Property For Industry's net profit drops 66% as valuation rise turns to fall, revenue up

NZX-listed landlord Property For Industry, with $1.47 billion of real estate, pushed up revenue but recorded a 66 per cent fall in its half-year net profit after tax because of real estate valuation writedowns.

Last year's $46.3 million for the half-year fell to $15.6m this year, although revenue from rental income rose from $47.5m to $48m.

As with all the other listed real estate specialists, PFI's accounts showed the impact of property revaluations in the half-year to June 30. In the same half-year in 2019, it was able to take a $23m fair value gain on investment properties figure onto its bottom line but in the latest half-year, valuations fell nearly $8m.

That fall only meant 0.5 per cent reduction across the entire $1.47b portfolio.

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"A $7.8m fair value loss on investment properties, as compared to a $23.4m fair value gain in the prior interim period, was the main contributor to this reduction in profit," the company said.

Chief executive Simon Woodhams said the half-year was memorable.

"The first half of 2020 will be remembered for the global onset of the Covid-19 pandemic. While the course of the pandemic continues to unfold, and its full impact will take many years to materialise, PFI has delivered a resilient interim result, maintaining a strong balance sheet and portfolio metrics, and continuing to pay dividends in line with the prior year," Woodhams said.

PFI is the landlord of Fisher & Paykel Appliances, which pays an annual $6.1m to rent its building.

The Herald reported yesterday that the last substantive update from the company was in May, where it confirmed it was still not able to quantify the impact of Covid-19 on its earnings and cashflows.

Adjusted funds from operations earnings were 3.79 cents per share which was 0.32 cents per share or 7.8 per cent down on the prior interim period.

PFI says it has more than 5000 shareholders and a portfolio of 94 properties valued at more than $1.47b.

"There are 94 properties in PFI's portfolio occupied by 144 tenants who pay rent totalling $84.9m. The portfolio is 99 per cent occupied with a weighted average lease term of 5.38 years as at December 31, 2019," the company says on its web site.

Fourteen properties were fully valued in the interim period. An independent desktop review was completed on the remainder of the portfolio.

"As a result of portfolio and valuation activity, a total write down of $7.8m or 0.5 per cent was recorded, and PFI's passing yield is now 5.74 per cent. An independent market rental assessment of the entire portfolio was completed as part of the valuation process, this assessment estimates that PFI's portfolio is about 3.5 per cent under-rented," the company said.

Nearly 31,000sq m or around 5 per cent of PFI's existing portfolio by rent was leased to 11 new and existing tenants for an average 6.4 years during the half-year.

Lease renewals accounted for more than 81 per cent of the contract rent secured. Low levels of incentives and capital expenditure were needed to attract and keep tenants, with average leasing costs of less than half a month per year of term, PFI said.

Further lease deals of $5.1m have been secured or are under negotiation.

Properties mostly tenanted

Vacancy is still at historically low levels, the company said, citing a CBRE report out last month recording Auckland prime industrial vacancies at 1.2 per cent and secondary industrial vacancies at 1.5 per cent.

"Notwithstanding these low levels of vacancy, market levels of incentive have begun to trend up, as landlords – including PFI – focus on securing strong tenant covenants, guarantees and long lease terms to ensure the security of cash flows," it said.

Rent reviews were completed on 53 leases in the half-year resulting in an average annual uplift of about 4.1 per cent.

The company's portfolio was 99 per cent full by the end of June and 1.9 per cent of contract rent is due to expire in the second half of this year. When combined with rent reviews, around 44 per cent of PFI's portfolio is subject to some form of lease event during the second half of 2020.

The dividend guidance was reinstated.

"When we released the 2019 annual result, we advised that we expected to pay a total cash dividend for the 2020 year of 7.65 to 7.70 cents per share," Woodhams said.

"This guidance was withdrawn on April 15 due to the considerable uncertainty in relation to the operating environment at that time, and the potential impact of that environment on the company's earnings and dividends," he said.

The board had decided to pay a second quarter cash dividend of 1.8000 cents per share, in line with the dividend paid for the same period in the previous year.

That dividend was based on the company's interim performance because during this period, funds from operation and adjusted funds from operation earnings were materially in line with the prior interim period and the second half of last year.