Significant Portfolio Activity Drives Increased Earnings

SIGNIFICANT PORTFOLIO ACTIVITY DRIVES INCREASED EARNINGS 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/izb4uwjf. 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 - Significant portfolio activity: 58,000 square metres or 8% of the portfolio leased during the interim period to 11 tenants for an average increase in term of 6.5 years - Increased earnings and dividends: profit after tax up $35.2 million, 9.4% increase in Funds From Operations (FFO) (1) earnings per share, 2.5% increase in Adjusted Funds From Operations (AFFO) earnings per share, cash dividend up 2.9% to 3.60 cents per share - Acquisition: neighbouring property acquired for $16.0 million, creates an industrial estate of ~4.5 hectares in Penrose - Governance changes: Peter Masfen retires after 16 years as Chair, Anthony Beverley appointed as new Chair Significant portfolio activity and increased earnings and dividends are the headline news as Property for Industry Limited (PFI, the Company) today announced its interim results for the six months to 30 June 2018, a period which also saw the retirement of Peter Masfen and the acquisition of 306 Neilson Street, Penrose. "Peter's legacy," says new Chair, Anthony Beverley, "is PFI's unwavering focus on shareholder returns. Even though Peter's retirement marks the end of a significant period in PFI's history, there will be no change in that focus." Summary of the interim result - Profit after tax for the six months of $29.6 million or 5.93 cents per share - 9.4% increase from the prior period in FFO earnings to 4.46 cents per share, 2.5% increase from the prior period in AFFO earnings to 3.52 cents per share - Second quarter cash dividend of 1.80 cents per share, total cash dividends for the six months of 3.60 cents per share, up 0.10 cents per share or 2.9% from the prior period - $7.9 million uplift from independent revaluation of ten properties, independent desktop review of remainder of the portfolio - Net tangible assets of 165.2 cents per share, up 1.2% from 31 December 2017 - 34% of contract rent varied, leased or reviewed during the first six months of 2018 - Portfolio occupancy of 98.1%, just 2.0% of contract rent due to expire in the second six months of the year Financial performance Net rental income for the six months increased by $3.7 million or 10.5% to $39.3 million, as increases from acquisitions ($2.7 million) and positive leasing activity ($1.6 million) were partially offset by decreases due to increased vacancy ($0.6 million). Average occupancy during the first half of 2018 was around 98%, and earnings guidance for the remainder of the year assumes that occupancy of around 100% is reached by late 2018 to early 2019. A reduction in management fees due to the June 2017 internalisation contributed $2.9 million to a reduction in expenses, which was partially offset by a $1.6 million increase in administrative expenses incurred from January to June 2018 in lieu of management fees. In May 2017, PFI received a binding ruling from the Inland Revenue Department 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 a reduced level of current taxation expense in the first half of 2018, as the $2.0 million of prior-year tax losses carried forward from 2017 were fully utilised. Excluding the impact of the internalisation, PFI's effective current tax rate for the first half of 2018 decreased to 19.5% (H1 2017: 21.2%), this decrease being largely due to a higher-than-average level of maintenance capex. All told, the Company made a profit after tax for the six months of $29.6 million or 5.93 cents per share, up $35.2 million or 7.18 cents per share on the prior period. A large portion of the increase was due to the impact of 2017's internalisation, net of tax, on the 2017 interim result. FFO and AFFO As a result of increased revenues and cost savings, PFI recorded a 9.4% increase in FFO earnings per share in the first six months of 2018. The higher-than-average level of maintenance capex (mentioned above) resulted in AFFO earnings per share increasing at a lower rate than FFO earnings, with an increase of 2.5% over the prior period. Maintenance capex is expected to normalise to around 35 basis points by the end of FY 2018. Distributable profit (2), the measure previously used to determine dividends, increased 9.6% on a per share basis over the prior period. (Refer table in announcement PDF) Dividend The PFI Board has today resolved to pay a second quarter cash dividend of 1.8000 cents per share, up from 1.7500 cents per share in the prior year. The dividend will have imputation credits of 0.4538 cents per share attached and a supplementary dividend of 0.2059 cents per share will be paid to non-resident shareholders. The record date for the dividend is 22 August 2018 and the payment date is 31 August 2018. The dividend reinvestment scheme will not operate for this dividend. The second quarter dividend will take cash dividends for the first six months of 2018 to 3.60 cents per share, up 0.10 cents per share or 2.9% from the prior period payment of 3.50 cents per share, resulting in the dividend pay-out ratios noted below: (Refer table in announcement PDF) Guidance PFI Chief Financial Officer and Company Secretary, Craig Peirce, notes: "The first half of 2018 has delivered strong leasing outcomes. The second half of the year will be heavily influenced by the leasing of PFI's vacancies and expiries, in particular, leasing at PFI's Carlaw Park assets in Parnell." (3) Anthony Beverley continues: "We want to take this opportunity to reiterate the view we have expressed in recent times: that the PFI Board recognises the importance of a rewarding dividend yield for shareholders, but we are mindful of balancing the competing priorities of maintaining or gradually increasing cash dividends, whilst at the same time growing AFFO earnings to cover those dividends." "Balancing these factors, we have confirmed today guidance of full year cash dividends totalling 7.55 cents per share for the 2018 financial year, up 0.10 cents per share on the prior year." The Company expects that this level of full year cash dividends will approximate 80% to 90% of FFO earnings and 95% to 100% of AFFO earnings, in line with the Company's dividend policy, and representing full year distributable profit of 8.10 - 8.30 cents per share. These earnings expectations are unchanged from the February 2018 annual results announcement. Net tangible assets PFI's net tangible assets (NTA) per share increased by 2.0 cents per share or 1.2% from 163.2 cents per share as at 31 December 2017 to 165.2 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, +1.6 cents per share), retained earnings (+0.3 cents per share) and the decrease in the net fair value liability for derivative financial instruments (+0.1 cents per share). Capital management PFI made no changes to its bank facilities during the first half of 2018. The average term to expiry of all bank and bond facilities stood at 3.2 years, and the Company has approximately $86 million of unutilised bank facility capacity, as at the end of the interim period. Craig Peirce explained: "Whilst the bank loan market remains supportive of PFI and the listed property sector more generally, subject to market conditions, we are considering options such as a second senior secured bond issue, to extend and diversify the Company's borrowings." PFI current hedge rate is forecast to remain at low rates for the remainder of 2018: 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 4.19%. All told, PFI's weighted average cost of debt reduced slightly to 4.90% (4) as at 30 June 2018 from 4.96% as at 31 December 2017. The Company ended the interim period with gearing (5) of 31.4%, well within the Company's self-imposed gearing limit of 40% and bank covenants of 50%. The interest cover ratio (6) of 3.8 times was also well within bank covenants of 2.0 times. Portfolio performance (Refer table in announcement PDF) At the end of the interim period, independent valuations were carried out on ten PFI properties which had significant leasing during the first half of 2018. This resulted in an increase in value of $7.9 million (3.7%), or $9.6 million (8.3%), excluding PFI's Carlaw Park, Parnell properties. An independent desktop review of the remainder of the portfolio confirmed that there has not been a material change in value. As a result of portfolio and valuation activity, PFI's passing yield firmed from 6.57% to 6.47%. Over 58,000 square metres, representing more than 8% 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 6.5 years. Lease renewals accounted for more than 80% of the contract rent secured, with seven PFI tenants retained for an average increase in term of 5.8 years. In addition to this, four new leases were secured for an average term of 9.2 years. Across these renewals and new leases low levels of incentives and capital expenditure were required to attract and retain tenants. In addition to these new leases and retentions, rent reviews were completed on 52 leases during the interim period, resulting in an average annual uplift of 2.6% on $21.2 million of contract rent. At 30 June 2018, the Company's portfolio was 98.1% occupied and 2.0% of contract rent is due to expire in the second half of the year (a total of 3.9%). Of that 3.9% of contract rent, vacancy and expiries at PFI's Carlaw Park asset in Parnell represent 1.8% (3.2% as at 31 December 2017), and 1.6% of that contract rent is in advanced stages of negotiation for renewal. PFI General Manager Simon Woodhams noted: "On the one hand, PFI's quality industrial properties continue to retain and attract tenants in a strong leasing market. On the other hand, leasing at PFI's Auckland city-fringe Carlaw Park office and mixed-use property is more challenging, with that market recording vacancy of ~10%. That being the case, we were pleased to retain Nestle for a reduced footprint of 1,700 square metres during the first half of the year. Leasing at this site is a key priority for us for the remainder of 2018 and in 2019, and our forecasts include conservative leasing-up assumptions." For more detail, please refer to the slide in the Company's interim results presentation, released today. Around 41% of PFI's portfolio is subject to some form of lease event during the remainder of 2018. PFI will continue to access projected market rental growth as approximately 28% of those lease events (7) are market related. Acquisition In their recent Auckland Market Outlook, CBRE noted that: "Following a period of stable yields in the second half of last year, both Prime and Secondary industrial yields compressed in the first quarter of 2018, reaching a record low of 5.35% and 6.51% respectively. The renewed yield compression reflects increasing evidence of sub 5% cap rates." With these record lows in mind, PFI has maintained a cautious stance towards acquisition activity, despite having significant unutilised bank loan capacity and low gearing. That said, PFI did purchase a $16.0 million industrial property located at 306 Neilson Street in Penrose in June. PFI General Manager Simon Woodhams noted: "This property is adjacent to three properties already owned by PFI, and the Company now owns an industrial estate comprising around 4.5 hectares of contiguous property contained in four titles in a sought-after Auckland industrial location." For more detail, please refer to the article in the Company's interim report, and the slide in the Company's interim results presentation, both released today. Development In mid-2017, PFI committed to a new 2,500 square metre warehouse on surplus land at 212 Cavendish Drive, Manukau, with tenant commitment to be sought during the design and build programme. A successful marketing campaign secured Kiwi Steel in March 2018 - before the design process was completed - on a 15-year term for $0.459 million per annum. The project has a total cost including land of ~$9.1 million, equating to a yield on total project cost of ~5%. Excluding the land, valued at $1.9 million, results in a return on additional cost of ~6.5%. Completion is expected April 2019. Market update At a macro level, New Zealand continues to enjoy low levels of unemployment, yet CPI inflation forecasts remains well within the RBNZ's target band, supporting a continued low interest rate environment. In their June 2018 Auckland Market Outlook, CBRE note that: "... there is still good investor demand, and the pricing of some investor categories, especially from offshore, has firmed. Monetary conditions will likely be supportive of yields over the next 18 months..." CBRE also report that secondary industrial continues as the market with the best return outlook: "Favourable industrial supply demand conditions drive Secondary industrial to outperform on capital returns mainly through rent growth, but also aided by cap rate trends." Their forecast of annual returns over the next five years totals 10.7% per annum, comprising an income return of 6.4% and capital growth of 4.2%. Prime industrial ranks third in their forecasts, with annual returns over the next five years expected to total 7.8% per annum, comprising an income return of 5.5% and capital growth of 2.4%. Governance In March, the Company announced that Peter Masfen, who had Chaired the PFI Board since June 2002, would retire at the Company's annual meeting in May, with Anthony Beverley succeeding him as Chair. Anthony Beverley paid tribute to Peter Masfen's tenure at the annual meeting: "On behalf of the Board and management team, I would like to thank Peter and acknowledge the enormous contribution he has made to PFI. I know Peter is extremely proud, not just of PFI's growth, but especially of the manner in which it has grown: one step at a time, each step carefully considered and managed." In other governance changes, upon being appointed as Board Chair, Anthony Beverley stepped down as Chair of the Audit and Risk Committee and Susan Peterson has taken on this role. David Thomson, who recently joined the Board in February 2018, also joined the Audit and Risk Committee. More detail on his appointment to the PFI Board can be found in the Company's interim report, released today, and a bio is available on the Company's website: https://www.propertyforindustry.co.nz/about-pfi/our-people-investors/. Outlook Simon Woodhams notes: "PFI ended 2017 in great shape, with significant balance sheet capacity to opportunistically pursue both core and value-add industrial acquisitions. The right opportunities have been scarce, so we were pleased to acquire a neighbouring property in Penrose in the first half of 2018." "For the second half of the year, we are focused on leasing at PFI's Auckland city-fringe Carlaw Park office and mixed-use property, as part of our efforts to to drive shareholder returns by actively managing vacancy and upcoming lease expiries. We will also cautiously pursue both core and value-add industrial acquisitions." ENDS ABOUT PFI & CONTACT PFI is an NZX listed property vehicle specialising in industrial property. PFI's nationwide portfolio of 93 properties is leased to 146 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 Appendix 1 Appendix 7 Interim Results Presentation Interim Report Appendices Appendix 1 - Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) (Refer table in announcement PDF) Appendix 2 - Distributable Profit (Refer table in announcement PDF) Notes: (1) Funds From Operations (FFO) and Adjusted Funds From Operations (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 1 for more detail as to how these measures were calculated. (2) Distributable profit is the measure previously used by the PFI Board to determine dividends. Please refer to Appendix 2 for more detail as to how this measure was calculated. (3) Please see below for further details on this asset. (4) Weighted average cost of debt comprises BKBM, hedging, margins and all borrowings related fees. (5) That is, total borrowings as a percentage of the most recent independent valuation of the property portfolio. (6) That is, the ratio of interest expense and bank fees to operating earnings excluding interest expense and bank fees. (7) Being ~12% of total contract rent. End CA:00321832 For:PFI Type:HALFYR Time:2018-08-08 08:31:04