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

Ladies and gentlemen, it's just gone 11. Just I'd like to call the meeting to order, please. Good morning. My name is Anthony Beverley, and I'm the Chair of the Board of Directors of PFI. Welcome to the 30th Annual Meeting of PFI. We have a quorum present, so let's get underway. This year, we are once again holding this meeting as a hybrid meeting, meaning that we have participants both here in person and attending virtually. Before we start, can I please remind those here in person to turn your phones off. And in case of emergency, please follow the instructions of generator staff. Please follow the emergency exits out of the meeting room, and the nearest assembly point is on [ Key Street ]. In order for this hybrid meeting to run smoothly, I'd like to confirm how questions and answers and how voting will work. First, let's deal with the procedure around questions and answers. Any shareholder or appointed proxy is eligible to ask questions. For those of you attending the meeting virtually, if you would like to submit a question, the Q&A is always open, so please feel free to submit questions throughout the meeting. These will be addressed at the relevant time. There will be time allocated for in-person attendees to ask questions during the course of the meeting. We will try to get to as many of these 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 key procedure is voting. We will open the poll for virtual attendees now to give you plenty of time to vote. If you are eligible to vote at the meeting, you'll be able to cast your vote under the vote tab. Of course, once voting is open, you can submit your vote for each resolution. You can change your vote up until the time I declare voting to be closed. I now declare that voting is open on all items of business. I will give you a warning before I move to close voting. Should you require any assistance with questions or voting, you can type your query into the Q&A tab at any time and one of the Computershare team will assist you, or alternatively, you can call Computershare on 0800-650-034 and ask to speak to one of the administrators assisting the PFI Annual Meeting. I will explain procedures for voting in person later in the meeting. So here is the agenda for today. I will start with a few remarks before handing over to our incoming Board Chair, Dean Bracewell. We will then hear from CEO -- our CEO, Simon Woodhams. You will then have an opportunity to ask questions or to make comments about the materials presented or about the financial statement and auditor's report. Then as you have seen in the notice of meeting, we have 3 resolutions we would like you to approve. There will be an opportunity for discussion of the resolutions at this point in the meeting. Following those resolutions, we will finish with a further opportunity for questions and answers when we get to general business. Those who are here in person are welcome to join us for light refreshments and a more informal chat with the Board and management team after the meeting. Let me please start with some introductions. We have Dean Bracewell, Independent Director; Simon Woodhams, Chief Executive Officer; David Thomson, Independent Director; Jeremy Simpson, Independent Director, who was appointed to the Board in February this year and is up for election today; Angela Bull, Independent Director; Carolyn Steele, Independent Director; and finally, Craig Peirce, Chief Finance and Operating Officer. We also have representatives from our auditors, PricewaterhouseCoopers, our legal counsel, Chapman Tripp, and our bond supervisor, Public Trust, here with us today. And just on that note, I would like to acknowledge the tremendous work of [ Andy ] as our lead audit partner over the last 5 years. I know there have been some very, very robust conversation with the team, but these have been held quite constructively. But [ Andy ], we really appreciate your input over the last 5 years, and we welcome back Sam. Sam was a great auditor for us in the early years and has a lot of experience with PFI, and so we welcome you back, Sam. All right. So Simon will shortly take us through the highlights for 2023 and more details on some of our strategic initiatives. But for my presentation, I wanted to focus on PFI Board composition and succession planning. This has remained an ongoing focus for PFI, and you may recall that PFI announced a number of changes to PFI's Board composition in February this year. First, we welcome Jeremy Simpson, who was appointed to the PFI Board in February. Jeremy has had a career of over 30 years in financial markets in New Zealand and Australia, including 27 years as an equity analyst, culminating with a senior equity analyst and director role at Forsyth Barr from 2002 to 2021. Through this work, Jeremy has a strong knowledge of the listed property sector and his appointment as part of PFI's succession plans would seek to balance technical and specialist governance skills, while at the same time, maintaining a Board with a very strong practical commercial capability and diversity of experience. Second, we farewell Greg Reidy, who has been on the Board since 2012. Greg has played a key role in many of the strategic milestones of the company. Unfortunately, he could not be with us here today. However, on behalf of the Board and management team, I'd like to acknowledge and thank Greg for his contribution to the company and to wish him the very best for his future endeavors. In addition to Jeremy joining and Greg's departure, Dean Bracewell will step down from his position as Chair of PFI's People Committee effective from the close of this meeting, and David Thompson has been appointed as People Committee Chair in his place. And lastly, it's been announced that I'm stepping down from my role as Board Chair at the close of this meeting. I will remain on the PFI Board, and Dean Bracewell, who has been on the Board since 2019, will take on the role of Board Chair. Dean, would you like to say a few words?

Well, thanks, Ant, and good morning, everybody. Good to see some familiar faces of the PFI Annual Meeting. I want to start by adding my welcome to Jeremy. We're delighted to have you join the PFI Board, Jeremy. It's great to see you here. I'd also like to add my thanks to Greg Reidy for his valuable contribution to the business over many years. In addition, I want to thank Ant for his chairing of PFI since May 2018. Ant has been a Director of PFI for many years and has made an enormous contribution to the Board and the company. Ant has agreed to remain as a Director on the Board for the balance of his current term, a gesture that is appreciated by all directors and me as the incoming chair. As for me, I look forward to building on the work of previous PFI Board chairs. In my view, a strong foundation is in place for the company's ongoing success. We've got a high-quality industrial property portfolio, a pipeline of important projects, a talented management team and an experienced Board. I'll be available throughout and after the meeting for questions, but in the meantime, I'll hand over to our CEO, Simon, for his presentation. Thank you.

Thanks, Dean. Thanks, Ant. Good morning, everyone. Once again, it's nice to be able to come together in person and reflect on what's been happening in the last 12 months. A warm welcome to those attending for the first time. I know we've got a couple here for the first time. So welcome. Welcome to those who attend regularly. We appreciate that, and welcome to anyone who's attending online, I'm not quite sure what the numbers are yet, but we'll get that shortly. As a management team and a Board, we really enjoy the opportunity to discuss with you what we've been up to for the last 12 months, so we'll get right into it. We're going to start by delving into the highlights for 2023, and then we're going to take a deeper look at some of the key projects that we've been working on, predominantly at Springs, Bowden Road and an upcoming transaction at Spedding Road. These are all key transactions that are going to play a pivotal role as PFI moves forward. So when we think about our highlights of 2023, front of mind for myself and the management team is how our portfolio performed. Our resilient, well-located portfolio of scale is focused primarily on the Auckland industrial property market where vacancy remains at near all-time lows, and this has been driving really good rental growth for us. We reviewed nearly $70 million of rent during 2023. And on average, those reviews delivered an average annualized uplift in excess of 4%. In addition, over 18% of the rent was leased during the year, and those leases resulted in an uplift in 26% above the previously contracted rents. We don't expect the rental growth to stop there. Our $2 billion industrial property portfolio was independently assessed by our values. It's been around 16% under-rented at the end of the year, which is to say, when we have the opportunity to re-lease or a market rent review or renewal on average, we expect the rents to grow by a further 16%. Our sustainability remains a core focus for us. We've made significant progress in this area by embedding an in-house facilities management team and advancing solar and power metering initiatives across our properties. And in addition, we have a pipeline of new projects targeting 5 Green Star ratings and I'll talk to those shortly. From a capital management perspective, we've been proactive and diversifying our funding sources, including launching a green finance framework and securing $150 million of green loans. And at the end of last year, our gearing remained modest at just 32%. That's really important for us. It provides flexibility to pursue further strategic opportunities. In terms of our financial performance, we reported a loss after tax for 2023 of $97.8 million compared to a loss of $13.9 million in 2022. This reduction was primarily due to a $140 million write-down via independent valuations of our property portfolio. Despite this, our net rental income for 2023 was only down slightly to $94.9 million whilst funds from operations earnings were down around 2% to $0.1003 per share. Adjusted funds from operations earnings was actually up 1% to $0.0892 per share. So with those highlights in mind, for the remainder of my presentation, I'm going to run us through 3 key development projects that we've got coming up, including our expanded pipeline of projects. So coming up on the next slide. One of our flagship projects that's currently well underway is the redevelopment of our Springs Road site. This represents a significant investment for us here in the future of our portfolio. As you can see on the slide, this is a 3-stage project, intended to deliver best-in-class facilities for our existing tenants, initially Fisher & Paykel Appliances. The image up now illustrates that Stage 1 is well underway. With a development cost of approximately $76 million, this phase involves the construction of a 25,500 square meter warehouse for our long-time tenant, Fisher & Park Appliances. Fisher & Paykel have committed for a lease term of 15 years on completion, which is scheduled for the end of this year, start of next year, and this a state-of-the-art facility is designed to achieve a 5 Green Star rating. That really reflects our dedication to sustainability and environmental stewardship. With regards to the future stages, we're pleased to report that we've signed a heads of agreement with a prospective tenant to develop a further 6,500 square meters in Stage 2. Should that tenant commitment be secured, the balance of Stage 2, which is around 4,800 square meters of warehouse, will likely be developed on a speculative basis. We're targeting construction to begin Q1 next year after Stage 1 Fisher & Paykel was completed. Plans for the balance of the site, Stage 3, allow for approximately 17,500 square meters of warehouse with any redevelopment likely to be tenant-led. Stages 2 and 3 will be committed to on an individual basis and will be taken into consideration the ability for the projects to meet hurdle rates of return, market conditions and obviously availability of capital. Another notable project in our portfolio is the redevelopment of our Bowden Road site. This is progressing very well. It's on time and on budget. And again, this signifies our commitment to delivering high-quality best-in-class properties that meet the needs of modern businesses. When we started this project, approximately 40% of the development was pre-leased to a company called Tokyo Food for a lease term of 12 years, with the remainder of the project developed on a speculative basis. Tokyo Food will operate from the smaller building on the right-hand side there. We commenced Stage 2 of the project on a spec base because we're very confident in demand for high-quality industrial space, particularly in the Mount Wellington state -- sorry, Mount Wellington region, and we're pleased to report that since the end of 2023, we've signed the heads of agreement with a global tenant who's intending on housing the New Zealand operations in this 11,200 square meter building. A 12-year lease, again, has currently been negotiated, and we're in the final stages of negotiation. And as with our Springs Road project, both these buildings have been developed to achieve 5-star green ratings. Let me just jump through. That's the -- through to Spedding Road. So this is another pivotal development in our strategic road map, Spedding Road. This represents a significant investment in a new Auckland location for us. The transaction underscores our commitment to identifying and capitalizing on high potential opportunities. During the year, we entered into a contract to purchase 2 lots that total 5.8 hectares within a proposed 46 hectare industrial subdivision. It's Spedding Road, and this is located at the end of the Northwestern motorway in Whenuapai opposite Costco, for those of you that know Costco. This is a strategic move for us. It allows us to tap into a market that is currently severely undersupplied in both industrial zone land but also quality industrial buildings. The contract to purchase lots is for $40.6 million, which equates to a square meter rate of about $700. A stage settlement for the purchase price reflects our disciplined approach to acquire an asset at favorable rates. In addition to the attractive pricing, the timing for the transaction is strategically advantageous. By initiating the purchase before subdivision consent is obtained, we've secured a competitive advantage and gained early access to this after location. Furthermore, as shown on this slide, yes, on the screen now, we plan to complete the project as multiple buildings and in stages, and that enables us to manage risk effectively while capitalizing on evolving market dynamics. The Spedding Road transaction represents a forward-looking investment for the company. It positions us for sustained growth and value creation. By leveraging our expertise and seizing opportunities in undersupplied markets, we are well positioned to deliver superior returns for our shareholders. Looking ahead, while favorable industrial property market conditions and our under-rented property portfolio will provide a strong platform for continued growth, we must remain mindful of challenges, such as changes to depreciation rules that are coming and potential economic headwinds later on in the year. In light of these factors and our change in balance date to 30 June, we have set dividend guidance for the next 6-month period at $0.415 per share, which is in line with what we paid last year in the 2023 year. So to conclude, I just want to reiterate our commitment to delivering for you, our shareholders and other stakeholders. Despite the uncertainties in the external environment, our focus on projects like those I've just spoken about, which are aimed at enhancing long-term shareholder returns, remains unwavering. We're confident of our ability to navigate the challenges that may be a hit and also seize opportunities, and we want to position Property For Industry for sustained success in future years. Just before I hand back to Ant, I'd like to take a moment to say thank you to you, the shareholders also to our stakeholders here today who continue to support us as a management team and as a Board. We look forward to including you on our story as we move forward. Thanks very much.

Thanks very much, Simon. Ladies and gentlemen, there's now an opportunity for questions or comments on the presentations or on the financial statements and auditors report, which you can find from Page 28 of the annual report.

For those here in person, if you raise your hand, we'll get a microphone so that everyone can hear. Can you start by introducing yourself please, your name and whether you are a shareholder or a proxy holder. And if a proxy holder, the name of the shareholder you are representing. To virtual attendees select the Q&A tab, type your question in the box and press send to submit. So ladies and gentlemen, any questions on the presentations or the financial statements and auditor's report?

Yes, [ Edwin Stranahan. ] I'm a shareholder of the company.

[ Edwin ], nice to see you here again.

I've heard the reference quite often of this 5 Green Star rating. Exactly what does that involve?

That's a really good topical question, and that's why it's great to have a CEO right on the stand here to answer. Look, it's I'm being facetious, but it's absolutely [indiscernible] for us going forward. And there's a couple of issues -- sorry, Simon. One is it's a fantastic sustainability approach going forward and to make sure that we are doing our best that can make our contribution. The flip side is the money. It's expensive. So we've got to make sure we get the balance. Simon, I've taken your [indiscernible].

Sorry, it's essentially a rating system for buildings going forward to talk about carbon emissions, effectively. And so we're working with the Green Building Council who sets that rating system to try and achieve a rating of 5 Green Stars, which is obviously at the top end of a scale. Key initiatives that you put into the building is around the materials you use when you build the buildings, but also if you demolish in existing buildings, which is what we did at Bowden Road and Springs Road is how you deal with the demolition waste effectively. So at the Springs Road site, and I've got Sarah down in the back, looking at me so she's going to tell me if I'm right or wrong, I think we recycled close to 93% of all materials. 98% of all materials that we took out at that site were recycled. So moving forward, I think what you're going to see around the green building is you'll start to achieve premium rents. All the tenants that we've signed up or in the process of signing up at these new buildings wanted Green Star buildings. They won't go anywhere else. And so you start to achieve -- you start to attract a high-quality tenant. And then also, the other benefit of what we've done is with the finance side of the business, we've got a green financing framework in place, and we've achieved better bank rates by signing up to the Green Star rating. So yes, it's the way the future is moving.

I'm still puzzled though that there's so much in that as a broad thing. You're talking about the building materials, for instance. What difference -- most buildings are concrete and steel and timber, aren't they? Are there other materials that come into this that are significant costs?

Yes, things like the type of paints you use, low VOC paints, the type of carpets you use, floorings, but even concrete. There's a lot of work going on both in New Zealand and overseas around reducing the amount of cement that goes into concrete. So it's -- when you think about it, we're building these buildings for 50 to 75 years, you've got to try and get it right at the start. It's a whole of life approach.

So you've got an approach as far as cement is concerned. What about sand? I mean, sand is most likely the least sustainable than cement.

Yes. Yes. We're waiting with our current contract is what I would say to...

Fletcher Building.

What's that, sorry?

Fletcher Building.

They're one of our tenants, yes. They're not our contract...

No, I'm talking about the supplier of your sand.

I think, Edwin, it's a really good point you make, but isn't it right to think of it like the imperative now is to actually everything you do, you're sort of thinking about that is to say what is our environmental footprint, what are the opportunities that we've got to minimize that. And part of that, of course, is understanding where your impact comes from. So Simon's example is a classic. Concrete makes a huge contribution to emissions. So the industry is now looking at actually how can we vary that product to minimize that contribution. So this imperative is pervading everything we do, and we're taking it really seriously. We've got dedicated staff. We'll be -- we've just issued our climate change disclosure and that sort of thing. So that is part of our wider approach to the business, and it's here and now and it's going to just get more and more important as we go. So it's a good question. Thank you.

And just [ William Canes ], I am a shareholder. New Zealand produces less than a [indiscernible]. It doesn't matter what we do in this country, we've got -- we're going to have absolutely no impact on global climate. So why waste shareholders' money on that?

Look, I think it's a fair question. But the answer is reasonably personal. And I just personally don't agree for a second with that. If everyone in the world took that approach, we'd get nowhere.

2/3 of the people in the world do take that approach.

They choose to take an approach that suits them, that's right. But the imperative is for the world to make its contribution. So you'd just say, let's take India and let's take U.S. and we'll leave it there. The world will get nowhere. So it is a bit of a personal thing, but it's here and now. And it's a bit like the question about farming. Why should farmers contribute -- farmers contribute 50% of our emissions, so they need to play their part of New Zealand is committed to the cause. So again, it's a bit of a personal perspective, but...

[indiscernible] disagree with you.

That's fine. But PFI for a second wouldn't take the position to sell our impact as results, so we're not going to bother.

I think the other thing is, if you look at -- as I said earlier, the tenants that we've signed up, they won't go into a building that doesn't have these Green Star ratings. So if we don't take the approach that there are tenants out there, then you'll start to actually have empty buildings as time moves forward.

Your point, that's a good -- look, if other people are stupid and they're prepared to pay extra ring to have a green building and you get better bank interest rates, which is going to give shareholders a better return then I'm supporting you.

Okay. Thanks for your support.

[indiscernible], shareholder. With the change in balance date, will we have a second AGM this year?

Yes. So we've got a 6-month stub period effectively. So in August, there will be a second -- well, another AGM effectively for 6 months. Sorry, a little later in August. When is it booked in for, Craig? October, I think. It may well be that, that one given it's only for a 6-month period will be online and then next year, we'll revert back to this. But yes.

And as you mentioned the change in depreciation rules, from my reading of the financials, it should make a little difference you only do depreciation on fit-outs, don't you?

Currently, we depreciate the buildings. It will make a reasonable impact on our bottom line. I think our current estimates are around $2 million, so it is a reasonable change, and that's why we've put it up as a headwind.

It's very significant boost for the sector. It really is. It's just straight to the bottom line.

Just on Spedding Road, it's a long way off it. Will you start building before you have a tenant or will you build for the spec?

At the moment, we're working -- there's actually been really good initial demand for out there. If you know Whenuapai sits in between the North Shore and Rosebank Road. So we've got the ability to build effectively 45,000 to 50,000 square meters across the 3 stages, and we've had engagement from over 100,000 square meters of tenants, both existing tenants within our own portfolio who are wanting bigger and better premises and outside interest from people, particularly on the North Shore. There's no real areas to expand there. So the intention at this stage is to -- that will be tenant-led, so we'll sign someone up. The titles aren't due on that -- I mean they're working on it right now, won't be due to middle of next year. So we've got another 12 months to secure tenants before then.

[ David Lee ], shareholder. Looking at the financial accounts, it seems that the actual trading rental income and cost was quite good this year compared to last year, but we seem to have been drawn down by 2 things, being interest rate swaps, which went from being very positive the previous year to very negative this year, and the second one being a fairly substantial write-down on the value of property, which the Chairman referred to in this meeting. Can you comment on both of those, like why the first one happened, there'll be a set of circumstances re-interest rate swaps? And also the second with regard to the property write-down, which is even more of interest to me given the property over time, generally, even though it degrades slightly, depreciation, generally, as the market goes up, not down in value?

Let me deal with the second one and Craig, if you're happy to pick up the swaps in a second. But the question about property valuations, we have a very clearly legislative approach to how we assess property values. Essentially, we have a panel of what we believe are the best values to be had, and we pick and rotate a [indiscernible] panel. So we get our assets individually valued every year independently. And that valuation process must assess the value that, that property will bring on the day willing by willing seller nonindustry. So it's a very clearly defined process that reflects market value at that time, and that market value at the time reflects what buyers and sellers are prepared to pay. We went through a period, of course, with interest rates dropping through the floor to levels New Zealand has never seen before, where yields went with them. They were highly correlated with that. And so we saw property yields at levels we've never seen, property transaction under 4%, and we've never seen that. So of course, with that, the values go through the roof. As interest rates move out, the market tends to correlate with that and yields go out with them. And that's mark-to-market each time you value it. So it's an independent assessment of what it's worth on the day. So while the fundamental real estate might, over time, appreciate as a general trend, the property cycles, and depending on when and where you value, you've got market to market. And that's essentially what we do and we get that done independently under a really clearly established process. The auditors are all through it, and they have their own independent property value experts that sort of check those valuations for validity and approach. So that's an independent process reflecting market on the day. It's not intended to reflect the fact that over time, these assets generally, as the market cycles up, goes up. So it depends when and where you value. And clearly, the market has moved out based on property transactions as to where it was. In fact, one of the difficulties we had was we had a pausity of transactions. And the values were sort of striving to know actually where was the market at certain times. There are transactions to hang your head on, which they did. So that's a long-winded way, so it's mark-to-market independently.

So I understand from that, there's not something fundamentally that was wrong with any particular building or 2, just what you've now outlined.

100%. It's a portfolio approach. Of course, within that, you get individual assets that themselves cycle in value as they get closer to end of expiry The income -- the risk around the income gets higher and the values reflect that. So the circumstances of each building are built into the valuation. But across the portfolio, it's very much where that portfolio is at relative to the market. Yes. So absolutely nothing to worry about in terms of the integrity of the portfolio. In fact, we -- one of the clear things we do with our portfolio approach of course is to trade out of older assets and build or trade into newer assets. So we do our best to keep the portfolio quality high with a really clear view on the WALT, weighted average lease term, to make sure that our tenure is a good long tenure so that we're managing risk but also having that built back into the valuations. So nothing to worry about the buildings themselves. It's a market thing. Yes. So Craig, are you happy to address the swaps?

Yes, sure.

Why has the value gone so differently? Last year it was about $50 million, $60 million down. This year it's $140 million down. That's a hell of a big difference.

Look, it sure is, Edwin, but a couple of things here. PFI has a big portfolio now. So in monetary terms, that sounds big, but relative to the overall portfolio, it wasn't that big, sort of circa 5%.

[indiscernible] talking in dollar terms, we're talking about -- across the portfolio surely hasn't changed by 3x. The size of the portfolio property.

Well, it was in excess of $2 billion. So traditionally PFI has grown over time. So the portion of value change relative to total portfolio, so circa 5% was a rough change in value, but completely driven by market. So the independent valuers will do their process. And the Board has to adopt the valuation, but it takes specific advice from those independent valuers to do so. So I don't think you're right, Edwin, actually, to say that, that's gone up by a factor of 3x.

I think what he's saying, Ant, is last year, we've written down about $50 million, this time, $140 million [indiscernible]

So from a monetary point of view, there's a point I'm making...

What it also reflects -- sorry, Edwin, is that rapid increase in interest rates. So the market -- sorry, the OCI was sort of 50 basis points that's jumped right up to 5%, 5.5%. So that's had a lag effect. It's taken 2 years to work its way through the market. So the valuations that we had done in December was based off [indiscernible] that happened in the previous 12 months. So it takes time for these interest rate changes to come through the market. But in terms of the valuation process, it's standard, and that's what we've done every year. So if you remember back in 2021, we had a write-up of over $200 million. So that's, that market working. And when it's going up, everyone is very happy with it. When it's going down, we get asked that question.

Well, I noticed from the audit report that the auditors pay a lot of attention, I sort of wonder perhaps whether they spend 60% of their time looking at the question of the valuation of properties talking to valuers and things like this. Have they made any comment about the extent of this change from the $56 million to $140 million?

Certainly, Edwin. Valuation, because we were a property company, valuation [indiscernible] key audit matter on each occasion. It's a critical aspect of that thing, but you might like to answer that. But we go through a very clear process. And because it's a key audit matter, it gets your attention. But Andy, would you like to comment on that?

Ant, that's absolutely right. It's a significant area of focus. It's a significant balance on the balance sheet. So a lot of effort goes into that. And all the work we do, Edwin, is highlighted in the audit opinion in terms of the procedures we do, which involves talking to the valuers and understanding the assumptions that kind of underpin the valuation.

Would half your audit time go into property revaluation looking at that or more than half your time?

I'd probably -- for just to throw a number at it, probably yes. And it's also the mix of people. It's generally the more experienced staff members that kind of evaluate it. So it is a considerable amount of effort that goes into making sure the valuations are reasonable and also the accuracy of the valuations, given the significant number of properties the company has.

Like what sort of proportion? 51% or 91%? I'm not looking for exact numbers, I just am looking for a bit clearer idea of it than what you've given.

Sure. I'd say it is probably around about 50% of our effort would be spent on the property valuations.

The other thing worth noting, Edwin, is we have a policy of selecting from a panel of valuers and a general policy where we would rotate those valuers across the assets every 3 years, so that we're not embedding any bias that might be through evaluation house, which is really just reflective of the completely independent nature of the process, which is critical for a property company. Sir, did you have a question?

Swaps.

Yes, sure. So when we talk about derivatives, what we're talking about is interest rate swaps, and we use interest rate swaps to manage the volatility in interest rates. So at times, that can mean they either cost you money or they're a benefit to you. At the moment, they are a benefit to us. At the end of 2023, they were worth nearly $15 million. So each time we pay interest, we received a little bit of benefit and it reduces our interest bill. So one of the main reasons why you've seen that change between 2022 and 2023 is the value at the end of 2022 was nearly $25 million. As I said, it's $15 million at the end of 2023. In part, what's happened there is you've effectively taken the benefit of those swaps throughout the course of that year and a lower interest bill. So that's the reason for that change. Well, one of the reasons for the -- probably the main reason for that change. Does that make sense?

[indiscernible].

Yes. So we don't swap all of our interest. At the moment, we swapped around 60% of our interest. So the other 40% is on float rates. I think as Simon mentioned earlier, those float rates have jumped up massively over the last little while. So they've gone from around 50 basis points to around 5.5%. So the remaining 40% is you're paying, I guess, the market rate on the day, which is roughly the 5.5% plus the costs on top of that. And so we would have been paying a higher rate for that portion of the debt.

Okay. So it's a fair summary that the interest bill went up, but it would have been even higher without the offsetting the swaps.

Absolutely. It's a very good answer.

[indiscernible]

Counterparty banks, basically.

Sorry, the question was who do we buy the swaps from? So all 4 of our syndicate banks have swap [indiscernible] us. We should have another bank related question online. A question from R. Smith, who's a shareholder wanting to know what's going to happen with the $100 million 4.59% bond that's due to be repaid in November and how will we refinance that? So at the moment, we're carrying facilities to simply repay that with additional bank debt. We would like to do another bond, but the bond markets -- the pricing on those varies greatly depending on a whole range of factors, and we're keenly aware of delivering value for shareholders. And so if we were to do a bond today, we wouldn't achieve a rate that we believe is fair and reasonable to shareholders, so we would probably look to use some other form of financing, preferably bank debt, to refinance that one. But when conditions are right, we would love to do another bond.

So did you have a question?

[ Lyle Pace ], just a small modest shareholder. My question relates to the $2 million hit to the bottom line. And it's probably a sort of a theoretical question in some ways. But my question is, you know that's going to happen. I think it's 2024. Have I got that right? That's when it's implemented. So what is the plan to recover that $2 million in your organization. We know that's going to hit you or hit us, so what is the plan?

[indiscernible] including us. So really, it's a normal portfolio management sort of question. Simon?

Yes. If you look, we click roughly once Fisher & Paykel come online and the leases that come online at Bowden Road will be clicked in around $105 million to $110 million on rent. So yes, $2 million pretty significant. We talked earlier about the under-renting in the portfolio. So day to day, we're trying to obviously increase the bottom line revenue that comes in via new leases, additional works on-site charging additional rent, that sort of thing. So it's -- we got -- given it back by labor, ironically, back in -- when did it come in, craig, was it 2010?

During COVID.

During COVID, sorry, National took it away, and then labor gave it back to us, which was a very welcome present. So we've only really had the benefit of it for the last 3 years. So yes, it would be great to have kept on to it, and there's been a lot of work done with the property council who we work very closely in terms of lobbying for it to be kept, but unfortunately, it's going. So it's one of those things we're going to have to work through.

I think the point I'm trying to make is well covered is that we know that's going to happen. In the world I've lived in, I'm now retired, but in the world I've lived in, in the past, if you know something is going to happen, you better have a plan to make sure you're going to recover it.

Yes. Yes. And it's sort of commercially...

It sounds like you have.

Yes, I think the other thing to point out is if you look at the dividends that we pay out, we pay out within a range. So we have a dividend policy, and we're at the very bottom end of that policy range. And that allows us to take onboard potential headwinds in the future. So we're not paying out more cash than we haven't done for a long time. So it's part of the wider strategy there.

Thanks for your question. Craig, are there any other questions online?

No.

Questions from the floor, please, on the financial statements, auditors report, or the presentations.

It's really just a wrap-up of my further 2 questions. How do you see the situation going forward with regard to interest rates, which also seem to be remaining high and that impact on profitability and also the impact on building valuations, which seem to be -- because I have some others decreasing as interest rates go up as they usually do. So how do you see the equity position -- sorry, going forward for the next 1 to 5 years?

Craig, why don't you deal with the interest rates? And Simon, you deal with the...

I was actually going to offer the services of the person sitting to your left, because he's from the Bank of New Zealand. So look, I mean we can't be putting out forecasts on where interest rates are. We're no more experts on that than we are in forecasting the weather. And as I mentioned earlier, we manage interest rate exposure using swaps according to a policy. So -- but I guess with that said, if you look at the kind of commentary that's out there, I'm sure you've read a lot of commentary yourself, I think it's a general view that interest rates have peaked now and that interest rates will start to decline as inflation gets under control, both here and globally. But the -- I guess, the pace that, that happens and the extent that, that happens, will dictate both our interest bill and the value of our properties, probably as well. So it really comes down to those central banks and inflation and those sorts of things, which are sort of well outside our control, I would say. Does that give you a sense of where we think it's going or not really?

I'd just add to that. If you look at the fundamentals of the company, we're lowly geared. So we've only got 32% debt. We're in a position where we're thinking interest rates at the top of the cycle. So we've put ourselves in a very strong position there. We've got a low payout ratio in terms of the dividends. The portfolio is effectively 100% occupied, and we know through the valuation process and the deals that we've done in the last 24 months that were under rented. So there's further growth, we think, that we can achieve through day-to-day operations by dealing with our tenants. Got a strong set of tenants. And again, it's been a body of work we've done over the last 5, 6, 7 years. We've only brought really good tenants into the portfolio. So we're not starting. We're in a very strong position right now, given where the cycle is. So we're pretty positive on it.

And I think also fair to say, Simon, we've said [indiscernible] for a while in terms of acquisitions. We've had a number in the circumstances, not surprising we've had a number [indiscernible] with the balance sheet capacity we've got, had a number of vendors come to us say, look, we need to raise some money. We need to sell some assets you guys are keen and quite purposely sat on our hands around those existing asset acquisitions, focused very much on our development activity. Because of that very point, where do valuations go. And the reality is we like to think probably is a sophisticated asset and it is in some ways, but really high correlation to interest rates of no surprise, through 2 reasons. One is the cost of funding. Buy an asset, you fund it, cost of interest, but second your alternative investment returns from fixed deposits. So highly correlated. So that very issue has really driven a lot of our behavior in the last couple of years to say, look, actually, in these circumstances, it makes no sense to pay up for prime assets, we're going to keep our powder dry and we've done that. So it looks as though as Simon says the market stabilized, but there's still a lot of stuff going on out there that could get in the way. So we're just being really cautious about that, I guess, fair to say. Okay. Other questions from the floor? Financial statements, auditors report or the presentations. And nothing. Craig?

No.

Okay. Look, thank you very much for the questions and comments. That was a good discussion. We'll now move to the resolutions. I have been advised that we have 329 shareholders representing 170,772,322 shares or 34% of the company's shares on issue are represented today by proxies. Voting for the resolutions will be conducted by poll, and 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 in-person attendees will be as follows: voting papers have been provided with the notice of meeting. Pins required will be distributed now. Please raise your hand if you need a pin. If you do not have a voting papers, please see the Computershare representative at the registration desk who will provide you with a voting paper. Indicate your vote for, against or abstain by placing a tick in the appropriate box. If you are here as a proxy for a shareholder who has not marked proxy discretion on their proxy form, your vote will be automatically counted in accordance with the voting direction given by your appointer, but please sign the voting paper provided when you arrived at the meeting. You are a proxy holder and you have been granted a discretion on how to vote the resolution, please use the voting paper provided when you arrived at the meeting. After recording your vote, please remember to sign your voting paper and place a voting paper in the boxes provided at the back of the room, where they will be collected by Computershare staff. Having collected the votes, they will be taken to a separate room for counting and the results of the poll will be announced by 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. So turning to those resolutions. The first resolution is that David Thomson, who retires and is eligible for election, be elected as a Director of the company. The Board considers David will be an Independent Director, if elected, and supports his reelection. David has been a Director of PFI since 2018. He is the senior partner at law fir, Buddle Findlay, where he runs a broad corporate and commercial law practice. A profile of David has been included in the notice of meeting. David, would you like to say a few words?

Thanks very much, Ant, and good morning, everyone. Thank you for the opportunity to briefly present my credentials for reelection. As the papers mentioned, I've been on the Board since 2018, February 2018. I'm also currently a member of PFI's Audit and Risk Committee, the People Committee and the Treasury Committee. If reappointed today, this directorship is currently my only directorship outside of my role as a lawyer. I've been practicing as a corporate and commercial lawyer for 31 years, including the past 22 years as a partner of a national law firm. In addition to my law degree, I hold a Bachelor of Commerce and I majored in accounting and business finance. My legal and commercial experience is very broad. I've involved with a wide range of mergers and acquisitions, joint ventures, infrastructure projects and large commercial contracts covering many sectors. I work with the public sector quite a lot and also with the private sector and with a number of international and New Zealand-based businesses. As an Independent Director, I believe that I can contribute to PFI by providing the benefit of a broad range of commercial experience, by providing perspectives and insights to the Board regarding what's happening in the market that I work in outside of the industrial property sector, by continuing to challenge and test management's proposals from an independent perspective, and by providing effective oversight on the processes and policies to ensure PFI's ongoing compliance as a listed company. The current PFI Board comprises a group with really quite a wide range of different skill sets and perspectives who work very constructively together for the benefit of shareholders, and I really enjoy being part of the Board. I'm very committed to PFI and to the creation of value for you as shareholders. I believe that our strategy that we've been progressing is very sound, and that PFI is in very good shape. In this market, we obviously need to continue to be very smart about where we find opportunities for growth, and we need to be careful -- with a careful watch on the fundamentals of each and every deal that we look to do. If reappointed, it will be a real pleasure to work with Dean Bracewell as our new Chair and with the other directors, and to assist the management team in working through the issues that confront us as a company as we continue to grow. Finally, I just wanted to add, it's been a real pleasure for me being part of the Board under Ant Beverley's time as Chair, and I personally thank him for his great contribution to the -- as Chair over many years. Thanks very much.

Thank you very much, David. So the resolution is that David Thomson, who retires and is eligible for election, be elected as a director of the company. Is there any discussion on the proposed resolution? Okay. Please mark your voting papers for Resolution 1, or for virtual attendees select your voting tools from the options shown under the vote tab on your screen. The second resolution is that Jeremy Simpson, appointed by the Board as a Director on the 27th of February 2024, who retires and is eligible for election, be elected as a director of the company. The Board considers Jeremy will be an Independent Director, if elected, and supports his election. Jeremy was appointed as a Director of PFI in February 2024. He's a chartered financial analyst, a chartered member of the Institute of Directors and has had an extensive career in the financial markets. A profile of Jeremy has been included in the Notice of Meeting. Jeremy, would you like to say a few words?

Thanks, Ant, and good morning, everyone. Yes. Thank you for the opportunity to present my credentials today to shareholders for the election -- or the reelection as an Independent Director of PFI. As Ant said, I've had a background of financial markets for over 30 years, and the vast bulk of those was an equity analyst working for major share broking and investment firms in the New Zealand market. The very first sector I analyzed when I started in the New Zealand market at 1994 was the property sector, and that was a year PFI listed. And from memory, I think PFI had 6 properties back then. So it was one of the very first companies that I looked at. So it's been great to see the development at close quarters actually to see how the company has progressed over the last 30 years. It's a privilege now to be involved with a company with a culture and track record of PFI. The listed property sector has grown to be a large sector and an important source of relatively defensive and low-risk returns for many investors, but it wasn't always the case for investors. And certainly, back in 1994, the sector was slightly reestablishing itself and trying to regain investor interest and confidence after the trials of the 1987 to 1992 period that many fellow PFI investors in the room here will remember well. While market cycles impact short-term returns, over the last 30 years, the management structures, the balance sheets, the governance, reporting standards, the quality of the portfolios, and I think really importantly, the sustainability of the dividends has improved dramatically in that period. And PFI has been at the forefront of this. As an independent analyst over that period, I feel I played my part in the journey of improvement for investors, and I'm excited about the opportunity to continue to improve shareholder returns and the investment quality of the sector with my role on the Board of PFI. While it's early days in terms of my listed company governance experience, I bring to the Board financial and valuation expertise, an analytical and inquiring mind, and a track record of independent thought and a strong understanding of the sector and also capital markets. I very much appreciate the opportunity to continue to serve on the Board and help the team at PFI work together to execute on its strategy and deliver shareholder value and look after all of its stakeholders. Thank you.

Good stuff. Thanks, Jeremy. Actually, that's an interesting observation Jeremy makes about the '87 to '93 period it was. Actually, I remember valuing commercial real estate in Wellington during that period. Top value was actually 18 months after the '87 crash to start writing properties off. They just weren't too sure where the market has gone. The equity market went in a day, I think, took [indiscernible] was 18 months, to your point, but the market then wrote -- the valuers in the market then wrote off 60% of the Wellington commercial market during that period. And it was just [indiscernible] the rents went from $600 to $50 over that time. So it's good to reminisce about those times. So thanks, Jeremy. The resolution is that Jeremy Simpson, appointed by the Board as a Director on the 27th of February 2024, who retires and is eligible for election, be elected as a Director of the company. Is there any discussion? Okay. Please mark your voting papers for Resolution 2, or for virtual attendees, select your voting tools from the options shown under the vote tab on your screen. The third resolution is that the directors are authorized to fix the fees and expenses of the auditors, PricewaterhouseCoopers Auckland. Is there any discussion on this resolution? Okay. Once again, please mark your voting papers for Resolution 3, or for virtual attendees, select your voting choice from the options shown under the vote tab on your screen. We'll just give you a moment or 2 to finalize your votes, and then I will close the voting. [Voting]

Okay. Voting is now closed. The results of these votes will be released to NZX later today. Computershare will now collect the voting papers from shareholders in the room. Thank you. We will now open up questions on general business from shareholders and proxies in the room and online. If there is something you wish to put to the meeting, could you please raise your hand and we'll get one of the microphones to you. A reminder, please state your name and whether you are a shareholder or a proxy holder. If you are attending virtually, press the Q&A tab on your computer, tablet or mobile, and then type and press send to submit your question. As mentioned earlier, we'll try to get to as many of the questions as possible, but not all of the questions may be able to be answered today. In this case, questions will be followed up after the meeting. I open up the floor to general business questions, please. Craig, do we have any questions online?

No.

No questions? All right. Thank you for your continued support of PFI and for your attendance today. That ends the formal part of the meeting, and I declare the meeting closed. For those here in person, please feel free to join us for light refreshments and further conversation. Thank you very much.