Archive | Property For Industry

PFI reports strong year

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.

Highlights:

  • 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.”

Summary:

  • 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.

Financial performance:

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.

Balance sheet:

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.

Links:
NZX announcement
NZX presentation

Attribution: Company release.

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PFI lifts guidance on valuation gain

Property For Industry Ltd upgraded earnings guidance yesterday on an expected $44 million (3.8%) portfolio valuation increase to $1.21 billion.

The NZX-listed industrial property landlord began the year with a portfolio of 84 properties valued at $1.083 billion, acquired 9 more for a total $84 million and sold one for its $12 million book value.

Independent valuers CBRE, Colliers International, JLL & Savills carried out the valuations, which remain subject to finalisation & audit.

PFI chair Peter Masfen said a driver of the valuation gain was the leasing of nearly 88,000m² – 12% of its portfolio. The company secured 24 new & existing tenants for an average term of 5.5 years. Half the contract rent was secured by lease renewals with 9 existing tenants for an average term of 4.3 years. The average term for the 15 new leases was 6.4 years.

Mr Masfen said the company had also completed a series of important strategic initiatives during the year, internalising management, adding to the portfolio and making rights & bond offers.

“These factors have combined to allow us to increase guidance for full-year distributable profit from 7.7-7.9c/share to around 8.0c/share. Guidance for full-year cash dividends totalling 7.45c/share is unchanged.”

PFI will release its full-year results, including the final valuation, on Monday 12 February.

Attribution: Company release.

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Updated: PFI $100 million bond issue fully subscribed

Published 2 November 2017, updated 12 November 2017:
Property for Industry Ltd confirmed its $100 million 7-year bond issue on 2 November. On 10 November, the interest rate was set at 4.59%/year, reflecting a margin of 1.65%/year above the 7-year swap rate.

PFI offered $75 million of senior secured fixed rate bonds to institutional & New Zealand retail investors and $25 million in oversubscriptions, and it was fully subscribed. There was no public pool. The company will use the proceeds to repay existing bank debt.

PFI expects the offer to open next Monday, 13 November, and to close on Friday 24 November. The indicative margin range above the 7-year swap rate for the bonds was 1.65-1.8%/year, subject to a minimum interest rate of 4.55%/year. The margin & interest rate were set following a bookbuild process on Friday 10 November.

Link: PFI bond offer product disclosure statement, terms sheet & presentation

Earlier stories:
1 November 2017: PFI settles portfolio purchase
6 October 2017: PFI uses new credit facility & rights issue to buy low-site-coverage freight portfolio

Attribution: Company release.

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PFI gets 79% takeup for rights offer

NZX listed industrial property landlord Property for Industry Ltd said on Thursday 78.7% of the new shares available under its 1:10 pro rata renounceable rights offer were taken up.

The 35.7 million new shares represent gross proceeds of $54.9 million. The new shares not taken up under the rights offer will be allotted to the underwriter, Forsyth Barr Group Ltd.

New shares will be allotted & begin trading on Tuesday 7 November.

Earlier stories:
2 November 2017: PFI launches $100 million bond issue
1 November 2017: PFI settles portfolio purchase
6 October 2017: PFI uses new credit facility & rights issue to buy low-site-coverage freight portfolio

Attribution: Company release.

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PFI settles portfolio purchase

NZX-listed industrial property landlord Property For Industry Ltd (PFI) has settled its $69.5 million purchase of a portfolio of 8 industrial properties & one head office.

The portfolio comprises 7 properties leased to the Transport Investments Ltd group, one of New Zealand’s largest private domestic freight & logistics businesses, and 2l properties leased to NZ Post, Aviagen & Rockgas.

PFI has initially funded the acquisition via an extension of its banking facilities. It will repay those facilities with the proceeds of its $70 million 1:10 pro rata renounceable rights offer, which closes today.

Earlier story:
6 October 2017: PFI uses new credit facility & rights issue to buy low-site-coverage freight portfolio

Attribution: Company release.

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PFI considers $100 million bond issue

NZX-listed industrial property landlord Property for Industry Ltd said on Friday it was considering issuing up to $100 million of bonds to institutional & New Zealand retail investors.

The offer would be up to $75 million of senior secured fixed rate bonds, expected to have a term to maturity of 7 years, with the ability to accept up to $25 million in oversubscriptions. The company would use the proceeds to repay existing bank debt.

It expects to release full details this week.

Attribution: Company release.

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PFI uses new credit facility & rights issue to buy low-site-coverage freight portfolio

Property For Industry Ltd announced its acquisition of a 9-property Transport Investments Ltd portfolio on Wednesday for $69.5 million, matched by a rights issue to raise $70 million of new equity.

The portfolio comprises 8 industrial properties & one head office. 7 are leased to the Transport Investments Ltd Group, one of New Zealand’s largest private domestic freight & logistics businesses. The 2 additional properties are leased to NZ Post Ltd, Aviagen NZ Ltd & Rockgas Ltd.

Image above: The 2-year-old Transport Investments depot at Wiri.

PFI will initially fund the acquisition via an extension of its banking facilities, using the proceeds of the rights offer to repay debt & provide balance sheet capacity to fund further portfolio activity. To this end, it’s established a $70 million institutional credit facility with ANZ Bank NZ Ltd, ranking alongside PFI’s existing facilities & expiring on 31 January 2019.

The 1:10 pro rata renounceable rights offer has an exercise price of $1.54/new share and is fully underwritten by Forsyth Barr Group Ltd. The issue price represents a 7.1% discount to the theoretical ex-rights price of $1.658.

Rights trading will open next Wednesday, 11 October, and close on Thursday 26 October. Trading in the new shares will open on Tuesday 7 November.

PFI expects the acquisition & equity raising to reduce pro forma gearing from 34.2% to 32.3%. The company has maintained its guidance for distributable profit of between 7.7-7.9c/share & a cash dividend of 7.45c/share for the 2017 financial year.

The portfolio has a weighted average lease term of 13.9 years, 100% occupancy & a passing yield of 7.22%.

A key feature for PFI is that the portfolio has low overall site coverage, averaging 25% across the 9 sites, providing medium to long-term development potential.

PFI general manager Simon Woodhams said the portfolio would increase the company’s overall weighted average lease term from 4.8 years to 5.4 years: “The lease agreements with Transport Investments are on attractive terms, with initial 15-year terms & fixed rent reviews of 4.55% every 2 years.

Settlement of the acquisition is scheduled for 31 October.

The properties:

Wiri, 63 McLaughlins Rd: net lettable area 7123m², site area 23,976m², site coverage 29.7%, rent $1.15 million, tenant TIL Group
Napier, 39 Edmundson St: net lettable area 2449m², site area 12,140m², site coverage 20.2%, rent $220,000, tenant TIL Group
New Plymouth, 330 Devon St East: net lettable area 482m², site area 1051m², site coverage 45.9%, rent $112,000, tenant TIL Group
New Plymouth, 2 Smart Rd: net lettable area 2342m², site area 6121m², site coverage 38.3%, rent $275,000, tenant NZ Post, Rockgas
New Plymouth, 20 Constance St: net lettable area 1432m², site area 3312m², site coverage 43.2%, rent $387,000, tenant Aviagen
New Plymouth, 28 Paraite Rd: net lettable area 12,521m², site area 40,324m², site coverage 31.1%, rent $1.195 million, tenant TIL Group
Blenheim, 11 Sheffield St: net lettable area 4823m², site area 20,724m², site coverage 23.3%, rent $490,000, tenant TIL Group
Nelson, 15 Artillery Place: net lettable area 2907m², site area 22,343m², site coverage 13%, rent $540,000, tenant TIL Group
Christchurch, 41 & 55 Foremans Rd: net lettable area 4584m², site area 24,907m², site coverage 18.4%, rent $670,000, tenant TIL Group
Total: net lettable area 38,663m², site area 154,898m², site coverage 25.0%, rent $5.039 million.

Transport Investments activity

Transport Investments is the parent company for a number of transport & logistics businesses including Hooker Pacific, TNL, Roadstar, Pacific Fuel Haul Ltd and 2 acquired this year, NZL Group Ltd & Move Logistics Ltd.

In Auckland, Transport Investments moved in October 2015 from 2 facilities at Airport Oaks & Onehunga to its purpose-built Wiri facility on McLaughlins Rd, a 7.4km hop to Auckland Airport.

Transport Investments said in March it had been looking at some strategic areas to move into to strengthen its overall business and one was third-party logistics, where the logistics provider takes responsibility for management of particular supply chain requirements for the client: “This can include warehousing, order taking & filling, inventory management, labour supply, fleet management &other activities, as well as the physical distribution aspect.”

The immediate outcome was to buy Move Logistics Ltd, intending it to operate as an autonomous entity within the group, starting 31 May.

In July, Transport Investments said freight & logistics company NZL Group Ltd, which it acquired in June, would move its Mt Maunganui operations to a $20 million purpose-built facility at the Tauriko Business Estate, 10km from the port, between state highway 29 over the Kaimais to the Waikato and the highway 36 bypass to Rotorua.

The Mt Maunganui site’s owner, businessman & former MP Bob Clarkson, will develop the new Tauriko facility. NZL has signed a 15-year lease with rights of renewals.

Links:
PFI announcement & supporting documents
PFI presentation document

Earlier story:
9 July 2017: NZL to move Mt Maunganui operations to Tauriko

Attribution: PFI release & offer documents, Transport Investments website.

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Masfen says PFI internalisation hit for long-term good

Property for Industry Ltd lifted its after-tax result for the June half by 12.2%, but turned it into a loss with the $42 million internalisation vote (at a net after-tax cost to PFI of $30.3 million) right on balance date.

PFI chair Peter Masfen said on Wednesday the benefits of the internalisation would accrue in the years to follow: “One benefit is an enhanced level of distributable profit, enabling higher dividends, which we have confirmed in today’s announcement.”

Highlights:

  • Increased full-year dividend guidance – distributable profit (1) of between 7.7-7.9c/share, cash dividend of 7.45c/share
  • Transition of the Penrose portfolio – $13 million of shareholder value created equating to a property level internal rate of return of about 24%
  • Including the impact of the internalisation, PFI recorded a loss after tax of $5.6 million (1.25c/share and net tangible assets of 155.6c/share (160.7c/share at December)
  • Excluding the impact of the internalisation, PFI recorded profit after tax of $25.2 million (5.58c/share), up 12.2%, and net tangible assets of 162.5 cents/share (up 1.1% from December)
  • Distributable profit up 2.4% to 3.86c/share
  • Strong balance sheet – $40 million short-term facility obtained to complete the internalisation, gearing of 34.2%
  • $6 million uplift from independent revaluation of 7 properties, independent desktop review of rest of the portfolio
  • 29% of contract rent varied, leased or reviewed
  • Portfolio occupancy at 99.5%, with 5.5% of contract rent due to expire in the second half of the year
  • $14.2 million acquisition & $14.3 million divestment.

Link: More details

Earlier stories:
5 July 2017: PFI settles internalisation
23 June 2017: PFI vote strongly in favour of internalisation, and building sale settles

Attribution: Company release.

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PFI settles internalisation

NZX-listed Property for Industry Ltd said on Friday it had settled the internalisation of the company’s management, which shareholders overwhelmingly approved at the annual meeting on 22 June.

Shareholders agreed at the annual meeting to pay the existing external management team $42 million (at a net after-tax cost to PFI of $30.3 million) for the contract. The company will employ the same team to run the business on internal contracts.

The company will release its interim results on Wednesday 9 August and said it would give more details about the changed management structure then.

Earlier story:
23 June 2017: PFI vote strongly in favour of internalisation, and building sale settles

Attribution: Company release.

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PFI vote strongly in favour of internalisation, and building sale settles

Property for Industry Ltd shareholders voted 94.4% in favour yesterday of paying $42 million to internalise the NZX-listed company’s management.

The same management team will stay in place, making some wonder why the transaction was needed at all.

But deputy chair Anthony Beverley said benefits included the control on expenses, dealing with conflicts and strategic benefits. He said the return to shareholders would from the investment would flow through reduced expenses and higher profits.

NZ Shareholders Association chair John Hawkins told the PFI meeting the association had seen lower numbers than the 6.5% accretion to shareholders that the independent report by Northington Partners ascribed to the internalisation, but all the other predictions were still accretive.

And then he added: “I am confident that if shareholders reject this deal the management contract will be sold to a third party – that’s from some of the parties we have spoken to.”

And that’s the crux of the internalisation. PFI had an opportunity to control the future of its management, whereas sale of the management contract to a third party could have led to a far different future.

There were some quibbles that owners of the present manager, PFIM Ltd, would switch to internal contracts yet would still be allowed to conduct other business from the company office, but Mr Beverley said the external contract allowed that and the new contract would require them to give PFI priority.

The vote was held at PFI’s annual meeting, where the operational highlight was a presentation by general manager Simon Woodhams on the returns the company had achieved from its $28.5 million acquisition of the Sistema Plastics Ltd portfolio of 5 Penrose properties in 2015.

Sistema moved last year to new premises at Ihumatao, near Auckland Airport, after a period leasing back its Penrose premises. PFI has signed long-term leases on 3 of the Penrose buildings, sold one and has the fifth building still vacant.

The sale of 65 Hugo Johnston Drive to Crown Equipment Ltd for $14.25 million, up from PFI’s August 2015 acquisition price of $11.01 million, settled on Monday.

Earlier stories:
29 May 2017: Northington sees big gain for PFI from internalisation
24 May 2017: IRD makes tax ruling relating to PFI internalisation
1 May 2017: PFI sells one & leases 3 of 5-property Penrose portfolio
3 April 2017: PFI proposes internal management after 6 years of external

Attribution: Annual meeting, company releases.

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