Announcement
FLLYR: PFI: PFI Announces Record Annual Results
08:33am
PFI
17/02/2020 08:33
FLLYR
PRICE SENSITIVE
REL: 0833 HRS Property for Industry Limited
FLLYR: PFI: PFI Announces Record Annual Results
PFI ANNOUNCES RECORD ANNUAL RESULTS
The PFI management team will present these results via live webcast from
10.30 am NZT today. To view and listen to the webcast, please visit
https://edge.media-server.com/mmc/p/5n3sjqp8. We recommend you log on a few
minutes before the start time, and if you cannot attend the live webcast, a
recording will be available on PFI's website shortly after the conclusion of
the live event. Alternatively, you can listen to the live presentation by
dialling in on 0800 667 018 and using the access PIN 9797585.
Highlights
- Record annual results: profit after tax of $176.3 million, Funds From
Operations (FFO)[1] earnings up 2.6% to 9.07 cents per share, Adjusted Funds
From Operations (AFFO) earnings up 4.4% to 7.79 cents per share
- Dividends AFFO covered: cash dividends of 7.60 cents per share, AFFO
dividend pay-out ratio of 98%
- Strong balance sheet: net tangible assets up 15.6% or 27.8 cents per share,
bank facilities and bonds secured for an average of 4.1 years, gearing of
28.2%
- Positive portfolio activity: nearly 100,000 square metres or 17% of the
portfolio leased during the year to 24 tenants for an average increase in
term of 6.7 years, rent reviews completed on 103 leases delivered an average
annual uplift of ~4.6%
- Priorities advanced: four Auckland industrial opportunities secured
totalling $106.4 million, $40 million of non-industrial divestments
contracted during the year, committed to or completed ~$26 million of
value-add strategies
Property for Industry Limited (PFI, the Company) today announced record
results for the year ended 31 December 2019.
"This year we achieved a record annual result, continued to deliver strong,
stable investor returns, and made constant progress on focusing the portfolio
on our core industrial strengths." says PFI Chief Executive Officer Simon
Woodhams.
Financial performance
Net rental income increased by $4.2 million or 5.3% to $83.3 million.
Positive leasing activity contributed an increase of $3.3 million or 4.2%,
and acquisitions contributed a further increase of $1.8 million. These
increases were partially offset by disposals ($0.4 million), lost rental
income from properties now under re-development ($0.3 million), and lost
rental income from a fire at 314 Neilson Street, Penrose[2] in April 2019
($0.2 million).
Property costs - net of recoveries from tenants - increased by $0.3 million
and administrative expenses increased by $0.4 million.
Interest expense and bank fees increased $0.2 million or 1.3%: average
borrowings increased by $21.2 million, but the impact of this was partially
offset by a reduction in the Company's weighted average cost of debt[3], down
~23 basis points from the end of the prior year to 4.63%.
PFI's effective current tax rate was 22.9% during 2019, up from 20.2%[4] in
the prior year, in part due to a higher level of maintenance capex in the
prior year.
Profit after tax for year of $176.3 million (35.35 cents per share) was up
$66.2 million (13.27 cents per share) on the prior year and this is the
highest level of profit ever recorded by the Company.
FFO and AFFO
FFO earnings of 9.07 cents per share were 0.23 cents per share or 2.6% ahead
of the prior year, whilst AFFO earnings of 7.79 cents per share were 0.33
cents per share or 4.4% ahead of the prior year.
AFFO adjustments totalled $6.4 million in the current year, down $0.5 million
or 8.0% from the prior year. A key component of AFFO adjustments is
maintenance capex. As noted in previous communications, PFI expects that
maintenance capex on its existing portfolio will average 35 basis points per
annum, but that the timing of this will be volatile. This volatility can be
illustrated when comparing the level of maintenance capex in the current and
prior years: in 2019, maintenance capex totalled $3.4 million or 25 basis
points, whereas in 2018, maintenance capex totalled $4.5 million or 35 basis
points.
Q4 Final Dividend
The PFI Board has today resolved to pay a fourth quarter final cash dividend
of 2.1500 cents per share. The dividend will have imputation credits of
0.8015 cents per share attached and a supplementary dividend of 0.3637 cents
per share will be paid to non-resident shareholders. The record date for the
dividend is 24 February 2020 and the payment date is 4 March 2020. The
dividend reinvestment scheme will not operate for this dividend.
The fourth quarter dividend will take cash dividends for the full year to
7.60 cents per share, an increase from the prior year of 0.05 cents per
share, resulting in an FFO dividend pay-out ratio of 84% (2018: 85%) and an
AFFO dividend pay-out ratio of 98% (2018: 101%, refer Appendix 2).
Given the level of volatility in maintenance capex and other AFFO
adjustments, PFI will also be mindful of the AFFO dividend pay-out ratio over
a longer time horizon than any one year when setting dividends. For example,
the average AFFO dividend pay-out ratio is 101.0% since PFI began disclosing
AFFO[5] in 2016 (refer Appendix 4).
Guidance
PFI Chief Finance and Operating Officer, Craig Peirce, notes: "At the
beginning of 2018, we announced our transition to a dividend policy that is
based on FFO and AFFO. Since then, we have been working to grow earnings at a
faster rate than we have been growing dividends. Now that our dividends are
covered by AFFO earnings, we will target an increase in the rate of growth of
our dividends. Historically, dividends have increased by 0.05 cents per share
each year, if performance allowed, but in 2020, we plan to lift dividends by
0.05 to 0.10 cents per share resulting in a forecast dividend of between 7.65
to 7.70 cents per share, subject, of course, to matters outside of our
control."
The Company expects that this level of full year cash dividends will
approximate 80% to 90% of FFO earnings and 95% to 100% of AFFO earnings, in
line with the Company's dividend policy.
Net tangible assets (NTA)
PFI's NTA per share increased by 27.8 cents per share or 15.6% from 177.7
cents per share as at the end of 2018 to 205.5 cents per share as at the end
of the year.
The change in NTA per share was driven by the increase in the fair value of
investment properties (described below, +25.1 cents per share), retained
earnings (+1.4 cents per share), gains made on the disposal of PFI's
non-industrial properties (+0.8 cents per share) and the decrease in the net
fair value liability for derivative financial instruments (+0.5 cents per
share).
Capital management
PFI's bank facilities were refinanced in November 2019. Existing lenders ANZ,
BNZ, CBA and Westpac each committed a quarter of a combined total of $300
million of facilities, up from $275 million prior to the refinancing. The
facilities are in two equal $150 million tranches, expiring November 2022 and
2023.
When combined with the Company's November 2024 ($100 million) and October
2025 ($100 million) bonds, at 31 December 2019, the weighted average term to
expiry of PFI's bank facilities and bonds stands at 4.1 years.
PFI's weighted average cost of debt[6] reduced during the year to 4.63% as at
31 December 2019 from 4.86% as at 31 December 2018. The Company remains well
placed to continue to take advantage of the current low interest rate
environment: based on current hedging and debt levels, an average of
approximately 59% of PFI's debt will be hedged at an average rate of
approximately 3.58% during 2020, down from 3.75% as at 31 December 2019, with
the remainder on low floating interest rates.
The Company ended the year with gearing[7] of 28.2% and an interest cover
ratio[8] of 4.0 times. After allowing for 2019 tax, the Q4 final dividend,
settlement of the divestment of 2 Pacific Rise and capital commitments,
gearing could move up to ~33%. Allowing for the divestment of PFI's remaining
non-industrial properties, gearing could return to ~27%.
Portfolio performance
(Please see the table in the attached PDF)
Further to the announcement in December 2019, PFI recorded an annual increase
in the value of its property portfolio from independent valuations of $125.2
million or 9.3% to $1,476.2 million. Around one-third of this valuation
outcome was due to rental growth, which in part reflects the successful
leasing outcomes, described below. Continued high levels of demand for
industrial property from both investors and owner occupiers was also an
influence, with movements in cap rates contributing the remaining two thirds
of the increase in value. As a result of the year-end valuation process,
PFI's passing yield firmed from 6.21% to 5.75%.
An independent market rental assessment of the entire portfolio was completed
at the end of the year as part of the independent valuation process. This
assessment estimates that PFI's portfolio is ~3.5% under-rented, but internal
estimates are that the Company's Auckland industrial portfolio is around 6%
under-rented.
Nearly 100,000 square metres, representing more than 17% of PFI's existing
portfolio by rent, was leased during the interim period to 24 new and
existing tenants for an average increase in term of 6.7 years. Lease renewals
accounted for more than 76% of the contract rent secured, with 16 PFI tenants
retained for an average increase in term of 6.9 years. Across these leasing
transactions, low levels of incentives and capital expenditure were required
to attract and retain tenants, with average leasing costs of less than half a
month per year of term.
Included in these totals is a renewal of DHL's lease at 7-9 Niall Burgess
Road in Mount Wellington, and a new lease to Coca-Cola Amatil at the recently
refurbished 6 Donnor Place, also in Mount Wellington. You can learn more
about both of these transactions in PFI's annual report, released today.
Rent reviews were completed on 103 leases during the year, resulting in an
average annual uplift of ~4.6% on ~$52.7 million of contract rent. 11 market
rent reviews on $5.3 million of contract rent delivered an annualised
increase of 4.7% over an average review period of 3.6 years, and these
reviews were settled at an average of approximately 7.5% above December 2018
market rental assessments.
At the end of the year, the Company's portfolio was 99.0% occupied and just
6.5% of contract rent is due to expire in 2020. When combined with rent
reviews, almost 73% of PFI's portfolio is subject to some form of lease event
during 2020.
In their December 2019 Auckland Market Outlook, CBRE predict industrial
rental growth over the next five years to average 2.5% per annum for Prime
properties and 3.0% per annum for Secondary properties. PFI will continue to
access this projected market rental growth as approximately 23% of the
Company's 2020 lease events[9] are market related.
Market update
In their January 2020 Quarterly Economic Outlook, ANZ note that: "The [New
Zealand] economy is at a crossroads and the political and international
context will be crucial."
On the one hand, they highlight that monetary policy appears to be doing its
job, that the housing market has strengthened, fiscal spending is supportive,
and the labour market is strong. Countering this, they also believe that
credit availability will be crucial, and that business investment will be
constrained. Drought conditions in some parts of New Zealand - and floods in
others - combined with the risks from the novel coronavirus, are also
potential risks.
Given these conditions, they forecast for 2020 and 2021 to end with an
Official Cash Rate of just 1.00%, with forecast 10-year Bond Rates of 1.30%
and 1.20% respectively.
Low interest rates play an important part in the attractiveness of property
and its returns relative to other asset classes. In December 2019 Auckland
Market Outlook, CBRE note: "Low interest rates combined with property's
return profile relative to other assets... underpin further yield firming for
the next two years."
"Omnichannel retailing" is also expected to be a key driver for industrial
property, according to CBRE. They estimate that for every $1 billion of
additional online sales, an extra 100,000 sqm of distribution space is
required. With the likes of H&M and Chemist Warehouse recently arriving in
New Zealand, and others like Cos, Costco, Decathlon, Ikea and Uniqlo
signalling their arrival, this trend is expected to gather momentum in the
medium term.
Also in their December 2019 Auckland Market Outlook, CBRE note other
favourable indicators: they estimate total industrial vacancy of just 1.4%,
rental growth in the last 12 months of 3.3% in prime industrial and 4.1% in
secondary industrial, firming yields and continued increases in industrial
zoned land.
These factors combine to result in secondary industrial remaining as their
top ranked category in in their December 2019 Auckland Market Outlook. CBRE's
forecast of secondary industrial annual returns over the next five years
totals 10.6% per annum (June 2019: 11.2%), comprising an income return of
5.8% (June 2019: 6.0%) and capital growth of 4.8% (June 2019: 5.2%).
Prime industrial is also set to deliver above-average returns: despite
falling from second place in June 2019 to fourth place (out of 12) in
December 2019, CBRE have forecast a small increase in average annual returns
over the next five years expected to 9.0% per annum (June 2019: 8.9%),
comprising an income return of 4.9% (June 2019: 5.1%) and capital growth of
4.1% (June 2019: 3.8%).
Our priorities
Simon Woodhams notes: "We are pleased to report excellent progress on the
four priorities we stated at the beginning of the year."
In addition to the asset management activity, discussed earlier in this
announcement, these priorities included the replacement of PFI's
non-industrial properties with quality industrial properties in sought-after
areas.
Simon Woodhams continues: "To that end, $106.4 million has been committed
during the year to four prime Auckland industrial opportunities. 12-year
leases have been secured at three of the four sites, with tenant commitment
to be secured by PFI's leasing team at the fourth property in Tidal Road
whilst the property is under construction. Across these transactions, the
return to PFI is estimated to be around 5.57%."
Significant progress has also been made in divesting PFI's non-industrial
properties, with $40 million of divestments contracted during the year.
Included in this total is the divestment of the mixed-use property at 229
Dairy Flat Highway in Albany, Auckland, for $33 million, and you can learn
more about this divestment in the Company's annual report, released today.
Non-industrial properties now account for just 10% of PFI's portfolio.
Finally, value-add strategies within the existing portfolio also formed an
important part of the Company's 2019 priorities. In addition to the $14.6
million spent during 2019, PFI has committed a further $21 million to four
new significant projects. These projects include the completion of the
refurbishment of PFI's property at 6 Donnor Place in Mount Wellington,
Auckland, prior to occupation by Coca Cola Amatil. More details on this
project can also be found in PFI's annual report.
Simon Woodhams concludes: "In 2020 we will continue on our pathway to
becoming a pure-play industrial listed property vehicle. In order to achieve
that goal, we will remain focused on our core asset management and value-add
strategies within our portfolio. We also plan to supplement that activity
with the replacement of PFI's remaining non-industrial assets - including
Carlaw Park in Parnell, Auckland - via acquisition of quality industrial
properties in sought-after areas."
ENDS
ABOUT PFI & CONTACT
PFI is an NZX listed property vehicle specialising in industrial property.
PFI's nationwide portfolio of 94 properties is leased to 144 tenants.
For further information please contact:
SIMON WOODHAMS
Chief Executive Officer
---
Phone: +64 21 749 770
Email: woodhams@pfi.co.nz
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CRAIG PEIRCE
Chief Finance and Operating Officer
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Phone: +64 21 248 6301
Email: peirce@pfi.co.nz
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Property for Industry Limited
Shed 24, Prince's Wharf, 147 Quay Street, Auckland 1010
PO Box 1147, Shortland Street, Auckland 1140
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www.propertyforindustry.co.nz
Attachments
NZX Form - Results Announcement
NZX Form - Distribution Notice
Annual Results Presentation
Annual Report
Appendices
Appendix 1 - FFO and AFFO Calculations
(Please see the table in the attached PDF)
Appendix 2 - FFO and AFFO Dividend Pay-out Ratios
(Please see the table in the attached PDF)
Appendix 3 - AFFO Pay-out Ratios (2016 - 2019)
(Please see the table in the attached PDF)
Footnotes
[1] Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) are
non-GAAP financial information and are common property investor metrics,
which have been calculated in accordance with the guidelines issued by the
Property Council of Australia. Please refer to Appendix 1 for more detail as
to how these measures were calculated.
[2] PFI has material damage insurance up to a value of $9.65 million and 24
months of business interruption insurance in place for this property. The
final amounts to be received under these insurance policies are yet to be
determined and received.
[3] Weighted average cost of debt comprises float interest rates, hedging,
margins and all borrowings related fees.
[4] 2018 excludes the impact of the June 2017 internalisation.
[5] AFFO has been disclosed for the financial years ended 31 December 2016 to
31 December 2019.
[6] Weighted average cost of debt comprises BKBM, hedging, margins and all
borrowings related fees.
[7] That is, total borrowings as a percentage of the most recent independent
valuation of the property portfolio. Covenant: 50%.
[8] That is, the ratio of interest expense and bank fees to operating
earnings excluding interest expense and bank fees. Covenant: 2 times.
[9] Being 16.6% of total contract rent.
End CA:00348515 For:PFI Type:FLLYR Time:2020-02-17 08:33:22
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