible for election, be elected as a Director of the company. The Board considers Anthony will be an Independent Director, if elected, and supports his reelection. Anthony is well known to many of you and there is a profile of Anthony in the notice of meeting. Turning to the resolution that Anthony Beverley, who retires and is eligible for election, be elected as a Director of the company. Please record your vote for resolution 1. [Voting]

I will now hand the meeting back to Anthony.

Okay. Thank you, Dean. The second resolution is that Dean Bracewell, appointed by the Board as a Director on the 29th of November 2019, who retires and is eligible for election, be elected as a Director of the company. The Board considers Dean will be an Independent Director, if elected, and supports his election. Dean is currently a Director of Tainui Group Holdings and has recently been appointed as a Director of Air New Zealand and to the Executive Board of the Halberg Foundation. He is also involved in an advisory role to the Ministry of Transport. From 1999 through to 2017, Dean was Managing Director of Freightways. And there is a profile of Dean, of course, in the notice of meeting. Dean, I wonder if you would like to say a few words.

Thanks, Ant. Throughout my career, I was fortunate to be part of a team whose objective was to deliver superior performance to all stakeholder groups, naturally including shareholders, who enjoyed many successive years of increasing returns, not dissimilar to PFI. During my time at Freightways, our ownership changed from private New Zealand shareholders to an Australian public company, to private equity ownership, and lastly, to be fully listed on the NZX. As such, I've experienced a variety of governance roles and been a part of a number of different Boards, all of whom I've learned something from. As Ant mentioned, the last couple of years, I've taken on a small number of governance roles in a range of companies where I feel that my past experience will enable me to make a positive contribution to each respective company. With your support, I have to bring to PFI the experience I've gained working in the service industry, serving a wide range of customers for the entirety of my career; the understanding I have of PFI's customers, many of whom I have also served as a supplier; the basic understanding of the property industry from my perspective of leasing a relatively large number of properties throughout industrial New Zealand and Australia, owning a few and developing a few; the understanding that we must target the satisfaction of all stakeholders' expectations to ensure the long-term positive performance of the company to benefit you, our shareholders. I thoroughly enjoyed my 6-or-so months on the PFI Board and would be honored to continue as a Director with your support. Thank you.

Okay. Thanks, Dean. The resolution is that Dean Bracewell, appointed by the Board as a Director on the 29th of November 2019, who retires and is eligible for election, be elected as a Director of the company. Please record your vote for resolution 2. [Voting]

Turning to the third and final resolution, that the Directors are authorized to fix the fees and expenses of the auditors, PricewaterhouseCoopers Auckland. Please record your vote for resolution 3. [Voting]

We will just give you a moment to finalize voting, and then I will close the poll. Okay. The poll is now closed. Thank you. So we now come to general business. If there is something you wish to put to the meeting, press the Question button on your computer, tablet or mobile, and then type and submit your question. As mentioned earlier, we will try to get to as many of the questions as possible, but not all questions may be able to be answered. And in this event, questions will be followed up after the meeting.

Thanks, Ant. So we just had one question come in so far, and that question is, what level of distributions and cents per share do you believe is sustainable over the next 1 to 3 years? So Ant asked me to provide a little bit of color around this one. Earlier this year, we actually withdrew our guidance from the market. We had previously put a guidance statement out with the annual result, but that's now been withdrawn. And really, that's a function of the fact that we are just 5 months into a 12-month period and the COVID situation has provided us with significant uncertainty. So unfortunately, we pulled that guidance away. I suppose there's another opportunity to put some more guidance out there at the half year once we've had a bit more trade income under our belts and also the first half of the year's results have come through. So that would be in regards to this year. In terms of the next 3 years or 2, 3 years, unfortunately, we don't give out guidance for years 2 and 3. That's not our normal custom. And so hopefully, that answers your question. Are there any other questions there? We'll just give it 20 or 30 seconds just to see if there's any further questions come through.

Yes. Just to add a bit of color to that, Craig, as well. I think the Board is obviously very conscious that a number of shareholders, in fact, all shareholders really do rely on the dividends from the company. And in these circumstances, as income gets very tight, a number of shareholders will get increasingly reliant on those dividends. So we're very conscious about that. So in considering what we were able to say to the market in terms of the earnings and distribution outlook, we're very conscious of balancing that in the period of events to the period of the company's ability to pay dividends. In these circumstances, the reality is we just didn't know what was coming and we still don't. Fair to say the company today is in pretty good shape compared to others, some others in the market. And we're reasonably confident in terms of how we're going to go, but the reality is we just don't know. So the withdrawal of guidance was a reflection of that. But just to reiterate that we actually are really conscious about dividends in the interest of shareholders and dividends in the interest of the company. And we will monitor and advise as appropriate. No other questions? All right. Well, look, there are no other questions. So we very much thank you for your continued support of PFI and for your attendance today. We would actually welcome any feedback you might have on the virtual meeting. I think we had 67 participants dialing in, so that's interesting in itself. But on that note, we end the meeting, and I declare the meeting closed. Thank you very much for your attendance.