Ann: HALFYR: PFI: PFI Announces Interim Result

• Release Date: 05/08/13 11:02
• Summary: HALFYR: PFI: PFI Announces Interim Result
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PFI
05/08/2013 09:02
HALFYR

REL: 0902 HRS Property for Industry Limited

HALFYR: PFI: PFI Announces Interim Result

PFI ANNOUNCES INTERIM RESULT

Highlights

- Profit after tax for the six months ended 30 June 2013 up from $7.0 million
to $11.9 million;
- Distributable profit steady at $7.6 million or 3.44 cents per share;
- 28% of contract rent varied, leased or reviewed during the first half of
2013;
- Tenant commitment secured to commence $4.1 million refurbishment of 15-19
Copsey Place and $2.6 million development at 54 Carbine Road & 6a Donnor
Place;
- Total shareholder returns (i) for the year ended 30 June 2013 of 26.5%;
- Merger with Direct Property Fund Limited completed 1 July 2013.

Property For Industry Limited (PFI) today announced its interim results for
the six months to 30 June 2013, the final reporting period for the NZX listed
industrial property landlord before the merger with Direct Property Fund
Limited (DPF), which completed on 1 July 2013.

PFI General Manager (Joint) Nick Cobham said: "Major leasing progress has
occurred since the beginning of 2012. This progress, coupled with 2012's
acquisitions and disposals, has translated into sound financial results for
the first half of 2013."

Profit after tax for the six months ended 30 June 2013 rose $4.8 million or
68.4% to $11.9 million from $7.0 million in the previous corresponding
period. A $2.6 million increase in non operating income and expenses and a
$1.4 million decrease in deferred taxation assisted underlying growth of $0.7
million in operating earnings net of current taxation. Distributable profit,
a non-GAAP performance measure used by the PFI board in determining dividends
to shareholders, was in line with the previous corresponding period.

Shareholders also enjoyed a period of particularly strong share price
performance. Total shareholder returns for the year to 30 June 2013 were in
excess of 25%, lifting returns since listing in 1994 to 9.20% per annum from
8.44% per annum as at 31 December 2012.

Merger

The merger of PFI and DPF became effective on 1 July 2013, following the
receipt of shareholder and High Court approvals. Following recent index
changes, PFI has risen to 28th in the NZX 50 Index and is now the 5th largest
listed property vehicle on the NZX Main Board (ii).

PFI Chairman Peter Masfen said: "The strong show of support from PFI and DPF
shareholders reinforces the board's belief in the merger proposition. With
the integration of PFI and DFF now cemented, we look forward to delivering on
shareholder's expectations of the merged entity."

Financial performance & distributable profit

Financial performance $000 $000
for the six months ended 30 June 2013 30 June 2012
Rental income  15,887 14,608
Interest and management fee income  102   111
Total operating revenue  15,989   14,719
Interest expense and bank fees (4,178)  (4,025)
Management fees  (1,361)  (936)
Non-recoverable property costs (522)  (758)
Other expenses (372)  (454)
Total operating expenses  (6,433)  (6,173)
Total operating earnings  9,556   8,546
Fair value change in investment properties  368   -
Gains on disposals of investment properties  47   -
Fair value change in derivative financial instruments  3,018   802
Total non operating income and expense 3,433 802
Profit before taxation 12,989  9,348
Current taxation  (1,930)  (1,659)
Deferred taxation  806  (643)
Total taxation (1,124)  (2,302)
Profit after taxation  11,865 7,046

Distributable profit $000 $000
for the six months ended 30 June 2013 30 June 2012
Profit after taxation        11,865   7,046
Adjusted for:
Fair value change in investment properties       (368)  -
Gains on disposals of investment properties  (47)   -
Tax on depreciation claw-back on disposals of investment properties
   -     -
Fair value change in derivative financial instruments  (3,018)
     (802)
Deferred taxation      (806)       643
Fixed rent reviews       (291)  -
Incentive fees net of tax      259       -
Other     (6)    750
Distributable profit        7,588  7,637
Distributable profit per share (cents) (iii)   3.44
3.48
Dividends paid relating to period reported (cents)       3.40
 3.10
Pay-out ratio 99% 89%

Operating revenues for the six months ended 30 June 2013 of $15.9 million
were $1.3 million or 8.6% higher than the previous corresponding period.
Additional rental income from properties acquired in the last quarter of 2012
and the first quarter of 2013 outweighed a reduction in rental income from
properties disposed of in the last quarter of 2012.

Operating expenses were $0.3 million or 4.2% higher than the previous
corresponding period, as savings in non recoverable property costs and other
expenses were offset by an increase in interest expense, bank fees and
management fees.

The increase in management fees of $0.43 million was largely due to an
incentive fee of $0.36 million ($0.26 million net of tax) in respect of the
current period. The fee, calculated as 10% of the change in shareholder
wealth above 10% and below 15%, was triggered as a result of the company's
total shareholder return for the year ended 30 June 2013 totalling 26.48%.

The effective current tax rate rose to 20% from 19%, with IRD changes to the
taxation of lease incentives, which became effective 1 April 2013,
contributing to the modest increase.

Distributable profit, a non-GAAP performance measure used by the PFI board in
determining dividends to shareholders, was in line with the previous
corresponding period at 3.44 cents per share (2012: 3.48 cents per share).

Balance sheet & capital management

After adjusting for the second quarter dividend, which was paid on 28 June
2013 as part of merger structuring, the company's net tangible assets
increased 1.8 cents per share during the interim period, the increase driven
by a reduction the in fair value of PFI's hedging and deferred tax
liabilities.

PFI's portfolio was not independently valued during the six months ending 30
June 2013. The next independent valuation will be performed as at 31 December
2013.

The merger of PFI with DPF resulted in significant changes to PFI's loan
facilities and hedging.

A new $350 million syndicated facility agreement, with an average term of
three years, was entered into on 1 July 2013. PFI's existing lenders, ANZ and
CBA, were joined by DPF's lenders, BNZ and Westpac, with the term and pricing
of PFI and DPF's current loan facilities maintained or improved through the
refinancing process.

In addition to this, the board imposed gearing policy limit was revised to
40%, recognising the company's gearing following the merger of 39%. The bank
facility covenant remained unchanged at 50%.

The interest rate hedging restructure outlined in the Information Memorandum
(iv)  has now been completed and has resulted in PFI carrying current hedging
of $163 million at an average rate of 4.55% for an average duration of 3.6
years. Combined with forward starting hedging of $55 million at an average
rate of 4.17% for an average duration of 6.1 years, the company now has total
hedging of $218 million at an average rate of 4.45% for an average duration
of 4.2 years.

The restructure, which included the cancellation of all of DPF's swaps
immediately prior to the merger at a cost of $8.2 million, resulted in a
lengthening of the duration of PFI's hedging to 4.2 years from 3.3 years as
at 31 December 2012. When combined with the new loan facility, the hedging
restructure has allowed PFI to achieve a significant reduction in its
weighted average cost of debt to 5.48% from 7.29% as at 31 December 2012.

Portfolio performance

Portfolio snapshot Merged PFI PFI PFI
As at 1 July 2013 30 June 2013 31 Dec 2012 30 June 2012
Number of properties 83 50 50 49
Number of tenants 137 85 86 90
Contract rent  $65.2 million   $33.3 million $32.6 million $30.2 million
Occupancy 97.3% 98.1% 97.4% 96.1%
Weighted average lease term 5.51 years 4.72 years 4.80 years 4.50 years

Nearly 30,000 square metres of space was leased to nine tenants for an
average term of 4.6 years during the first half of 2013, resulting in further
improvements in the company's portfolio statistics.

Leasing activity included Autex  Industries Limited, Barkers Clothing Limited
and Canterbury New Zealand Limited committing to all the lettable space at
the previously vacant 15-19 Copsey Place, Avondale, Auckland. The property is
currently undergoing a $4.1M refurbishment with the leases commencing during
December 2013 and January 2014 on completion of the work.

Work has also begun on a new warehouse facility for Tycab NZ Limited on
expansion land at 54 Carbine Road & 6a Donnor Place, Mount Wellington,
Auckland. The project will cost $2.6M, with the new 10 year lease commencing
on completion, targeted for January 2014

In addition, a new 8,867 square metre bulk storage development was completed
in June on former DPF existing expansion land at Mount Maunganui. Simon
Woodhams, General Manager (Joint) said: "The lease to Ballance Agri-Nutrients
Limited is for 15 years and the project provided a return on capital invested
of 7.75%, including land at value. It is pleasing to progress the
repositioning of secondary assets and undertake development on expansion land
within the portfolio, as these activities are key drivers of shareholder
value."

PFI also completed rent reviews on 17 leases, representing more than $6M of
contract rent, during the interim period. The reviews resulted in an average
annual uplift of 2.7%, with fixed or index-linked review mechanisms, a
feature of nearly 60% (v) of PFI's leases, contributing more than 80% of the
growth in contract rental income.

In addition to the activity within PFI's existing portfolio, the merger with
DPF resulted in a significant shift in PFI's portfolio statistics on 1 July
2013, including extending PFI's weighted average lease term to 5.51 years.

As anticipated, the merger did result in an increase in vacancy, albeit the
majority of the additional vacancy is concentrated at 9 Narek Place, Wiri,
Auckland and 18 Ron Driver Place, East Tamaki, Auckland. These properties
represent 0.4% and 1.2% respectively of the total vacancy of the total merged
vacancy of 2.7%.
PFI has just 3.1% of the merged contract rent roll due to expire within the
remainder of the current year, with the largest single expiry, 2-6 Niall
Burgess Road, Mount Wellington, Auckland, representing 1.2% of merged
contract rent.

Dividends

PFI paid a second quarter cash dividend of 1.7 cents per share on 28 June
2013. The dividend had imputation credits of 0.4829 cents per share attached
and a supplementary dividend of 0.2191 cents per share was paid to
non-resident shareholders.

The second quarter dividend was paid earlier than usual, and the pay-out
ratio increased from 89% to 99%, following formal approval of the merger of
PFI with DPF. Shareholders can expect to receive their next dividend on or
around 27 November 2013.

The second quarter dividend reflects the distribution policy outlined in the
recent Information Memorandum, with an amendment to exclude management
incentive fees net of tax.

PFI expects cash dividends in respect of the year to 31 December 2013 to
remain consistent with the forecast in the Information Memorandum.

Market, Outlook and Strategy

The market conditions evidenced in late 2012, where investors and owner
occupiers were particularly active, continued into the first half of 2013.

The effect of this activity has seen overall industrial vacancy reduce to
3.6% from 4.1% as at June 2012. Whilst the reduction in vacancy was greatest
in secondary "B" grade space, all grades of industrial property experienced
increased occupancy, according to CBRE (vi). CBRE also report that net
effective rents (vii) have improved, with prime and secondary rents up by
0.3% and 5.2% respectively in the last six months.

Mr Cobham noted: "Whilst the firming of yields for prime industrial property
may have slowed, leasing and investor activity on secondary industrial
property has increased. The firming of yields and growth in net effective
rents, together with reduced vacancy, is allowing the repositioning of
secondary vacant property and greenfield development on existing land within
the portfolio."

PFI's focus is not only managing the vacancy and upcoming lease expiries
within the portfolio, but also when viable the company will seek to take
advantage of opportunities to develop existing expansion land and to
modernise older, potentially secondary property.

Contact

For further information please contact:
Nick Cobham
General Manager (Joint)
Phone: +64 9 303 9656
Email: [email protected]

Simon Woodhams
General Manager (Joint)
Phone: +64 9 303 9652
Email: [email protected]

About PFI

PFI is New Zealand's only listed company specialising in industrial property.
PFI's portfolio of 83 industrial properties in Auckland, Hamilton, Mount
Maunganui, Wellington and Christchurch, is leased to 137 tenants.

www.pfi.co.nz

Attached

PFI - Appendix 1 - 30 June 2013
PFI - Appendix 1 - Financial Statements - 30 June 2013
PFI - Interim Results Briefing - 30 June 2013

(i) Income yield plus change in share price, assuming dividends are
reinvested.
(ii) These conclusions are based on PFI's own analysis and have not been
approved or checked by the NZX.
(iii) Per share figures are on a weighted average basis.
(iv) The term Information Memorandum is used throughout this announcement and
relates to the Information Memorandum in relation to the merger of PFI with
DPF dated 22 May 2013.
(v) 58% of merged contract rent.
(vi) CBRE Industrial Market Overview, June 2013.
(vii) Face rentals less incentives.
End CA:00239283 For:PFI    Type:HALFYR     Time:2013-08-05 09:02:39