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

Good afternoon. My name is Dean Bracewell, and I'm the Chair of the Board of Directors of PFI. Welcome to the 31st Annual Meeting of PFI, and thank you for your attendance today. I record that the Notice of Meeting was sent to shareholders on Monday, 16th September 2024, and we have a quorum present. So let's get underway. Given the very short agenda and the fact that this is PFI's second annual meeting of the calendar year, following our change of balance date earlier in 2024, we're holding this meeting as a virtual meeting. With an expected return to a single annual meeting and a fuller agenda next year, we will plan to revert to a hybrid meeting, meaning that participants will be able to attend both in person and virtually. In order for virtual meeting to run smoothly, I would like to confirm how questions and answers, and voting will work. First, let's deal with the procedure around questions and answers. I confirm that any shareholder or appointed proxy is eligible to ask questions. If you would like to submit a question, the Q&A facility is always open, so please feel free to submit your questions throughout the meeting, and these will be addressed at the relevant time. We will try to get to as many of the as possible, but not all questions may be able to be answered during the meeting. In this case, questions will be followed up after meeting. The second key procedure is voting. We will open the virtual poll now to give you plenty of time to vote on today's single resolution. The resolution relates to the remuneration of the company's auditors, which I will discuss in more detail later in the meeting. If you are eligible to vote at this meeting, you will be able to cast your vote under the Vote tab. You can change your vote, up until the time I declare voting closed. I now declare that voting is open on the single item of business. I'll give you a warning before I move to close voting. Should you require any assistance with asking 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. Alternatively, you can call Computershare on 0800-650-034 and ask to speak to one of the administrators supporting the PFI annual meeting. Here is the agenda. I will start with a few remarks before handing over to our CEO, Simon Woodhams. You will then have the opportunity to ask questions or to make comments about the materials presented, or the financial statements and auditor's report. Then we will move to the resolution that we would like you to approve. There will be an opportunity for discussion of the resolution at this point in the meeting. Following the resolution, we will finish with a further opportunity for questions and answers when we get to general business. Before we get into the substance of today's presentations, I would like to point out that during the course of our presentations, we will be referring to results for the 6 months ended 30 June 2024 as the FP '24 results. FP '24 is a 6-month full year financial period, as opposed to the usual 12-month full year financial period presented in an annual report, due to the change in PFI and its subsidiaries balance date from 31 December to 30 June. In order to provide a useful basis for comparison throughout this presentation, the results for FP-24 have been compared to the unaudited interim 6-month results from 1 January to 30 June 2023, which is referred to as the prior comparable period, unless otherwise noted. Let me start with some introductions. With me here in the room today are Simon Woodhams, Chief Executive Officer. Angela Bull, Independent Director; Anthony Beverley, Independent Director; Carolyn Steele, Independent Director; David Thomson, Independent Director; Jeremy Simpson, Independent Director; and finally, Craig Peirce, Chief Finance and Operating Officer. We also have several other members of PFI team in the room here with us and welcome representatives from our auditors, PricewaterhouseCoopers. Our legal counsel, Chapman Tripp, Our bond Supervisor, Public Trust and our share registrar, Computershare to the meeting today. At our Annual Meeting held earlier this year, my fellow Director, Anthony Beverley, presented several changes to the Board, in line with PFI's carefully thought-out succession planning process. One of those changes was Anthony's retirement as chair of PFI. I'm very pleased that Anthony remains on the Board as an independent director, and I am privileged to take on the chair's position, with this being my first annual meeting as Chair of PFI. As I reflect on the 6 months, to 30 June 2024. There are two themes that I wish to share with shareholders today. The first theme is the Board's steadfast conviction in the industrial property sector, the assets in which we are invested and the capability of PFI's talented management team and experienced board. There is no denying that it has been a challenging economic environment that many New Zealand businesses have been doing it tough recently. Our Industrial Property is an asset class that has continued to perform in the face of a challenging operating environment, supported by low levels of vacancy and cumulative market rental growth of over 30% for the previous 3 years. Just as importantly, PFI has a very strong portfolio of existing assets in great locations with high-quality tenants and a clear strategy to unlock further growth well into the future. We see this source of growth has been largely two-fold. Firstly, with significant under-renting in PFI's existing portfolio providing embedded growth in revenues, and secondly, projects like Bowden Road, Springs Road and Spedding Road representing strategic opportunities for PFI to develop high-quality, 5 Green Star rated industrial estates in highly desirable industrial precincts. While our developments continue at pace and we undertake rigorous rent review process on dates agreed with our tenants, we are also aware that in this market, strategic opportunities can present themselves from time to time. On this note, our highly experienced management team closely monitor the market for opportunities that have the ability to have continued value to PFI. The second sentiment I wish to share is that in spite of trying wider economic conditions, PFI has continued to deliver for its investors during FP '24. Simon will provide a more detailed overview of our results, but at the top line level, PFI continues to manage a very significant and robust industrial portfolio comprised of 91 properties with an aggregate valuation of over $2 billion. 126 tenants, a 98.6% occupancy rate and a weighted average lease term of 5.07 years. In parallel, a huge amount of work has gone on to executing on PFI's capital management and sustainability strategies. Simon will also touch on these areas in more detail, but the work that has been done in recent times has further strengthened our foundations, giving us confidence to front foot both the opportunities and challenges that will present in the future. As a Board and management team, we looking firmly into the future and believe that we are in a strong position to grow PFI's portfolio in a profitable and sustainable way. With our strong balance sheet, funding lines renewed and extended, gearing comfortably within our target range, and interest rates starting to trend more favorably, we are well set up to execute on our strategy and continue to deliver value for our shareholders. As I hand over to our CEO, Simon Woodhams, I reiterate, there is a lot to be proud of, and we believe that there is a lot to look forward to for all associated with PFI.

Thanks, Dean, and good afternoon, everyone. Once again, it's nice to be able to join you and reflect on the period to 30 June 2024. Welcome back to those who regularly attend these meetings and a warm welcome if you are joining us for the first time. As a Management Team and Board, we really enjoy being able to show you what we've been doing over the last 6 months, so let's get into it. We will start by delving further into the highlights of FP '24 and then take a deeper look at some of our key projects, such as Bowden Road, Springs Road, and Spedding Road, all of which are playing pivotal roles in shaping our future. When we think about the highlights of FP '24, front of mind for me and the team is how our portfolio performed in a challenging economic environment. Our resilient well-located portfolio of scale is focused on the Auckland industrial property market with demand for high-quality, well-positioned industrial property remains strong. In terms of financial performance, we reported profit after tax of $21.2 million, up $51.7 million from the prior comparable period. This result incorporated a $4.2 million fair value loss on the independent valuation of our property portfolio, as compared to a $55 million fair value loss in the prior comparable period. This indicates to us that the valuation of our $2.1 billion portfolio is stabilized. Our net rental income of $48.3 million for FP '24 was up around 2.1% on the prior comparable period. Funds from operations or FFO earnings were up around 2.2% to $0.503 per share, while adjusted funds from operations or AFFO earnings of $0.458 per share were in line with the prior comparable period. Finally, we paid cash dividends for the period of $0.415 per share, consistent with FY '23 dividends on an annualized basis. This equates to an FFO dividend payout ratio of 83% and an AFFO dividend payout ratio of 91%. We reviewed around $36 million of rent during the 6 months to 30 June 2024, and those reviews delivered an average annualized uplift of 5.67%. We are also confident that there remains scope for further growth. PFI's $2.1 billion industrial property portfolio was independently assessed as being around 16% under-rented at the end of the year, providing PFI with a platform for further rental growth as rents are reset to market over time via reviews or renewals. Pleasingly, post 30 June, PFI has continued to see re-leasing spreads in excess of the portfolio under-renting gap. Our sustainability efforts remain a core focus as we continue to execute on the sustainability strategy that we set in 2022. In particular, we've made significant progress in this area by advancing solar and power metering initiatives across our properties, which are benefiting both PFI and our tenants. In addition, we have a number of development projects having recently achieved or targeting 5 Green Star ratings, which I'll discuss in more detail shortly. 5 Green Star ratings enable us to both deliver on our sustainability strategy and attract high-quality tenants, creating value for our investors. From a capital management perspective, we've established or refinanced $600 million of facilities since December 2023, leaving us with almost $300 million of available liquidity. Gearing remains well within our target range at 32.9%. And as Dean mentioned a moment ago, there are signs of improvement in the interest rate environment, which would benefit PFI. So with those highlights in mind, for the remainder of my presentation, I would like to shift our focus to our key development projects, including our expanded pipeline of projects, that are propelling us forward and positioning us for continued success. Some of you may recall me giving updates at previous shareholder meetings on our multi-stage development at the Bowden Road site at Mount Wellington. I am pleased to report that the last stage of this project is expected to reach practical completion within the next month, and will move to being a core and particularly high-quality component of our portfolio. Bowden Road really is an example of our commitment to delivering high-quality, sustainable properties that meet the needs of a modern business. Breaking down the Bowden Road development. The first stage achieved practical completion in June of this year, and the lease to our valued tenant, Tokyo Food, has now commenced for an initial term of 12 years. To add to this, we're pleased to confirm that we have been awarded a 5 Green Star design rating for this building. We initially commenced Stage 2 of the Bowden Road project on a speculative basis as we were confident of the strong demand for premium industrial space in the market. That confidence proved to be well founded as we've gone on to secure a 12-year lease term with Daikin Air Conditioning, for this 11,200 square meter building, with that lease expected to commence in November this year. As was Stage 1, we are targeting a 5 Green Star rating, which is in the process of being confirmed by the New Zealand Green Building Council. The 2 stages combined will produce rental income in excess of $5.1 million each year with a weighted average lease term of 12 years. The next of our major projects being the redevelopment of our Springs Road site in East Tamaki, represents a significant investment in the future of our portfolio. As you can see on this slide, the 3-stage project is intended to deliver best-in-class facilities that meet the evolving needs of our tenants. Completion of Stage 1 of the project will shortly see the delivery of a 25,500 square meter 5 Green Star rated warehouse for our long-term tenant Fisher & Paykel Appliances, with an option to expand the warehouse to 30,000 square meters. Fisher & Paykel Appliances have committed to a 15-year lease from completion of the development, which we expect to take place in November 2024. In terms of Stage 2 Springs Road, earlier this year, we signed a Design and Build Agreement to Lease with MiTek to develop 6,500 square meters of warehouse. MiTek will anchor Stage 2 of the redevelopment with the remaining balance of 4,800 square meters of warehouse space to be developed on a speculative basis. Early works for Stage 2 are expected to begin at the start of 2025, with the project targeted to complete in mid to late 2026. Plans for the balance of site, being Stage 3, allow for a circa 17,500 square meter warehouse with 500 square meters of office, 4,200 square meters of breezeway and canopies and 2,000 square meters of yard, with the timing of any redevelopment likely to be tenant led. Based on current plans, once complete, all 3 stages of the redevelopment of 78 Springs Road are expected to combine to create over 70,000 square meters of 5 Green Star rated industrial area, which will be a very substantial and high-quality addition to our portfolio. Another pivotal development in our strategic roadmap is Spedding Road, which is located at the end of the Northwestern Motorway here in Auckland. In October 2023, we entered into a contract to purchase 2 lots, totaling 5.8 hectares within the proposed 46-hectare industrial sub division. This strategic move provides us with a scale greenfield development opportunity in an Auckland location that we perceive is under-supplied for both industrial-zoned land and industrial buildings of quality or scale. Our sale and purchase agreement for this transaction has recently become unconditional and a deposit has now been paid, and we expect settlement of the transaction to take place in the second half of 2025. Indicative plans demonstrate that site coverage of around 70% of the lots to be purchased can be achieved, with early concepts allowing for approximately 40,000 square meters of covered workable area once complete. Furthermore, as shown on the slide on the screen now, we can complete the project as multiple buildings and in stages, enabling us to manage risk effectively while capitalizing on evolving market dynamics. Consistent with PFI's sustainability strategy, we are targeting the design and development of the Spedding Road estate to achieve 5 Green Star Ratings. The Spedding Road development represents a forward-looking investment that we consider positions us for sustained growth and value creation in the coming years. The team and I are really looking forward to taking this development forward and sharing progress with you in future meetings. In conclusion, I want to reiterate our commitment to delivering for our shareholders and other stakeholders. In particular, I hope that our presentation this afternoon has highlighted that our strategic focus on our key projects remains unwavering. I'm pleased that PFI's Board has set dividend guidance for FY '25 at a range of $0.830 to $0.850 per share, an increase of up to $0.020 per share or 2.4% on an annualized FP '24 dividends. This guidance is reflective on an economic environment that remains somewhat uncertain. However, it also reflects our confidence that we are prepared for economic challenges that might arise and our belief that we are well positioned for sustained success. In summary, we are confident that PFI has a strong platform for continued growth, bringing benefit to our shareholders. Just before I hand back to Dean, I'd just like to take a moment to say thank you to our shareholders and other stakeholders who continue to support PFI. As a Management Team and Board, we look forward to including you in our growth story well into the future. Thank you.

Thank you, Simon. There is now an opportunity for questions or comments on the presentations, on the financial statements and on the auditor's report, which you can find from Page 13 of the annual report. If you wish to ask a question, please select the Q&A tab, type your question in the box and press send in to submit. Craig, any questions?

We don't have any questions at the moment Dean.

We will move on to the next part of the meeting, that's understandable general business. Okay. We'll move on to our ordinary resolution to be voted on today. I have been advised that 353 shareholders representing 183,641,78 shares or 36.57% of the company's shares on issue are resented by proxies. Voting for the resolution will be conducted by poll. For the purpose 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 for voting now. The resolution and voting choices are displayed on your screens and to vote, please select your voting choice from the options shown on the screen. You can change your vote at any time up until the poll closes. To change your vote, simply select another voting choice. Please note that the Board recommends that you vote in favor of the ordinary resolution. The resolution is that the directors are authorized to fix the fees and expenses of the auditors, PricewaterhouseCoopers. We will now provide an opportunity for you to ask questions on the resolution. If you would like to ask a question, please select the Q&A tab, type your question in the box and press send to submit.

Thanks Dean. No questions on the resolution at this stage.

Thanks, Simon. Thanks very much, Craig. We'll move right along. Please select your voting choice from the options shown under the vote tab on your screen. We will give you all a moment to finalize your votes and then I will close the voting. [Voting]

Okay. Look, we've got 1 resolution that it's going to take a long time to vote. So we will now close the voting. The results of this vote will be released by PFI to NZX later today. Thank you. We will now open up for questions on general business from shareholders and proxies. If you wish to ask a question, please select the Q&A tab, type your question and press send to submit your question. Okay. Any questions on general matters, Craig?

We don't have any questions.

I just want to say if there's no questions today, always feel free to get in touch the management team.

Simon, you've done a great job in your presentation. You anticipated the questions. You've answered them within your presentation. Your shareholders are happy. We're going to close the meeting now. But in closing, I believe, a strong foundation is in place for the company's ongoing success with a high-quality industrial property portfolio, a pipeline of important projects, a talented management team and an experienced board. Thank you for your continued support of PFI and for your attendance virtually today. That is the formal part of the meeting, and I declare the meeting closed.