PFI Announces FP24 Results

Property for Industry Limited (PFI, the Company) today announced the Company’s result for the six  months ended 30 June 2024 (referred to as Financial Period 24, or FP24). 

FP24 is a six-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 document  the results for FP24 have been compared to the unaudited interim six-month results from 1 January to  30 June 2023 (the prior comparable period, or ‘pcp’), unless otherwise noted. 

PFI has delivered a sound operating result evidencing the positive attributes of the Company’s strategic  positioning within NZ’s industrial property market. Profit after tax of $21.2m is up $51.7m on the pcp and  incorporates a fair value loss of $4.2m on the Company’s $2.1bn industrial property portfolio. Strong  leasing outcomes and stable operating cash flows have supported a consistent dividend. 

With PFI’s property valuations stabilising, and funding lines that have been renewed and extended, the  outlook for the Company’s earnings and cash flows will be supported by capturing embedded growth  within the portfolio as rents are reviewed and an interest rate environment that is forecast to improve1. 

Highlights 

FP24 result: Profit after tax of $21.2m, up $51.7m on the pcp, incorporating fair value losses on  properties of $4.2m, as compared to losses of $55.0m in the pcp, Funds From Operations (FFO)2 up 2.2% on the pcp to 5.03 cents per share (cps), Adjusted Funds From Operations (AFFO) down 0.9% on the pcp to 4.58 cps, FP24 cash dividends of 4.15 cps, consistent with FY23 dividends on  an annualised basis, fully covered by AFFO and strong cash flows from operations. 

Portfolio under-renting3 provides embedded growth: Industrial property portfolio valuation of  ~$2.1bn has stabilised and is ~16% under-rented, $36.3m of contract rent reviewed during FP24  delivering an average annualised uplift of 5.7%, $5.9m of contract rent leased during FP24 at an  average of 25.3% above previous contract rents. 

Green Star development pipeline advanced: Tenant commitment secured for Stage 2 of the  redevelopment of 78 Springs Road, balance of 30-32 Bowden Road leased for a term of 12-years,  active Green Star projects on track with ~$33m of committed spend remaining, opportunity to deploy  ~$350m on Green Star development over the medium-term. 

Liquidity profile extended: $600m of facilities refinanced or established since December 2023,  ~$300m of facility headroom following post-balance date refinancing, gearing comfortable at  32.9%, interest rate environment forecast to improve. 

FP24 result 

PFI reported a profit after tax for FP24 of $21.2m (profit of 4.22 cps), as compared to a loss of $30.5m  (loss of 6.08 cps) in the pcp. A $4.2m fair value loss on the independent valuation of the Company’s  property portfolio, as compared to a $55.0m fair value loss in the pcp, was the main contributor to this  increase. 

FP24 net rental income4 of $48.3m was up $0.9m (2.1%) on the pcp ($47.4m), due to the impacts of positive leasing activity (+$3.4m) and acquisitions (+$0.1m), partly offset by active brownfield  development projects (-$1.6m), divestment activity (-$0.8m), and vacancy (-$0.1m).  

Interest expense and bank fees were largely unchanged, while current taxation of $2.6m decreased by  $0.7m on the pcp, largely due to an increase in deductible capital expenditure and tax deductions  associated with redevelopment projects. 

As a result, FFO earnings were up +2.2% on the pcp to 5.03 cps, whilst AFFO earnings of 4.58 cps were  down 0.9% on the pcp. 

In line with PFI’s dividend policy, the PFI Board resolved to pay a second quarter final cash dividend of  2.20 cps. The dividend will have no imputation credits attached and no supplementary dividend will be  paid to non-resident shareholders. The record date for the dividend is 2 September 2024, and the  payment date is 11 September 2024. The dividend reinvestment scheme will not operate for this  dividend. 

The second quarter dividend will take cash dividends for FP24 to 4.15 cps, consistent with 2023  dividends. 

Portfolio under-renting provides embedded growth 

PFI’s portfolio has continued to benefit from strong re-leasing outcomes and structured rental growth, a continuation of the themes witnessed in recent years, resulting in portfolio occupancy of 98.6% and a weighted average lease term of 5.07 years at the end of FP24.  

Rent reviews were completed on 63 leases during FP24, resulting in an average uplift of 8.3% (5.7%  annualised) on ~$36.3m of contract rent. CBRE forecast6 Auckland industrial rental growth over the next  five years to average 1.2% per annum for prime properties and 0.9% per annum for secondary  properties, following growth of 42% and 31% over the past five-years to 30 June 2024, respectively. 

Around 80,033 square metres (sqm), or $11.6m (11.6%) of PFI’s portfolio by rent, was leased during  FP24 to five new and 15 existing tenants for an average increase in term of 6.2 years. Negligible incentives were required to secure these leasing transactions, and a positive re-leasing spread7in  excess of 25% on annual passing rents was observed where rents were agreed on stabilised properties. 

Combined, over 44% of contract rent was reviewed, varied, or leased during FP24. 

At the end of FP24 just 1.6% of contract rent was due to expire in FY25 (excluding brownfield  opportunities), with the largest single expiry just $364k or 0.4% of contract rent. FY25 fixed reviews  ($57.7m, 57.0% of contract rent) are contracted to deliver an average increase of 5.8%, supported by  renewal rents being agreed in prior periods. FY25 expiries and market reviews ($16.6m, 16.4% of  contract rent) are ~24% under-rented at the end of FP24 after factoring in review caps. These FY25  reviews, combined with the fact that the next leasing event for 17.4% of PFI’s portfolio by rent is an expiry or market rent review, provides an embedded pathway for near-to-medium-term rental growth. 

Further progress has also been made across a variety of areas in the Company’s sustainability  programme, including installing 1,180 solar panels across five buildings and power metering at 57 properties by the end of FP24. 

The Company ended FP24 with a property portfolio valued at $2,050.5m including a decrease from  independent valuations of $4.2m or -0.2%. Realised rental growth was estimated to have added around  ~7% to the value of the portfolio, with the balance of the valuation outcome due to a softening in yields  or cap rates in response to sustained interest rate pressures. As a result of portfolio and valuation  activity, and excluding the Company’s active brownfield development sites8, PFI’s passing yield softened 

by 0.13% to 5.14%, while the portfolio market cap rate softened by 0.15% to 5.89%. An independent  market rental assessment of the entire portfolio was completed as part of the valuation process, this  assessment estimates that PFI’s portfolio is around 16% under-rented. 

Net tangible assets (NTA) as at the end of FP24 of $2.71 per share is in line with December 2023 values,  reflecting the stabilisation of PFI’s investment property valuations, which looking forward, are supported  by a large portfolio under-renting gap along with an interest rate environment that is forecast to improve,  which is expected to support investor sentiment and drive an increase in transactional activity. 

Green Star development pipeline advanced 

PFI currently has around $313m (15%) of the portfolio held in brownfield opportunities, and progress at  the Company’s active brownfield development sites (30-32 Bowden Road and 78 Springs Road) has  continued apace. Consistent with PFI’s climate commitments, all significant new developments will target  a 5 Green Star rating, a key part of PFI’s transition to a low-carbon, climate-resilient portfolio. 

At 30-32 Bowden Road, the Tokyo Food building achieved practical completion in June 2024 and was  awarded a 5 Green Star rating9. The speculative element of this project was leased to Daikin Air  Conditioning New Zealand Limited (Daikin) for a term of 12-years,and is expected to complete in October  2024 following additional design changes associated with the Daikin lease. The redevelopment of 30- 

32 Bowden Road is now fully-leased for an average lease term of 12 years, and once complete, will  combine to create PFI’s first 5 Green Star rated industrial estate, with close to 24,000 sqm of covered  workable area. 

At 78 Springs Road, the Company is continuing to develop a 25,500 sqm warehouse for existing tenant  Fisher & Paykel Appliances (Stage 1), with an option to expand the warehouse to 30,000 sqm. The  programme of works for Stage 1 is ahead of schedule and on budget, with completion now expected in  November 2024. 

PFI is also pleased to announce that, subsequent to the end of FP24, it has entered into a Design and  Build Agreement to Lease with MiTek New Zealand Limited (MiTek), who have pre-committed to a 12- year lease over a ~6,500 sqm warehouse facility. As a result of this pre-commitment, the PFI Board has  approved Stage 2 of the redevelopment of 78 Springs Road. Stage 2 will deliver a dual-unit warehouse  facility, with the balance of the development (4,800 sqm of warehouse) to be completed on a speculative basis. Early works are expected to begin in late 2024 / early 2025, with the project expected to complete  in mid / late 2026. Stage 2 of the redevelopment of 78 Springs Road has an estimated total incremental  cost of around $42m, with a targeted yield on incremental cost, including land, in excess of 6%. 

PFI has the opportunity to invest ~$350m into Green Star development opportunities over the coming  years, including the completion of the active projects at 30-32 Bowden Road and Stage 1 of 78 Springs  Road, as well as beginning Stage 2 of 78 Springs Road. Looking forward, the final Stage of 78 Springs  Road, along with the contracted settlement and development of land at the Spedding Road industrial estate in North-West Auckland, are expected to anchor the next phase of PFI’s development pipeline,  before the Company looks to commence the redevelopment of its remaining brownfield sites from 2027  and beyond.  

Liquidity profile extended 

“Capital management efforts at PFI have intensified this year,” says PFI Chief Finance and Operating  Officer, Craig Peirce. “We’ve proactively increased and extended our liquidity profile, allowing the  Company to execute on our near-term development pipeline and repay upcoming bond maturities using  our existing funding envelope, given domestic bond markets remain unattractive to PFI at present.” 

Following all FP24 and post-balance date activity, the weighted average term to expiry of PFI’s bonds  and bank facilities has increased by 1.5 years to 3.6 years10, and the Company has ~$300m of available  bank liquidity. 

PFI’s gearing as at the end of FP24 was 32.9% (covenant: 50%) and the interest cover ratio for the year  then ended was 2.5 times (covenant: 2 times). Interest rate hedging provides for an average of ~57% of  the Company’s debt to be hedged at an average fixed rate of ~2.74% for FY25, offering some protection  from higher floating interest rates. 

Closing and outlook 

“Positive leasing outcomes have continued to deliver a growing income stream in the face of a high  interest rate environment” says PFI Chief Executive Officer, Simon Woodhams. “With 100% of PFI’s  active brownfield development pipeline now leased, our attention shifts to capturing value from the next  stages of the redevelopment of Springs Road and the development of land at Spedding Road, supported  by an interest rate environment that is forecast to improve in the next 24 months.”  

Throughout the RBNZ’s tightening cycle, PFI’s portfolio has delivered significant re-leasing spreads (an  average of ~18% over the last 2.5 years) following a period of elevated market rental growth (over 30%  cumulative growth in last three years), helping to offset increased borrowing costs. Looking forward,  PFI’s ~16% portfolio under-renting provides an embedded pathway for near-to-medium-term rental  growth. In addition, PFI’s resilient and well-diversified leasing profile has limited vacancy and low levels 

of expiries in the next 24 months (~10% of contract rent11). 

Notwithstanding these positive factors, changes to depreciation rules will impact PFI from 1 July 2024,  and will see the Company’s tax bill rise by approximately ~$2m a year from FY25.  

Looking to the financial year ahead, the PFI Board is guiding to FY25 cash dividends of 8.30 to 8.50 cps,  an increase of up to 0.20 cps or 2.4% on annualised FP24 dividends. While forecast to decline, the uncertainty around the pace and size of changes in the Official Cash Rate have the potential to impact  forecast earnings. This guidance is also subject to additional downside risk from matters that are outside  the Company’s control. Cash dividends of 8.30 to 8.50 cps are anticipated to result in a dividend pay out towards the lower end of PFI’s dividend policy range. 

“Despite the challenging operating environment, we are close to completing our active development  projects on time and within budget, while at the same time delivering strong returns from the core  portfolio and investing in our people, systems and sustainability initiatives,” says Simon Woodhams. “PFI  continues to deliver stable cash returns for investors today, while investing in New Zealand’s industrial  future.” 

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