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

Good day, and thank you for standing by. Welcome to PFI Interim Results presentation. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to our first speaker today, Mr. Simon Woodhams. Thank you. Please go ahead.

Thanks, Davina. Good morning, everyone, and welcome to PFI's 2021 Interim Results Briefing. As the speaker stated, Simon Woodhams speaking, CEO of PFI. And on the line today with me is Craig Peirce, our Chief Finance and Operating Officer, currently on mute. We've also got Matt Maloney, who is pushing the slides for us a little bit unique. This is the first time we've done this remotely. So I'm at one location, and the other guys are at their home as well. So be with us if there's any technical issues. And just before we start the presentation, obviously, a quick brief update on the COVID situation from the PFI point of view. As you'd expect, that's been our fourth lockdown. The team is well versed and leaving the office and working from home. Today, we've had another seamless transition never unsettled and in their respective home offices and carrying on as normal which is good. And then naturally, our tenants are our next focus, and we'll be working with them in the coming days or weeks as necessary once we know what the situation is to ensure that those who need it, especially the smaller ones have some support. We will answer any questions you have around that later on in the presentation. But I can say, as of this morning, we have not had one phone call from our tenants yet, which is pretty good sign. But obviously, we're very early on in this lockdown. So turning to Slide 2, which is headed content. This morning, Craig and I will speak to the topics outlined on this page. I'm going to begin reviewing the highlights for the interim period and give an overview of the portfolio and the key metrics as at June 30, 2021. Craig is then going to take you through the interim results and sections on capital management and ESG before giving a brief update on the market. I'll then review our priorities before closing the presentation, and then we'll take any questions that you may have. So if you move ahead to Page 4 of the presentation, headed highlights. We're very pleased to report on what has been another busy 6-month period for us here at the office, highlights that Craig and I will expand on included a record interim profit of $273.5 million with both our funds from operations and adjusted funds from operations improving by significant amounts. Our balance sheet is in great shape with our NTA increasing by approximately 23% to $2.714 per share with our gearing steady at 30% and the successful refinancing of our bank facilities. Progress on our strategy means our portfolio metrics, including our occupancy at 99.5% and our weighted average lease term at close to 5 years remains very stable. Finally, today, we've announced confirmation of increased dividend guidance for the year and a revised dividend policy moving forward, and Craig will talk you through that in some detail. If you want to jump on to Slide 6. Here, we have a summary of the portfolio statistics. You can see that the company continues to own a diversified portfolio of 96 properties leased to 148 tenants. Perhaps, the key point to put out here is that as at June 30, for the first time, the portfolio was valued in excess of $2 billion. The contract rate increased by 7.24% during the period and our big focus on industrial property with the majority being held here in Auckland continues. Turning to Slide 7. For some of you here today, you would have attended our recent AGM, and you'll remember that we said going forward, we would be talking about the composition of our portfolio in 4 categories or buckets. This will allow us to focus on continuous improvement across the portfolio and drive growing returns for our shareholders. As at the 30th of June, our portfolio was comprised of 73% for core generic properties, 15% brownfield or add-value opportunities, 6% of assets held for sale, Carlaw Park being the bulk of that and 6% of specialized assets. I'm going to talk about progress we've made in each of these categories a little bit later on. So if you would talk -- sorry, move through to Slide 8, we'll cover the valuations. As at June 30, we revalued 94 properties, which resulted in a significant uplift in value of $240.3 million or 14.5% to touch over $2 billion. Of this increase, approximately 90% came as a result of further yield compression. The valuations also highlighted that our portfolio is considered to be about 3% under rented. The portfolio passing yield is now 4.75%. It was previously 5.53%. Post June 30, both investor and occupier demand remains at an all-time high, supported by low levels of vacancy and projected rental growth. In fact, there will be some recent sales coming through shortly at record levels in terms of pricing achieved. If you turn to Slide 9, we'll look at leasing and upcoming expiries. So during the period, we completed 10 leases on over 17,500 square meters area for an average lease term of 4.4 years. As I mentioned earlier, the portfolio is currently 99.5% occupied. And as the graph on the top right shows, in the second half of the year, we have just 1.1% contract rent due to expire during the rest of 2021. That was at June 30. Pleasingly, post June 30, commercial terms for all second half expiries have now been agreed and paperwork is underway. So no further vacancy is forecast. The forecast expires for 2022 is at 9.9% of contract rent, and this is in line with historical norms for this time of year. And as always, management is actively working with our tenants to secure the continued occupation of the properties. Moving to Slide 10. Rent reviews were completed on 66 leases during the period, resulting in an annual uplift of 3.1% on approximately $32.6 million of contract rent. Of these reviews, 6 were the market, and they've delivered an annualized increase of just 1.9% over an average review period of 5.7 years on $2.6 million of contract rent. CBRE forecasting strong rental growth in the coming years, with prime rents forecast to increase by an average of 3.9% per annum and secondary rents to increase by 3.7% per annum over the next 5 years. These forecasts are up from 2.5% and 2.3%, respectively, forecasted just 6 months ago in the December 2020 report. Around 42% of our portfolio is subject to some form of lease have been during the second half of 2021. I'll now hand over to Craig, who's going to talk to several topics before I take the presentation there. Craig, do you want to take it over?

Yes. Thanks, Simon. Good morning, everyone. Hopefully, you can hear me okay. As Simon mentioned earlier, PFI has recorded a record interim result with an interim profit after tax of $273.5 million, funds from operations earnings per share up 12.1% to $0.0536. Adjusted funds from operations earnings per share up 24.3% to $0.0471 and cash dividends of $0.036 per share. So let's just stick into those numbers a little bit. Please turn to Slide 12. First up, as always, we take a look at net rental income, which at $45.9 million is up $4.3 million or 10.4% on the prior interim period. On the plus side of the ledger, increases were due to positive leasing activity totaling $2.6 million and acquisitions, which also totaled $2.6 million. On the other side of the ledger, decreases came from vacancies, disposals and divestments as well as properties now under redevelopment and that totaled just $0.8 million. Moving to Slide 13. Here, we see how the activity of the first half of 2021 has translated into FFO and AFFO. FFO earnings of $0.0536 per share was $0.0058 or 12.1% even the prior interim period and AFFO earnings of $0.0471 per share was $0.0092 or 24.3% up on the prior interim period. Looking at the drivers of those changes. Net rental income, which we just spoke about, was up $5.7 million or $0.0113 per share on the prior interim period. Now that number does differ a little bit to the number you've seen on the previous slide because we made some adjustments in the FFO calculation to net rental income, including COVID adjustments. Maintenance CapEx was down $0.7 million or $0.0015 per share, equating to 16 basis points on an annualized basis, and savings and nonrecoverable property costs and interest also contributed $0.0013 per share. On the other side, an increase in the effective current tax rate to around 19% caused a $0.003 per share reduction and increases in admin expenses from the full period impact of new hires and an IT projects we currently have underway caused the $0.0017 per share reduction despite those costs being constant as a percentage of average property values and of rent. So turning now to Slide 14. As Simon mentioned earlier, there's been a bit of a change in terms of the dividend policy. So we'll spend a little bit of time on this slide as we cover off that detail here. So the PFI Board today resolved to pay a second quarter to dividend of $0.018 per share, and dividends for the first 6 months of 2021, a $0.036 per share with both the Q2 dividend and the year-to-date dividend in line with the prior interim period. And that's our custom here at PFI to pay 2 smaller dividends in the first half of the year, which are consistent. The FFO payout ratio is 74%, and the AFFO payout ratio was 84%, and the dividend reinvestment scheme will operate for the second quarter dividend as it did in the first quarter. Execution of our strategy, combined with positive results for the year and buoyant market conditions now mean that the PFI Board expects to a clear cash dividend of $0.079 per share for the 2021 financial year, which is at the upper end of the initial guidance range we gave in February of $0.0785 to $0.079. Cash dividends of $0.079 are anticipated to result in a dividend payout ratio below 80% for forecast FFO and 95% of forecast AFFO. Accordingly, we've revisited our dividend policy. To ensure that we can continue to grow dividends, while at the same time pursuing strategic and value-enhancing activities and initiatives, the Board has decided to amend the policy to distribute between 90% to 100% of FFO on a rolling 3-year historic average basis. The cash dividends this year of $0.079 per share are anticipated to result in a dividend payout ratio at the midpoint of this revised dividend policy range. Of course, this guidance is subject to there being no material adverse changes and conditions or unforeseen circumstances, including no material tenant failures or further material COVID-19 restrictions other than those in place at the date of this presentation. That was quite a mouthful. Turning now to investment properties, the balance sheet. Here, we look at the change in the value of PFI's investment properties on Slide 15, and that includes assets held for sale. And as Simon mentioned earlier, for the first time, we tacked over $2 billion. The increase from $1.63 billion at the end of 2020 was driven by $248 million of gains in properties that Simon talked about earlier as well as $138 million of acquisitions listed on this slide. We also spent significant CapEx redeveloping 59 Dalgety Drive, starting the development of 47A Dalgety Drive and completing a new breezeway canopy at 124 Hewletts Road, amongst other things. And so our total CapEx came in at just a shade under $11 million. So looking on Slide 16, how this translates into NTA. And pretty much every other movement in NTA is dwarfed by that fair value gain that's $0.505 the NTA has gone up. And of that $0.493 of the increase was attributed to fair value gains in investment properties. The balance of things being very minor changes around retained earnings, derivatives, insurances. So looking now at capital management, I'm going to move through to Slide 18. In April, we refinanced our $100 million liquidity facility with a 7-year $125 million term loan facility from the Commonwealth Bank of Australia, which is a really pleasing result. And then shortly after the end of the interim period, our $300 million syndicated bank facility was also refinanced and increased by a further $100 million with a 2-year facility from the Bank of New Zealand. So post that July refinancing, which completed on the 2nd of July, the weighted average term to expiry of the PFI banking bonds increased by approximately 1 year to 4.4 years, and we have almost $120 million of available liquidity before the settlement of Carlaw Park. We believe we've got the ability to execute on our strategy with high levels of liquidity from diverse ranges of sources. We have these short-term loans, longer-term loans, bonds, syndicated facility, but also the contracted Carlaw Park divestment gives us greater funding flexibility. Moving now to Slide 19. On this slide, the top graph shows these facilities [indiscernible], and that's all looking pretty good from our point of view. The bottom graph illustrates our hedging, and that profile provides for an average of 64% of our debt to be hedged at an average fixed rate of 2.59% for the remainder of 2021, and the rest of their debt on low float interest rates, notwithstanding those predicted float increases, which didn't materialize yesterday. So for another month or so, we get to benefit from low BKBM sits there. That's on the capital management side. I'll also quickly touch on ESG. So moving through to Slide 21. So following the development of our ESG frame work, we're pleased to confirm that we've made meaningful progress on our ESG program over the first 6 months of the year, as outlined on this slide. That includes the replacement of the HVAC systems at 6 of our properties that contained ozone-depleting gases, and we're on track to phase out this gas over a 3-year period in line with the commitment we made at the end of last year. We've also made really good progress on some of the more complex aspects of our program, such as investigating solar panel installations, seeking Green Star certifications for upcoming developments and investigating our physical climate change risks in more detail following our first climate-related disclosure or TCFD report last year. All of these items are really long-term focuses, but it's good to get some traction on them, and we'll keep you up to date as we make progress on these over time. So now that's going to spend a quick moment on the markets on Page 23. As can be seen on this slide, the e-commerce penetration accelerated by the COVID-19 pandemic is continuing in 2021. Online sales in New Zealand are expected to grow from the current level of around 11% to 17% by 2025. And based on this growth alone, it's estimated an additional 230,000 square meters of warehouse space will be needed to accommodate that change. PFI's portfolio is set to benefit from this thematic as tenet demand for well-located industrial property close to key transport links continues to grow. Looking closer at some of the CBRE data from the Auckland property market outlook. The forecast for further rental growth in the yield compression reflecting favorable supply demand conditions and strong economic growth expectations laid out there. And the vacancy outlook is largely unchanged on December last year. So a strong set of data there from CBRE, which are dynamics which will also play the PFIs portfolio. So look, that's enough from me for now. I'll hand you back to Simon. And of course, if you have any questions, I'm available at the end, so ask these. So back to Simon.

Thanks, Craig. I think you can all hear me. I'm turning to Slide 25 now. So before we review how we've gone in the last 6 months on our main areas of focus, I think it's important to step back and review our purpose, vision and strategy. Simply, we see our purpose very clearly is generating income for our shareholders and investors, and we do this as professional landlords to the industrial economy, and we think that we do both of these things well, we will have a positive impact on the wider New Zealand economy. Our vision sets out what success looks like. Our drive is to be best-in-class at what we do and assist that against 4 measures: performance, quality, reputation and scale. Our strategy acknowledge that it requires us to be intentional and proactive and as a team to build on what we already have. So the way we look at it is our strategy prevents us from being just a passive investor writing what is currently a strong rising market and see the emphasis is on deliberately but prudently creating value for the shareholders. And essentially, this is done by, if you move to Slide 26, focusing on first-class management and looking to continually improve the portfolio. Both of these are actions you would already or should be expecting from us here at the PFI. Just jumping on to Slide 27. You would have seen this earlier in the presentation. But now when we look at our portfolio, we split it into 4 categories or buckets. This gives us a focus and enables us that with confidence as the portfolio continues to grow. During the interim period, we've made really good progress on each of these categories as it happens, and we'll just run you through a couple of examples. So if you turn to Slide 28. So right back at the beginning in January, we completed the acquisition of a core generic asset. This is located at 670-680 Rosebank Road, and we paid 390 -- sorry, $39 million for it. The property was purchased on an acquisition yield of about 4.4% and had a weighted average lease term of about 4 years. We were attracted to this property as we own the neighboring properties. The neighboring property is 5 point hectares in size. So when we combine it with this property, we created an industrial estate that is 8.6 hectares in size adjacent to the North Western Motorway, and it's now valued in excess of $125 million. Over the medium to long term, we're going to be looking to create value here by integrating the new property and with our existing properties. Turning to Slide 29. In May, we announced the acquisition of 44 Noel Burnside Road in Wiri for $91.7 million. This was purchased with a 2-year triple-net lease in place with a commencement rent of $3.64 million, providing an initial yield of around 4%. Because of the shorter initial lease term, we're viewing this as a brownfield opportunity. And once a long-term lease has been secured, negotiated here, we will transfer that property back into the core generic holding bucket. Due to the location and this is adjacent to the South Western Motorway in Wiri and the quality of improvements, we're very confident in releasing it once it becomes available to the market. Moving to Slide 30. Another of our brownfield or value-add opportunities is our property located at 30-32 Bowden Road in the Middle Mount Wellington. We have a final expiry in the first quarter of 2023, and our redevelopment plans have been well advanced during the last 6 months. At nearly 4 hectares, we have the ability to construct up to 22,000 square meters of modern warehouse facilities, and the intention is to begin construction in Q2 2023 once the existing tenant has vacated the site. To date, we received good levels of lease inquiry on this property. Again, that reflects the current strength in the industrial property market. If we move through to Slide 31. The slide highlights the assets currently held for sale. As previously announced, we contracted the divestment of Carlaw Park, our largest nonindustrial property, which had settlement due to occur in Q4 later this year. We're also planning to sell Shed 22, a Waterfront restaurant and event center we own down in Wellington. At the moment, we're in the middle of some seismic strengthening works, which are due to be completed in November. And then the current plan is to market this property in the new year following the busy Christmas trading period. Once both of these sales are completed, the portfolio opens being equal, will essentially be 100% industrial with a pro forma LVR of just 25.4%. Turning to Slide 32. During the period, we also progressed some work on one of our specialist assets, a set of bulk stores located at Mount Maunganui adjacent to the port of Tauranga. Working with our tenants, we constructed a new 4,000 square meter breezeway canopy that will not only improve weather loading capabilities but will materially reduce decommissions from the site, thereby improving the overall environmental performance of the property. Pleasingly, a lease extension back out to 12 years was agreed as part of these works with the overall state now being valued in excess of $130 million. Turning to the final slide, Slide 34. So just to summarize everything, we're really pleased to deliver what has been another very strong interim results over the last 6 months. Industrial property as an asset class has continued to perform. Demand from both investors and occupiers remains very robust, supported by record low levels of vacancy and projected rental growth. Pleasingly, our portfolio and strategy is benefiting from these dynamics. Looking forward, as always, there's going to be some challenges, and the events of the suite being a current casing point. But we believe PFI is very well placed to respond to these challenges. And just as importantly, we're ready to take advantage of any opportunities that will no doubt present themselves as they come about. So thank you. Hope you've all managed here and the technology is held up. That concludes the presentation, and we're going to take any questions you may have.

[Operator Instructions] Our first question comes from the line of Arie Dekker.

Yes, first one was just around acquisitions. Obviously, you're pretty active in the first half of the year, and you've got a decent amount of sort of balance sheet capacity and a little bit of time before brownfields development takes on. Can you sort of just talk to where you sort of sit on acquisitions? Are you actively looking at much in the market at the moment? Yes, I'll start with that.

Okay. Yes. It's fair to say when you look at the overall numbers, we were active and that we brought 2 quite large properties, Rosebank Road and Wiri. So when you combine that number yet, it looks though we're very active. What I would say is we've been looking at a lot of different properties. We've been very selective. We've said no to a lot of properties. There's a lot coming to market at the moment. So we're still active. We're very active, but highly selective is how I describe it. And a good example, just the recent time, we've got back to us a sale and leaseback from [ Sinlay ] with a 10-year lease on a property out at the airport. They had 8 offers on that. We went and looked at it and decided that it was going to be too aggressive after we've done a little bit of work and that has transacted circa 3.5% -- over 3.5%. So from our point of view, that didn't really -- the property itself wasn't great. Well, it was very good, I think, there always a couple of things we didn't like about it. But at that level, didn't really add any value to us. So we didn't even engage in that. So there's plenty been on the market. A lot of it's been done off market, and the agents are going to sort of 7 or 8 parties who they know Scott Capital and these transactions will start to come through in the next couple of months as they settle out, but being very selective of how I'd describe it. But you make the point, Arie, we've got good balance sheet capacity, good funding lines, lots of liquidity there. So if we can find things we like, then we're not afraid to transact.

And are they more likely to be properties like the Rosebank Road run, which sort of integrate in with existing or sort of open to position like Noel Burnside as well?

I think you have to be open. If you just said we're only going to buy properties that are adjacent to our own properties, you sort of narrow that pull down to about -- we own 94 properties, so we've got 180 properties. So no, no, we're very fixable. We'll obviously continue to focus on Auckland and pure industrial going forward. So -- but yes, in terms of whether, it's got a short lease term, like Wiri head or add-value opportunity down the track like Roseland Road head. We're working on everything we look.

Sure. And then just on brownfields, you've highlighted that you're progressing Bowden Road and looking to commence that sort of towards the end of the first half of '23.

Yes.

What else are you sort of -- in the portfolio, what other properties are you sort of looking at the moment to sort of progress over the next year or 2?

So there's probably 3 on the horizon in the medium term. The next one will be we've got a property at Harris Road, which is currently leased for about 2 years to run, and that's a 2.5 week this site with building should the tenant leave, and I know that tenant has a right of renewal there that we would be looking to redevelop there. And then really Springs Road. So obviously, we own a Fisher & Paykel Appliances' headquarters and that doesn't become vacant until the end of 2024, but we've already begun some master planning work on that and that will come to shape over the next 12, 18 months, really.

Our next question comes from the line of Shane Solly.

Thank you for a really helpful briefing. I've got 3 questions at this stage. In terms of the leasing term, I just noticed it is coming in a little bit and lease in terms on the team leases you've done the sort of 4.4 average. Is there anything we should be thinking about in terms of leases coming out it in shorter terms? Or is it just about mix or timing or...

Well, I think that's the key thing to look at in terms of the 2 acquisitions we've made, both are quite chunky, $39 million and $92 million, and both had shorter than our current wealth lease terms. So that naturally drag that down a little bit, and we're comfortable with that for the reasons we explained. In terms of the lease transactions we've done in the first 6 months, some of those -- or the majority of those are actually relatively short extensions in terms of people having rights to renewal or they come to us and we just pushed them out by 2, 3 years. So it's sort of a range really, but we're comfortable. And 1 or 2 of them have been COVID-related in terms of we've added some money and pay it back with sort of [indiscernible]. So it's a bit of a mixture of things. But yes, I mean, it is -- while it's close to 5 years, it's definitely -- it's not over 5 years, but we're well aware of that and working on it.

Simon -- It's Craig, I think the other thing it would be fair to say, Shane, is that that level of leasing that we've done reflects that there wasn't a huge amount of expiry in the period. I mean if I'm looking here, last year at the interim period, we did 31,000 squares. So 17,500 is quite a small run rate for this time of year, reflective of the low level of expiry that we started the year with.

Okay. Jut a second question. Then you've got -- you suggested you are 3% under rented. Can you talk about potential spires that come up or that may see that realized and you've noted in your release about structured components. Can you talk about what structured growth terms look like at the moment?

So in terms of the under-rentedness, that's sort of probably a reflection of a couple of things. One, obviously, we've got over 150 leases now. Some will be under, some will be over. So there's no 1 or 2 specific ones that's dragging the whole portfolio down. It's more a blended theme. But the second point being the forecast rent booked starting to come through to the valuations. So as Craig mentioned, you look at the CBRE forecast rents, they're well over 3%. And so when that starts to come in valuations, the structured rents that we've got on at 2.25%, 2.5% or CPI plus a margin or CPI, there's just a little piece of underrenting there. On $96-odd million of rent, 3% is marginal era sometimes. So we're pretty comfortable with that. In terms of the deals we're doing now and structural rental growth, pretty similar to what we've always done around if we're doing a long-term lease 10 years, 12 years, we like to have a midpoint market review. Typically, that might have a -- kept in collar of 10%. And then you have annual fixed reviews of anywhere from 2.25% to 3.75%. We've had a couple this year, we've just done at 3%, but that's sort of a little bit out of the range and pretty happy with, obviously. So nothing's really changed in a big way from 6 months ago.

Okay. So I appreciate the guidance is anticipating extended lockdowns, fair enough. But you mentioned you've finished repositioning your portfolio, pretty much finished repositioning the portfolio. So the guidance assumptions are a steady state, no further change, no asset sales.

No, there's just the 2 flagged as divestment there, Shane, the Carlaw Park and Shed 22. I mean, again, I guess, the one rider to that is we, as a business, have always been active in churning our assets for all the right reasons. So there will be other assets where, from time to time, we will look to churn those out, particularly if we've got a better opportunity to put the money somewhere else.

Guys, I'll ask some more questions if there's more time, but I'll let somebody else here to go.

You've got a couple of others waiting on the line as well, Shane. And obviously, we can engage after the session as well.

Our next question comes from the line of Nick Mar.

Kind of generic question just around the guidance. At the Wiri acquisition, you mentioned the dividend would be at least $0.079. You're now guiding to $0.079. Is there any nuance around that wording?

Look only to say that when we put Wiri guidance -- sorry, Wiri acquisition and dividend guidance out, we've really, I guess, had formed a view on the dividend policy and how that might shape up. I think now we have the dividend policy shaped up landing on that $0.079, which I would add is 2.6% up on the prior year. We think that's the right place to land thinking about how we are planning on looking at dividends going forward. That work was very much done after the Wiri transaction, but prior to this announcement. So yes, that's, I guess, the only piece really.

No, that's fine. And then in terms of the second half, if we take that and fall off the kind of chart and take off the first half, if there's something like $0.042, which is broadly flat on last year's second half. Is there anything coming up in terms of maintenance that would be dragging that down or any other specific factors?