PFI announces interim results, rights offer

NZX listed industrial property landlord Property For Industry Limited (PFI) today announced its interim results for the six months to 30 June 2015 and an underwritten pro rata renounceable rights offer to fund earnings accretive acquisition and development activity.

PFI Chairman Peter Masfen said: "PFI has produced a robust half year result from its fully occupied high quality industrial property portfolio. In addition, the company has secured acquisition and development activity totalling $86 million."

In order to fund this activity, the company plans to use a combination of existing bank loan facilities and the proceeds of an underwritten $49.5 million pro rata renounceable rights offer.

Mr. Masfen continued: "Post acquisition, development and completion of the rights offer, PFI is expecting pro forma year end gearing of around 35%, 2015 full year earnings per share of at least 7.35 cps, and an enhanced earnings growth profile driven in part by future development activity."

Financial performance

Operating revenues for the six months of $32.1 million in line with the previous corresponding period, as increases due to acquisitions and rent reviews were offset by decreases due to disposals and vacancy. The company expects operating revenues in second half of 2015 to be ~5% higher than in the first half of the year, as recent acquisitions and developments begin to contribute, or contribute further.

Operating expenses for the six months of $15.3 million were up $2.3 million or 17.8%, due to increases in management fees incurred (increase of $1.7 million) and interest expense and bank fees (increase of $0.6 million).

The effective current tax rate (D) decreased to 18.8% (2014: 20.6%) due to increased operating expenses reducing taxable income.

After allowing for non-operating income and expenses and deferred tax, PFI recorded profit after tax of $36.4 million or 8.85 cents per share (2014: $14.4 million or 3.5 cents per share).

Distributable profit & dividends

PFI recorded distributable profit of 3.64 cents per share, a decrease of 0.16 cents per share or 4.2% over the previous corresponding period (2014: 3.80 cents per share).

The PFI board has today resolved to pay a second quarter cash dividend of 1.75 cents per share. The dividend will have imputation credits of 0.4590 cents per share attached and a supplementary dividend of 0.2083 cents per share will be paid to non-resident shareholders. The record date for the dividend is 25 August 2015 and the payment date is 3 September 2015.

The second quarter dividend will take cash dividends for the first six months of 2015 to 3.50 cents per share, in line with the previous corresponding period.

The dividend reinvestment scheme (DRS) has been suspended for the quarter ended 30 June 2015 due to the timing of the scheme coinciding with the rights offer. The board of PFI will continue to assess whether to operate or suspend the DRS on a quarter-by-quarter basis, as PFI’s capital needs dictate. Notwithstanding this, the board of PFI expects to recommence the DRS in the following quarter, ended 30 September 2015.

Following the rights offer, PFI continues to expect to meet the earnings guidance announced at the time of the 2014 annual results, but with materially lower gearing and enhanced growth prospects, driven in part by a number of the new development opportunities announced today. For the 2015 financial period, PFI expects distributable profit to be at least 7.35 cents per share and cash dividends to be 7.30 cents per share, subject to economic and market conditions.

Balance sheet & capital management

PFI’s valuers, CB Richard Ellis, Colliers International and Jones Lang LaSalle completed a desktop review of the company’s property portfolio as at 30 June 2015. 12 properties were also subject to full independent valuations due to significant capital expenditure or changes in contract rental during the six month period. As a result of the desktop and full independent valuations, PFI recorded a portfolio revaluation uplift of $25.6 million or 2.8% to $930.3 million.

PFI’s net tangible assets per share increased by 5.2 cents per share or 4.0% from 130.2 to 135.4 cents per share. This increase was driven by the uplift in the fair value of investment properties described above (+6.2 cents per share), but was partially offset by the fair value change in PFI’s derivatives (-0.9 cents per share). Other changes accounted for the remaining -0.1 cps.

In May 2015, the company’s syndicated bank loan facility was refinanced on competitive terms and increased from $350 million to $375 million. The facility, provided by existing lenders ANZ, BNZ, CBA and Westpac, comprises two $187.5 million tranches committed for four and five year terms respectively. The refinance extended the average term to expiry to 4.3 years (E) as at 30 June 2015 and at the same time the cost of the facilities was reduced.

PFI carries current hedging (F) of $233 million at an average rate of 4.88% for an average duration of 3.6 years (G). Based on current hedging and debt levels, an average of ~70% of the company’s debt will be hedged during the remainder of 2015.

When combined with PFI’s syndicated bank loan facility this hedging provides the company with a weighted average cost of debt of 5.92% (H), in line with the rate as at 31 December 2014 of 5.96%.

The company ended the interim period with gearing (I) at 36.8%, up slightly from 35.8% as at 31 December 2014 but well within PFI’s self-imposed gearing limit of 40% and bank covenants of 50%. The interest cover ratio (J) reduced slightly to 2.8 times but also remains well within bank covenants of 2.0 times. As noted earlier in this announcement, post acquisitions, developments and completion of the rights offer, PFI is expecting pro forma year end gearing of around 35%.

In order to manage the timing of cash-flows associated with the acquisitions, developments and rights offer, PFI has today entered into a $25 million Institutional Credit Agreement with ANZ. The facility has an initial expiry date of six months, with an option to extend the expiry to 12 months. The facility ranks alongside PFI’s existing syndicated bank loan facility, and PFI does not expect to retain this facility at the completion of the rights offer.

Portfolio performance

More than 56,000 square metres of PFI’s existing portfolio was leased during the first six months of 2015 to 11 new and existing tenants for an average term of 6.7 years. PFI also completed its development at 9 Narek Place, Manukau, Auckland during the interim period, with a new 10 year lease to Z Energy commencing at this purpose-built facility.

The company also completed rent reviews on 40 leases, representing almost $20.4 million of contract rent, during the interim period. These reviews resulted in an average annual uplift of 2.0%, with fixed or index-linked review mechanisms, present in around two thirds of PFI’s leases (K), contributing almost 90% of the growth.

PFI’s near term leasing outlook remains positive: at 30 June 2015 the company’s portfolio is 100% occupied and only 3.4% of contract rent is due to expire during the remainder of 2015. The largest single 2015 expiry represents just 0.8% of rent.

Market update

The industrial property sector experienced continued growth in prime industrial rents in first half 2015, following a period of stability throughout the second half of last year, while transactional activity continues to remain high following a strong 2014.

Attractive yields are being paid for secondary properties offering redevelopment potential, while relatively low prime yields persist reflecting the weight of capital seeking investment opportunities relative to the availability of those opportunities, lower interest rates, good occupancy conditions, and income growth.

Strategy and outlook

PFI’s portfolio is well positioned to benefit from continued favourable market conditions. Momentum in leasing activity following a strong 2014 has allowed PFI to achieve an occupancy rate of 100% as at 30 June 2015 and provides the opportunity for rental growth in the medium term.

Investor sentiment towards investment grade industrial property is strong and this has led to the firming of capitalisation rates for these assets. PFI has benefited from this trend through a 2.8% portfolio revaluation uplift and expects buoyant market conditions to persist in the near term.

In the current market, securing prime industrial property accretive to shareholder returns continues to be a challenge given the dearth of high quality assets available and the intensity of competition to acquire, particularly from private investors and owner occupiers. Despite this, PFI has successfully completed a number of acquisitions since the start of 2015 which have enhanced earnings and provided PFI with "core" industrial property in key locations. In addition, PFI has committed to a number of existing development opportunities within the portfolio that will contribute meaningfully to earnings once completed.

Recent acquisitions and development

PFI has had a busy start to 2015, acquiring 232 Cavendish Drive in Manukau and a portfolio of five industrial properties in Penrose, located on Hugo Johnston Drive and Autumn Place. These acquisitions cost a total of $46.9 million.

PFI has also committed to various pre-leased development opportunities, estimated to cost $26.5 million in total. This comprises construction of four new bulk store facilities at 124 Hewletts Road in Mount Maunganui, leased to RMD Bulk Storage, ADM, Glencore Grain and Regal Haulage.

In line with its objective of maximising utilisation of the portfolio, PFI is also projecting to spend $12.9 million on the development of surplus Auckland land. This will be at 212 and 232 Cavendish Drive, Manukau, 9 Narek Place, Manukau and a new warehouse at 54 Carbine Road & 6a Donnor Place, Mount Wellington.

These acquisitions and developments, expected to represent a total capital commitment of $86.3 million, are in line with PFI’s strategy of delivering incremental value enhancing growth opportunities for shareholders. PFI intends to fund this capital commitment via the rights offer announced today, existing debt facilities and by recycling capital through minor, selective asset sales.

Details of the offer

PFI will raise approximately $49.5 million through a renounceable pro rata rights offer. The offer is fully underwritten by Forsyth Barr Group Limited at an issue price of $1.44 per share.

Under the offer, eligible shareholders will be entitled (but not obliged) to acquire 1 new share for every 12 existing shares held at 5:00 pm on the record date of 20 August 2015. Further details of the offer can be found in the rights offer document released today and expected to be mailed to shareholders on 21 August 2015.

The Manager and the Board have committed to exercise and take up all rights in respect of their beneficial shareholdings, which represents a commitment to subscribe for 1,037,048 new shares as part of the offer.

It is intended that the net proceeds of the rights offer will be used to pay down bank debt relating to the recent acquisitions and committed developments, increasing available headroom in banking facilities, with gearing of ~35% expected at the end of the 2015 financial year.