Property For Industry Ltd came out ahead on its preferred funds from operations measures of performance in 2017, a year when it internalised management, paid no tax and generally lifted returns.
- Significant acquisition activity: $84.3 million of property acquired, improving portfolio metrics and providing significant medium to long-term development potential
- Transition of the Penrose portfolio: approximately $14 million of shareholder value created equating to a property level internal rate of return of about 26%
- Strong balance sheet: $70 million rights offer, $100 million of senior secured fixed rate 7-year bonds, gearing of 30.8%
- Dividend policy change & increased dividend for the 2018 financial year: guidance of full-year cash dividends of about 7.55c/share, about 95-100% of adjusted funds from operations
- Governance & management changes: David Thomson, a senior partner & member of the board of management at law firm Buddle Findlay, appointed to the board today as an independent director, internalisation of management on 30 June 2017
Chair Peter Masfen noted: “PFI’s 2017 financial results reflect strong leasing outcomes with nearly 97,000m² leased during the year. A series of important strategic initiatives have also been completed during the year, with the internalisation of management, portfolio acquisition, rights offer & bond offer all contributing to a very successful year.”
- Including the impact of the internalisation payment, net of tax, PFI recorded a profit after tax for the year of $51.7 million, or 11.25c/share, and net tangible assets of 163.2c/share
- Excluding the impact of the internalisation payment, net of tax, PFI recorded profit after tax for the year of $82.6 million, or 17.96c/share (down 34.5%) and NTA of 169.4c/share (up 5.4%)
- Distributable profit for the year up 6.6% to 8.08c/share
- Fourth quarter cash dividend of 2.15c/share, total cash dividends for the year of 7.45c/share, an increase of 0.1c/share
- $43.6 million, or 3.7%, increase in the value of the property portfolio from independent valuations
- 63% of contract rent varied, leased or reviewed during the year
Year-end portfolio occupancy at 99.9%, 2018 expiries of 7.4%
Cost savings as a result of the internalisation in the second half of 2017 are estimated at $2.7 million before interest & tax, equating to an increase in distributable profit of 0.59c/share. After allowing for interest & tax, the increase is $1.4 million, or 0.3c/share, a contribution of 7.1% to the increase in distributable profit in the second half of 2017. This contribution is ahead of the 6% estimated by Northington Partners in its independent appraisal report.
Operating revenues for the year increased by $2.4 million, or 3.4%, to $73.5 million, as increases due to positive leasing activity ($1.9 million), acquisitions ($1.7 million) & completed developments ($800,000) were partially offset by decreases due to increased intra-period vacancy ($1.2 million) & disposals ($800,000). The transition of the portfolio of 5 Penrose properties from former tenant Sistema to new tenants contributed about $800,000 to the increase in vacancy.
The company cut operating expenses by $2 million, or 7.3%, to $25.9 million. The internalisation of management in June cut costs by $4.3 million, partially offset by a $1.6 million increase in administrative expenses incurred from July-December in lieu of management fees. Non-recoverable property costs also increased by $700,000 due to the higher levels of vacancy, and costs incurred due to PFI’s recent asbestos testing programme.
Given these changes, the ratio of operating expenses to operating revenues was reduced from 39.3% to 35.3%.
In May 2017, a binding ruling from Inland Revenue confirmed that the proportion of the payment relating to the termination of the PFI management contract was deductible for income tax purposes. As a result, PFI recorded no current tax expense in 2017. The company will carry current-year tax losses of $2 million forward and expects to use them fully in 2018.
Excluding the impact of the internalisation payment, PFI’s effective current tax rate (the ratio of current taxation to operating earnings) increased to 21.0% (19.8% in 2016), largely due to the timing of deductible capital expenditure.
Non-operating income & expenses, which, for the most part, comprised the $42.9 million gross charge for termination of the management agreement, offset by a $43.6 million fair value gain on investment properties, totalled income of $1.9 million, as compared to income of $88.9 million in 2016.
After allowing for these non-operating income & expenses and deferred tax, the company made a $51.7 million profit after tax, or 11.25c/share. Excluding the impact of the internalisation payment, net of tax, the company recorded profit after tax of $82.6 million or 17.96c/share, down 34.5%.
PFI recorded distributable profit of 8.08c/share (7.58c/share), up 0.5c/share, or 6.6%.
The PFI board resolved today to pay a fourth quarter final cash dividend of 2.15c/share. As the company paid no tax paid in 2017, the dividend will have no imputation credits attached and a supplementary dividend won’t be paid to non-resident shareholders. The fourth quarter final dividend will take cash dividends for the year to 7.45c/share, up 0.1c/share. The dividend payout ratio was 96% (97%).
PFI also reported funds from operations (FFO) earnings of 8.57c/share (7.99c/share) and adjusted funds from operations (AFFO) earnings of 7.49c/share (6.95c/share), resulting in an FFO dividend payout ratio of 87% (92%) and an AFFO payout ratio of 99% (106%).
Change in dividend policy:
The PFI board resolved today to change the company’s dividend policy. It was based on distributable profit, but from this financial year will be based on FFO & AFFO: “Put simply, the new policy means dividend payments will reflect cashflow from sustainable rental activity alone.”
The PFI board believed the new policy was in line with best practice in this area and was expected to have a minimal impact on the quantum of dividends paid.
PFI’s net tangible assets/share (NTA) increased by 2.5c/share, or 1.6%, from 160.7c/share at the end of 2016 to 163.2c/share at December 2017.
After rebasing for additional shares on issue (-14.9c/share) and allowing for the rights offer & dividend reinvestment scheme (+13.9c/share), the change in NTA/share was driven by the increase in the fair value of investment properties (+8.7c/share), retained earnings (+0.8c/share) and a gain on the disposal of PFI’s property at 65 Hugo Johnston Drive in Penrose (+0.4c/share). Offsetting this were reductions in NTA as a result of the decrease in fair value of derivative financial instruments (-0.2c/share) and the net internalisation payment (-6.2c/share).
Excluding the impact of the internalisation payment, net of tax, PFI’s net tangible assets/share would have increased by 8.7c/share, or 5.4%, over the year to 169.4c/share.
The company ended the year with gearing of 30.8%, well within its self-imposed gearing limit of 40% & bank covenants of 50%. The interest cover ratio of 3.7 times was also well within bank covenants of 2.0 times.
Attribution: Company release.