PFI Announces Interim Results

PFI ANNOUNCES INTERIM 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/m6/p/2sfkeyvt. 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. >> Highlights of the interim period ? Internalisation of management on 30 June 2017 ? Increased guidance: distributable profit (1) of between 7.70 and 7.90 cents per share, cash dividend of 7.45 cents per share ? Transition of the Penrose portfolio: approximately $13 million of shareholder value created equating to a property level internal rate of return of approximately 24% NZX listed industrial property landlord Property for Industry Limited (PFI, or the Company) today announced its interim results for the six months to 30 June 2017. "Two items headline PFI's first half of 2017," says PFI Chairman, Peter Masfen. "The decision at the annual meeting of shareholders in June to internalise management and transitioning the portfolio of five Penrose properties purchased in 2015." "We continue to invest for the future: at the annual meeting of shareholders in June, shareholders approved the internalisation of PFI's management. The immediate, one-off, cost of this is recorded in the financial statements released today, but the benefits will 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." Mr. Masfen continues: "We also continue to execute on our strategy: in August of 2015, we purchased a portfolio of five Penrose properties for $28.5 million. Two years on, as you will see in the material released today, we are pleased to report the creation of approximately $13 million of shareholder value from that transaction." "We're sticking to our plan. It's how we deliver strong, stable returns to shareholders." Summary of the interim results ? Including the impact of the internalisation, PFI recorded a loss after tax for the six months to 30 June 2017 of $5.6 million or 1.25 cents per share and net tangible assets of 155.6 cents per share ? Excluding the impact of the internalisation (2), PFI recorded profit after tax for the six months to 30 June 2017 of $25.2 million or 5.58 cents per share (up 12.2% on the prior period) and net tangible assets of 162.5 cents per share (up 1.1% from 31 December 2016) ? Distributable profit for the six months to 30 June 2017 up 2.4% on the prior period to 3.86 cents per share ? Second quarter cash dividend of 1.75 cents per share, total cash dividends for the six months to 30 June 2017 of 3.50 cents per share, in line with the prior period ? Strong balance sheet: $40 million short-term facility obtained to complete the internalisation, gearing of 34.2% ? $6.0 million uplift from independent revaluation of seven properties, independent desktop review of remainder of the portfolio ? 29% of contract rent varied, leased or reviewed during the first six months of 2017 ? 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 and $14.3 million divestment Internalisation At the Company's annual meeting in June, PFI's shareholders passed a resolution to internalise the management of PFI, and the internalisation was settled on 30 June 2017. The impact of the internalisation, including the termination payment of $42 million, has been recorded in the Company's interim financial statements, released today. Mr. Masfen noted: "The management of the Company by the prior Manager, PFIM, has been very positive for PFI and has contributed to the delivery of strong and stable returns for our shareholders. Pleasingly, internalisation sees this partnership continue, with the retention of the existing highly experienced management team and employees." "There are several other benefits expected from internalisation, including an enhanced level of distributable profit, enabling higher dividends, which we have confirmed in today's announcement." Financial performance Operating revenues for the six months increased by $0.5 million or 1.4% over the prior period to $35.7 million, as increases due to completed developments ($0.7 million), positive leasing activity ($0.8 million) and acquisitions ($0.4 million) were partially offset by decreases due to increased vacancy ($0.8 million) and disposals ($0.4 million). The transition of the portfolio of five Penrose properties from the prior tenant (Sistema) to new tenants contributed approximately $0.6 million to the increase in vacancy. Operating expenses for the six months of $13.5 million reduced by $0.6 million or 4.2%. A reduction in management fees ($0.7 million) and interest expense and bank fees ($0.5 million), was partially offset by an increase in non-recoverable property costs ($0.6 million). This increase in non-recoverable property costs was a result of the aforementioned higher levels of vacancy and costs incurred due to PFI's recent asbestos testing programme. Given these changes in operating revenues and expenses, the ratio of operating expenses to operating revenues reduced to 37.7% from 39.9%. In May 2017, PFI received a binding ruling from the IRD confirming that the proportion of the payment relating to the termination of the PFI management contract is deductible for income tax purposes. As a result, PFI recorded no current taxation expense in the first half of 2017. Current year tax losses of $7.3 million will be carried forward to the second half of 2017 and are expected to be fully utilised in 2018. Excluding the impact of the internalisation, PFI's effective current tax rate (being the ratio of current taxation to operating earnings) for the first half of 2017 increased to 21.2% (H1 2016: 18.1%), this increase being largely due to the timing of deductible capital expenditure. Non-operating income and expenses, which, for the most part, comprised the gross charge for the termination of management agreement of $42.9 million, totalled an expense of $35.1 million in the first half of 2017, as compared to income of $3.5 million in the prior period. After allowing for these non-operating income and expenses and deferred tax, the Company made a loss after tax for the six months to 30 June 2017 of $5.6 million or 1.25 cents per share, but excluding the impact of the internalisation, the Company recorded profit after tax of $25.2 million or 5.58 cents per share, up 12.2% on the prior period. Distributable profit, dividends, FFO and AFFO PFI recorded distributable profit of 3.86 cents per share for the first six months of 2017, an increase of 0.09 cents per share or 2.4% over the previous corresponding period (H1 2016: 3.77 cents per share). The PFI Board has today resolved to pay a second quarter interim cash dividend of 1.75 cents per share. Due to there being no tax paid by the Company during 2017, the dividend will have no imputation credits attached and a supplementary dividend will not be paid to non-resident shareholders. The record date for the dividend is 23 August 2017 and the payment date is 1 September 2017. The dividend reinvestment scheme (DRS) will operate for the second quarter dividend with a discount of 2%. The last date for receipt of an election notice for participation in the DRS for the second quarter dividend is the record date, 23 August 2017. Further details on PFI's DRS can be found on PFI's website: https://www.propertyforindustry.co.nz/investor-centre/dividend-information/di vidend-reinvestment/. The second quarter dividend will take cash dividends for the first six months of 2017 to 3.50 cents per share, in line with the prior period, resulting in a dividend pay-out ratio of 91% (H1 2016: 93%). PFI also reported Funds From Operations (FFO (3)) earnings of 4.08 cents per share and Adjusted Funds From Operations (AFFO (3)) earnings of 3.43 cents per share, resulting in a FFO dividend pay-out ratio of 86% and an AFFO pay-out ratio of 102%. Guidance Mr. Masfen said: "The first half of 2017 has delivered strong leasing outcomes. The Company's results for the full year are expected to see a continuation of these outcomes and are also expected to be assisted by the recent internalisation. The Company has therefore increased the guidance for full year distributable profit to from 7.50 - 7.70 cents per share to 7.70 - 7.90 cents per share." "In the ordinary course of business, if performance allowed, PFI has increased dividends by approximately 0.05 cps each year. However, in the second half of 2017, there is the additional consideration that the internalisation is forecast to provide earnings accretion, enhancing distributable profit for PFI, which allows for higher dividends." Mr. Masfen continued: "We want to take this opportunity to reiterate the view we expressed in the annual results announcement in February: that the PFI Board is looking to balance the competing priorities of maintaining or gradually increasing cash dividends, whilst at the same time seeking to grow AFFO earnings to cover those dividends." "Balancing these factors, we expect to pay full year cash dividends totalling 7.45 cents per share in 2017, up 0.10 cents per share on the prior year." Balance sheet PFI's net tangible assets (NTA) per share decreased by 5.1 cents per share or 3.2% from 160.7 cents per share as at 31 December 2016 to 155.6 cents per share as at the end of the interim period. The change in NTA per share was driven by the increase in the fair value of investment properties (described below, +1.3 cents per share) and a gain on the disposal of PFI's property at 65 Hugo Johnston Drive in Penrose (described below, +0.4 cents per share). Offsetting this was the net internalisation payment resulting in a reduction of NTA of 6.8 cents per share. Excluding the impact of the internalisation, PFI's net tangible assets per share would have increased by 1.8 cents per share or 1.1% over the first six months of 2017 to 162.5 cents. Capital management PFI's strong balance sheet was maintained by active management of the Company's capital structure. In April 2017, a $50 million Institutional Credit facility was established with ANZ to ensure adequate bank loan facilities were in place to complete the internalisation. The facility expires on 31 July 2018 and ranks alongside PFI's existing syndicated bank loan facility. Following the sale of PFI's property at 65 Hugo Johnston Drive in Penrose, the facility limit was reduced to $40 million in June 2017. In addition to this facility, the Company maintained its $375 million syndicated bank loan facility with ANZ, BNZ, CBA and Westpac. The average term to expiry of all facilities stood at 3.1 years as at the end of the interim period. Whilst the bank loan market remains supportive of PFI and the listed property sector more generally, subject to market conditions, the Company is also considering options such as a senior secured bond issue, to extend and diversify the Company's borrowings. During the first half of 2017 PFI maintained current total hedging (4) with a notional value of $220 million at an average rate of 4.46% for an average duration of 2.8 years. This current hedge rate is forecast to remain at low rates for the remainder of 2017: based on current hedging and debt levels, an average of approximately 57% of the Company's debt will be hedged at an average rate of approximately 4.44%. The fair value of PFI's hedging, recorded on PFI's statement of financial position, was largely unchanged from year-end (30 June 2017: liability of $10.5 million, 31 December 2016: liability of $10.0 million). PFI's weighted average cost of debt (WACOD) reduced to 4.78% (5) at the end of the interim period, a significant reduction from the 31 December 2016 rate of 5.24%. This decrease was in part due to increased levels of borrowings to fund the internalisation. The Company ended the interim period with gearing (6) of 34.2%, well within the Company's self-imposed gearing limit of 40% and bank covenants of 50%. The interest cover ratio (7) of 3.6 times was also well within bank covenants of 2.0 times. Portfolio performance < Refer table in attached PDF > At the end of the interim period, independent valuations were carried out on seven PFI properties which had significant leasing during the first half of 2017. The independent valuations resulted in an increase in value of $6.0 million or 9.8%. An independent desktop review of the remainder of the portfolio confirmed that, for the properties reviewed in the aggregate, there has not been a material change in value. As a result of portfolio and valuation activity PFI's passing yield remained constant at 6.7%. Nearly 33,000 square metres representing more than 6% of PFI's existing portfolio by rent was leased during the interim period to 11 new and existing tenants for an average increase in term of 6.0 years. Lease renewals with five PFI tenants for an average increase in term of 2.9 years represented 44% of the contract rent secured. In addition to this, six new leases were secured for an average term of 8.4 years. Across these renewals and new leases low levels of incentives were required to attract and retain tenants. Coupled with this, face rental growth is being achieved, with contracted rental rates ahead of December 2016 market rents. In addition to these new leases and retentions, rent reviews were completed on 41 leases during the interim period, resulting in an average annual uplift of 2.4% on $16.7 million of contract rent. As highlighted at the Company's annual meeting in June 2017, the first half of this year has also seen the successful transition of the portfolio of five Penrose properties purchased in 2015. In August of that year, PFI purchased these properties for $28.5 million. Two years on, 93% of the properties have been transitioned from former tenant Sistema to new tenants Boxkraft and MOTAT and one property has been sold for a gain on sale of $1.9 million. General Manager Simon Woodhams notes: "This has been a particularly pleasing set of transactions. We estimate that in total around $13 million of shareholder value has been created, which equates to a property level internal rate of return of around 24%." Looking forward, PFI's near term leasing outlook remains positive: at 30 June 2017, the Company's portfolio was almost 100% occupied and 5.5% of contract rent is due to expire during the second half of the year. Since 30 June 2017, a further 1.8% of 2017 expiries and 0.2% of vacancy has been leased and an additional 1.3% of 2017 expiries are in advanced stages of negotiation. Around 42% of PFI's portfolio is subject to some form of lease event during the remainder of 2017. PFI will continue to access projected market rental growth as approximately 30% of those lease events (8) are market related. Divestments, acquisition and development The sale of PFI's vacant industrial property at 27 Zelanian Drive, East Tamaki, settled in February 2017. Also in February 2017, PFI purchased an industrial property at 11 Turin Place, East Tamaki, in a sale and lease back transaction from Thermakraft for a net purchase price of $14.2 million, representing a yield on purchase of 6.5%. In May, the Company accepted an unsolicited offer to sell its property at 65 Hugo Johnston Drive, Penrose for a gross sales price of $14.3 million. The sale of this vacant property to an owner-occupier settled in June 2017 and represented a 17.8% premium above the December 2016 book value. At the end of the interim period, PFI committed $5.0 million to undertake the design and build of a new 2,500 sqm warehouse to be built on the Company's surplus land at 212 Cavendish Drive, Manukau. Tenant commitment will be sought during the 12-month design and build programme, and the project is expected to provide a return on incremental cost of approximately 7.5% once leased. The recycling of capital remains an important part of PFI's strategy: in total, PFI has acquired approximately $76.5 million and developed approximately $34.0 million of industrial property over the last three years. Over that same period, the Company has disposed of approximately $47.1 million non-core and vacant property. Market update Commentators report that the New Zealand economy is in good shape: ANZ say the current economic cycle has reached a mature stage but they nevertheless expect annual GDP growth to hover around 3% over 2017, well above the developed world average. This positive period of economic growth is translating into high levels of occupier demand for industrial property: in June 2017, CBRE reported that Auckland industrial vacancy stood at just 1.7% or 210,000 sqm. They report new rental benchmarks are being set for prime grade assets and active leasing market, low vacancy, and a manageable supply pipeline contributed to rental growth of nearly 3% for secondary grade assets in Q1 2017. Colliers International July 2017 Commercial Property Investor Confidence Survey showed that while the retail and office sectors have seen a reduction in confidence in all three main centres, industrial property confidence increased across the board. Auckland's industrial investor confidence was the highest at a net positive of 60%. This mix of strong economic growth, favourable occupier supply and demand dynamics and high levels of investor market confidence has, according to CBRE in their July 2017 report, resulted in industrial property yields falling a further approximately 30 basis points (0.3%) in the first six months of 2017. Strategy and outlook "The retention of the existing team as part of PFI's recent internalisation will ensure the continuity of our successful strategy" noted Mr. Masfen. "We remain focused on investing in quality industrial property in New Zealand's main urban centres. Our team 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." Mr. Masfen concluded: "We have invested for the future and we have executed on our strategy. At the mid-point of 2017, with a very long history of providing strong and stable returns, we continue to attend to performing for our shareholders." ENDS ABOUT PFI & CONTACT PFI is New Zealand's only listed company specialising in industrial property. PFI's portfolio of 83 properties located in Auckland, Hamilton, Mount Maunganui, Wellington and Christchurch is leased to 144 tenants. 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 --- Property for Industry Limited Shed 24, Prince's Wharf, 147 Quay Street, Auckland 1010 PO Box 1147, Shortland Street, Auckland 1140 --- www.propertyforindustry.co.nz Attachments NZX Appendix 1 - 6ME 30 June 2017 NZX Appendix 1 - 6ME 30 June 2017 - Financial Statements NZX Appendix 7 - 6ME 30 June 2017 NZX Interim Results Presentation - 6ME 30 June 2017 Appendices Appendix 1 - Earnings and net tangible assets excluding the impact of the internalisation < Refer table in attached PDF > Appendix 2 - Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) < Refer table in attached PDF > Notes: (1) Distributable profit is a non-GAAP performance measure used by the PFI Board in determining dividends to shareholders. Please refer to note 4.1 of the 30 June 2017 financial statements for more detail as to how this measure is calculated. (2) The internalisation of management is a significant one-off event. In order to provide a basis for comparison, some measures have been presented excluding the impact of internalisation. Please refer to Appendix 1 for more detail as to how these measures were calculated. (3) FFO and AFFO are non-GAAP financial information and are common investor metrics, which have been calculated in accordance with the guidelines issued by the Property Council of Australia. Please refer to Appendix 2 for more detail as to how these measures were calculated. (4) PFI defines hedging as any debt that has an interest rate secured for more than three months. Above figures exclude hedging with forward starting dates. (5) 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. (7) That is, the ratio of interest expense and bank fees to operating earnings excluding interest expense and bank fees. (8) Being ~13% of total contract rent. End CA:00305229 For:PFI Type:HALFYR Time:2017-08-09 08:37:08