PFI Announces Record Annual Results

PFI ANNOUNCES RECORD ANNUAL RESULTS Highlights - Record profit after tax for the year of $123.4 million or 27.42 cents per share - Distributable profit (1) for the year of 7.58 cents per share - Fourth quarter cash dividend of 2.05 cents per share, total cash dividends for the year of 7.35 cents per share, an increase of 0.05 cents per share over the prior year - 2017 distributable profit guidance of between 7.50 and 7.70 cents per share (2), dividend guidance of at least 7.35 cents per share - Strong balance sheet maintained, committed gearing of 31.0% - $88.2 million or 8.9% portfolio revaluation uplift, 14.4% increase in net tangible assets per share to 160.7 cents - 74% of contract rent varied, leased or reviewed during the year - Portfolio occupancy at 99.6%, 2017 expiries of 11.2% - $14.2 million acquisition and $8.3 million divestment settled after year-end NZX listed industrial property landlord Property for Industry Limited (PFI, the company) today announced record results for the year ended 31 December 2016. "Persistence and patience" is PFI Chairman Peter Masfen's summary of 2016. "We've maintained our focus on industrial property, concentrated on extracting value from strong Auckland demand, and watched and waited for favourable investment opportunities. A record profit, but-- more importantly-- another year of PFI delivering on its promise: consistent, long-term performance and strong, stable returns." Financial performance (refer appendix 1) Operating revenues for the year increased by $4.2 million or 6.2% over the prior year to $71.1 million, as increases due to acquisitions ($2.0 million), completed developments and rentalised capital expenditure ($1.4 million) and positive leasing activity ($1.3 million) were partially offset by decreases due to disposals ($0.5 million). Operating expenses for the year of $28.0 million were down $2.4 million or 7.9%. A reduction in interest expense and bank fees of $1.6 million, driven by a reduction in the weighted average cost of debt of almost 50 basis points, was responsible for the majority of this reduction, but reductions in non-recoverable property costs (decrease of $0.5 million) and management fees (decrease of $0.3 million) also contributed. As a result of these decreases, the ratio of operating expenses to operating revenues reduced to 39.3% from 45.4%. PFI's effective current tax rate for the year, being the ratio of current taxation to operating earnings, remained static at 19.8% (2015: 19.6%). Non-operating income and expenses, which, for the most part, comprised an $88.2 million fair value gain on investment properties, were more than double the amount in prior year. After allowing for these non-operating income and expenses and deferred tax, the company made a record profit after tax of $123.4 million. Distributable profit and dividends (refer appendix 2) PFI recorded distributable profit of 7.58 cents per share for the year, an increase of 0.57 cents per share or 8.1% over the prior year (2015: 7.01 cents per share). The PFI board has today resolved to pay a fourth quarter final cash dividend of 2.05 cents per share. The dividend will have imputation credits of 0.50 cents per share attached and a supplementary dividend of 0.23 cents per share will be paid to non-resident shareholders. The record date for the dividend is 27 February 2017 and the payment date is 8 March 2017. The dividend reinvestment scheme (DRS) will not operate for this dividend. The fourth quarter final dividend will take cash dividends for the year to 7.35 cents per share, an increase of 0.05 cents per share over the prior year, resulting in a dividend pay-out ratio of 97% (2015: 106%). Guidance PFI Chairman Peter Masfen said: "Looking to 2017, we expect distributable profit before management performance fees, if any, to be between 7.50 and 7.70 cents per share, subject as always to economic conditions." The company has, for the first time, today released an analysis of Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO), calculated in accordance with the Property Council of Australia's best practice guidelines (3). These calculations show that PFI's recorded FFO earnings of 7.99 cents per share and AFFO earnings of 6.95 cents per share, resulting in a FFO dividend pay-out ratio of 92% and an AFFO pay-out ratio of 106%. Peter Masfen continued: "For some investors, FFO and AFFO earnings are important measures, as there is a belief that they help investors better understand and compare the underlying financial performance of property entities. Some investors also advocate for an AFFO dividend pay-out ratio that is less than 100%. "That said, there are other investors for whom maintaining at least the current level of-- or growing-- cash dividends is more desirable. "The PFI board is looking to balance these views by maintaining or gradually increasing cash dividends, whilst at the same time seeking to grow AFFO earnings to cover those dividends. That being the case, we expect to pay a cash dividend of at least 7.35 cents per share in 2017." Balance sheet PFI's net tangible assets per share increased during the year by 20.2 cents per share or 14.4% to 160.7 cents per share. The $88.2 million fair value gain on investment properties, discussed further in the portfolio performance section below, accounted for 19.5 cents per share of the increase, with other minor items accounting for the remaining increase of 0.7 cents per share. Capital management PFI carried out a number of capital management initiatives during the year to ensure that the company maintained a strong balance sheet. The company's DRS operated throughout the year raising $7.5 million. In February 2016, the company's $375 million syndicated bank loan facility was refinanced on competitive terms. Existing lenders ANZ, BNZ, CBA and Westpac committed two $187.5 million tranches until May 2020 and 2021, extending the average term to expiry to 3.8 years as at end of the year. The cost of the facilities was also reduced as part of this process. In addition to these facilities, PFI maintained current total hedging (4) with a notional value of $313 million at an average rate of 4.31% for an average duration of 3.0 years. This current hedge rate is forecast to remain at low rates during 2017: based on current hedging and debt levels, an average of ~65% of the company's debt will be hedged at an average rate of ~4.46% (beginning of 2016: average of ~73% hedged at an average rate of 4.61%). The fair value of this hedging - recorded on PFI's statement of financial position - was largely unchanged at year-end (2016: liability of $10.0 million, 2015: liability of $10.4 million) despite significant volatility during the course of the year as a result of changes in market interest rates. When combined with the syndicated bank loan facility PFI's hedging provides the company with a weighted average cost of debt (WACOD) of 5.24% (5), which has continued to trend downwards (WACOD at December 2015: 5.71%), as historic expensive hedging rolled off during the year and was replaced with hedging at lower rates and low BKBM rates. The company ended the year with adjusted gearing (6) of 30.1%. Following the settlement of 11 Turin Place, East Tamaki (see development, divestments and acquisition below), PFI's gearing increased slightly to 31.0%, well within the company's self-imposed gearing limit of 40% and bank covenants of 50%. The interest cover ratio (7) of 3.4 times was also well within bank covenants of 2.0 times. Portfolio performance (refer attached PDF for table) Further to the announcement in December, PFI recorded an annual increase from independent valuations in the value of its property portfolio of $88.2 million or 8.9% to $1,083.3 million. An active year of portfolio management resulted in a number of individual property values increasing. High levels of demand for industrial property from both investors and owner occupiers, spurred on by low interest rates, also influenced the increase. As a result of the year-end valuation process, PFI's passing yield firmed from 7.33% to 6.69%, and on a portfolio basis there is now no over or under renting. Nearly 123,000 square metres representing 18% of PFI's existing portfolio was leased during the year to 32 new and existing tenants for an average term of 4.9 years. More than 80% of the contract rent secured by this leasing was as a result of lease renewals with 25 PFI tenants for an average term of 4.6 years. In addition to this, seven new leases were secured for an average term of 6.7 years. Incentives required to attract and retain tenants have reduced noticeably during 2016, with an average incentive of just 0.3 months per year of lease term being recorded in 2016. Included in the aforementioned totals was the lease of 3,872 square metres to Boxkraft at PFI's 80 Hugo Johnston Drive property in Penrose. This property is one of the five purchased by PFI in August 2015 from Sistema Plastics, with Boxkraft's lease commencing shortly after Sistema's departure in January 2017. The company also completed rent reviews on 84 leases during the year, resulting in an average annual uplift of 1.5% on $41.6 million of contract rent. Looking forward, PFI's near term leasing outlook remains positive: at year-end the company's portfolio was almost 100% occupied and 11.2% of contract rent is due to expire during 2017 (as at 31 December 2015: 9.3% was due to expire during 2016). In total, ~68% of PFI's portfolio is subject to some form of lease event during 2017, and PFI will continue to be able to access projected market rental growth as ~35% of those lease events (8) are market related. Development, divestments and acquisition The company's $25.9 million development of four pre-leased bulk store facilities at 124 Hewletts Road in Mount Maunganui, was completed in June 2016 ahead of schedule and under budget. A new $1.9 million warehouse at 54 Carbine Road & 6a Donnor Place, Mount Wellington was also completed during the first half of the year, with tenant commitment secured during the build process. The sale of PFI's non-core property at 85 Cavendish Drive, Manukau, settled in February 2016, with the funds realised from that sale being reinvested into the aforementioned developments. In December 2016, the company contracted to sell a property at 27 Zelanian Drive, East Tamaki, for a net sales price of $8.3 million. The sale of this vacant property settled subsequent to year-end on 1 February 2017. Also subsequent to year-end, on 2 February 2017, PFI purchased an industrial property at 11 Turin Place, East Tamaki. The property is leased for 15 years to Thermakraft-- a market leader in building and wall wrap, roofing underlay, and window flashing tape-- and the lease provides fixed rental growth of 4.55% every two years. The property was purchased in a sale and lease back transaction for a net purchase price of $14.2 million, representing a yield on purchase of 6.5%. Market update ANZ estimate that the New Zealand economy grew around 3.5% over 2016, and suggest that a similar pace of annualised growth will be achieved for at least the first half of 2017. Paul Bloxham, the HSBC economist who branded New Zealand as the "rock-star economy" of the OECD in 2014, has said he expects the country's economy to continue to outperform many of its peers in the coming years. This positive period of economic growth, say Colliers International, is reflected in the industrial sector. "The recurring commentary," they say, "is the lack of stock." Access to suitable levels of stock remains a vital ingredient for an expanding market and across the country demand is outweighing supply. They believe the medium-term outlook for the industrial sector is robust. CBRE point out that the amount of new industrial supply that entered the market in 2016 is the largest since 2007, and they expect 2017 to be another strong year, with no significant slowdown in construction activity and with more speculative developments in the pipeline than in recent years. Nevertheless, they say given that economic forecasters have unanimously revised New Zealand's growth prospects upwards, and because the industrial property market is highly correlated with overall GDP trends, they expect strong demand for industrial space in 2017. Consequently, they expect overall industrial vacancy to be stable in 2017 at below 2%. They also predict yields will largely be stable in 2017. Strategy and outlook PFI remains focused on its strategy of investing in quality industrial property in New Zealand's main urban centres. The company will continue to drive shareholder returns by actively managing vacancy and upcoming lease expiries, opportunistically pursuing both core and value-add industrial acquisitions, maximising utilisation of the portfolio and divesting of non-core assets when value has been maximised and an opportunity to recycle capital into industrial property arises. "Commentators are very positive about New Zealand's economic prospects for 2017," says Peter Masfen, "but we should not ignore their caveats: as the ANZ says, 'the world is awash with risks and challenges'. At PFI, we'll take it carefully and stay focused on the long-term. That is the key to successful investing." Contact For further information please contact: Simon Woodhams General Manager Phone: +64 9 303 9652 Email: woodhams@propertyforindustry.co.nz Craig Peirce Chief Financial Officer and Company Secretary Phone: +64 9 303 9651 Email: peirce@propertyforindustry.co.nz About PFI PFI is New Zealand's only listed company specialising in industrial property. PFI's portfolio of 84 industrial properties in Auckland, Hamilton, Mount Maunganui, Wellington and Christchurch, is leased to 143 tenants (9). www.propertyforindustry.co.nz Attachments NZX Appendix 1 - 12ME 31 December 2016 NZX Appendix 1 - 12ME 31 December 2016 - Financial Statements NZX Appendix 7 - 12ME 31 December 2016 NZX Annual Results Presentation - 12ME 31 December 2016 Appendices (refer attached PDF for appendices) (1) Distributable profit is a non-GAAP performance measure used by the PFI board in determining dividends to shareholders. Please refer to the appendices for more detail as to how this measure is calculated. (2) Before management performance fees, if any. (3) FFO and AFFO are non-GAAP financial information and are common investor metrics. Please refer to the appendices for more detail as to how this measure is calculated. (4) PFI defines hedging as any debt that has an interest rate secured for more than three months. (5) As at 31 December 2016. Weighted average cost of debt comprises BKBM, hedging, margins and all borrowings related fees. (6) That is, total borrowings as a percentage of the most recent independent valuation of the property portfolio, adjusted for the sale of 27 Zelanian Drive, which had been unconditionally sold as at 31 December 2016 and settled on 1 February 2017. (7) That is, the ratio of interest expense and bank fees to operating earnings excluding interest expense and bank fees. (8) Being ~23% of total contract rent. (9) As at 13 February 2017. End CA:00296627 For:PFI Type:FLLYR Time:2017-02-13 08:36:38