Earnings and Dividend Growth, Management Transition
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announcement
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18 February | 2019
Page 1
EARNINGS AND DIVIDEND GROWTH,
MANAGEMENT TRANSITION
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/3d97n233. 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. Alternatively,
you can listen to the live presentation by dialling in on 0800 667 018 and using the access PIN 5292536.
Highlights
▪ Earnings and dividend growth: profit after tax up $58.4 million, 3.2% increase in Funds From
Operations (FFO)
1
earnings per share, Adjusted Funds From Operations (AFFO) earnings per share
in line with the prior year, cash dividend up 1.3% to 7.55 cents per share
▪ Valuation gains: $66.4 million or 5.3% increase in the value of the property portfolio from
independent valuations, net tangible assets (NTA) per share up 14.5 cents or 8.9% to 177.7 cents
per share
▪ Strong balance sheet: second $100 million senior secured fixed rate 7-year bond issue, refinancing
of $37.5 million of bank facilities, gearing of 30.3%
▪ Significant portfolio activity: over 100,000 square metres or 15% of the portfolio leased during
the year to 30 tenants for an average increase in term of 6.2 years
▪ Auckland industrial acquisitions: two properties acquired for $28.4 million
▪ Management changes: former General Manager, Simon Woodhams, appointed as Chief Executive
Officer, former Chief Financial Officer, Craig Peirce, appointed as Chief Finance and Operating
Officer, former Managing Director, Greg Reidy, to transition to Non-Executive Director by June 2019
Property for Industry Limited (PFI, the Company) ended 2018 delivering on its promise of strong, stable
returns and implementing a management transition to ensure such performance continues.
“The management transition announced late last year is about strategic continuity and regeneration,”
says PFI Chairman, Anthony Beverley. “Investors will recognise that we are focused on retaining the
expertise and experience that help us deliver on our promise of strong, stable returns.”
Financial performance
Net rental income for the year increased by $6.1 million or 8.4% to $79.1 million, as increases from
acquisitions ($4.9 million) and positive leasing activity ($3.0 million) partially offset a decrease due to
increased vacancy ($1.8 million). Average occupancy during 2018 was 98%, before rising back to in
excess of 99% at the end of the year. Not only did this lower level of occupancy weigh on net rental
income, but property costs – net of recoveries from tenants – also increased slightly by $0.2 million or
8.0% as a result.
Interest expense and bank fees increased $1.0 million or 5.6%, with year-end borrowings increasing by
$27.6 million or 7.4% as a result of capital expenditure and two investment property acquisitions during
the year.
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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.
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No management fees were incurred in 2018 due to the June 2017 internalisation, and this reduction in
management fees of $2.9 million more than offset a $1.8 million increase in administrative expenses
incurred in lieu of management fees.
Also as a result of the June 2017 internalisation, PFI recorded no current taxation expense in 2017 and
a reduced level of current taxation expense in 2018. Excluding the impact of the internalisation, PFI’s
effective current tax rate was 21.0% in 2017 and 20.2% in 2018.
All told, the Company made a profit after tax for the year of $110.1 million or 22.08 cents per share, up
$58.4 million or 10.83 cents per share on the prior period.
FFO and AFFO
As a result of cost savings offsetting a reduction in net rental income (on a per share basis), PFI recorded
a 3.2% increase in FFO earnings per share as compared to the prior year. With maintenance capex
increasing from 23 basis points in 2017 to 35 basis points in 2018, AFFO earnings per share were in
line with the prior year. Distributable profit
2
, the measure previously used by the PFI Board to determine
dividends, increased 3.7% on a per share basis over the prior year.
Measure 2018 CPS 2017 CPS Change
FFO 8.84 8.57 3.2%
AFFO 7.46 7.49 -0.4%
Distributable Profit 8.38 8.08 3.7%
Dividend
The PFI Board has today resolved to pay a fourth quarter final cash dividend of 2.1000 cents per share.
The dividend will have imputation credits of 0.4417 cents per share attached and a supplementary
dividend of 0.2004 cents per share will be paid to non-resident shareholders. The record date for the
dividend is 4 March 2019 and the payment date is 13 March 2019. The dividend reinvestment scheme
will not operate for this dividend.
This fourth quarter dividend will take cash dividends for the year to 7.55 cents per share, up 0.10 cents
per share or 1.3% from the prior year, resulting in the dividend pay-out ratios noted below
3
:
Measure Policy 2018 Pay-out Ratio 2017 Pay-out Ratio
FFO 80 – 90% 85% 87%
AFFO 95 – 100% 101% 99%
Distributable Profit 95 – 100% 90% 96%
Guidance
PFI Chief Executive Officer, Simon Woodhams, noted: “As was the case in 2018, in 2019, PFI’s results
will be influenced by working through the incentives from recent deals completed, and the leasing to be
completed, at Carlaw Park.”
Anthony Beverley adds: “As we have previously explained to the market, the PFI Board recognises the
importance of a rewarding dividend yield for shareholders. We are however mindful of balancing the
competing priorities of growing AFFO earnings to cover dividends, whilst at the same time, maintaining
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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
Figures in the table are calculated on a per share basis. If these calculations are done on the basis of the dollar value of
earnings and dividends, and not on a per share basis, the 2017 pay-out ratios would be 90% for FFO and the 103% for AFFO.
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18 February | 2019
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or gradually increasing cash dividends, which historically have increased by approximately 0.05 cps
each year, if performance allowed.
“Balancing these factors, and the leasing programme ahead of us, we are guiding to a cash dividend of
7.60 cents per share for the 2019 financial year, an increase of 0.05 cents per share on the 2018
dividend.”
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.
Net tangible assets (NTA)
PFI’s NTA per share increased by 14.5 cents per share or 8.9% from 163.2 cents per share as at the
end of 2017 to 177.7 cents per share as at the end of the 2018.
The change in NTA per share was driven by the increase in the fair value of investment properties
(described below, +13.3 cents per share), retained earnings (+0.8 cents per share) and the decrease in
the net fair value liability for derivative financial instruments (+0.4 cents per share).
Capital management
PFI carried out several capital management initiatives during the second half of 2018 to ensure that the
Company maintained a strong balance sheet with diversified and long-dated sources of funding.
In October, a second $100 million senior secured 7-year bond issue was completed at a rate of 4.25%,
reflecting a margin of 1.60% per annum
4
. The Company also cancelled $100 million of bank facilities
that were due to expire on 4 May 2020 on allotment of the bond issue.
PFI Chief Finance and Operating Officer, Craig Peirce notes: “Our second bond issue has further
reduced our reliance on bank funding and was completed at attractive rates with longer tenor than what
is normally available from banks.”
In December, the Company refinanced $37.5 million of bank facilities. Tranche A, which previously
totalled $87.5 million, is due to expire on 4 May 2020. Following the refinancing, Tranche A was reduced
to $50 million. Tranche B, which totals $187.5 million and is due to expire 4 May 2021, remains
unchanged. A new third tranche, Tranche C, totalling $37.5 million, was provided by existing lenders
ANZ, BNZ, CBA and Westpac, with an expiry date of 4 May 2022.
At 31 December 2018, the weighted average term to expiry of PFI’s bonds and bank facilities stands at
4.0 years, up from 3.7 years at the end of 2017.
Craig Peirce continued: “Capital management initiatives completed during the second half of 2018
ensure that PFI has all core debt
5
secured in a mix of bonds and bank facilities with expiry dates in
excess of 2.3 years at year-end, with additional liquidity and flexibility available in the shorter dated
Tranche A.”
PFI’s current hedge rate is forecast to remain at low rates during 2019: based on current hedging and
debt levels, an average of approximately 54% of the Company’s debt will be hedged at an average rate
of approximately 4.01%. PFI’s weighted average cost of debt
6
reduced slightly during the year to 4.86%
as at 31 December 2018 from 4.96% as at 31 December 2017.
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4
The bond issue was swapped back to float interest rates via fixed rate receiver swaps.
5
PFI defines core debt as 105% of forecast debt requirements.
6
Weighted average cost of debt comprises BKBM, hedging, margins and all borrowings related fees.
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The Company ended the year with gearing
7
of 30.3%, well within the self-imposed gearing limit of 40%
and bank covenants of 50%, and the Company has approximately $74 million of unutilised bank facilities,
as at the end of the year. The interest cover ratio
8
of 3.9 times was also well within bank covenants of
2.0 times.
Portfolio performance
Portfolio snapshot as at 31 December 2018 31 December 2017
Book value $1,322.0m $1,210.8m
Number of properties 94 92
Number of tenants 148 148
Contract rent $82.0m $79.6m
Occupancy 99.3% 99.9%
Weighted avg. lease term 5.39 years 5.33 years
Auckland property 83.1% 82.4%
Industrial property 87.3% 86.4%
Further to the announcement in December 2018, PFI recorded an annual increase from independent
valuations in the value of its property portfolio of $66.4 million or 5.3% to $1,322.0 million. Around one-
third of this valuation outcome was due to rental growth, which in part reflects the successful leasing
outcomes described below. High levels of demand for industrial property from both investors and owner
occupiers also influenced the increase, with movements in cap rates contributing the remaining two
thirds of the increase in value. As a result of the year-end valuation process, PFI’s passing yield firmed
from 6.57% to 6.21%, and on a portfolio basis there continues to be no over or under renting.
Over 100,000 square metres, representing more than 15% of PFI’s existing portfolio by rent, was leased
during the year to 30 new and existing tenants for an average increase in term of 6.2 years. Lease
renewals accounted for almost 70% of the contract rent secured, with 22 PFI tenants retained for an
average increase in term of 5.7 years. In addition to this, eight new leases were secured for an average
term of 7.4 years. Across these renewals and new leases, low levels of incentives and capital
expenditure were required to attract and retain tenants.
Rent reviews were completed on 100 leases during the year, resulting in an average annual uplift of
2.5% on $46.4 million of contract rent. 17 market rent reviews on $5.8 million of contract rent delivered
an annualised increase of 2.3% over an average review period of 3.5 years.
Around 75% of PFI’s portfolio is subject to some form of lease event during 2019. In their December
2018 Auckland Market Outlook, CBRE predict industrial rental growth over the next five years to average
3.1% per annum for Prime properties and 4.1% per annum for Secondary properties. PFI will continue
to access this projected market rental growth as approximately 22% of the Company’s 2019’s lease
events
9
are market related.
At the end of the year, the Company’s portfolio was 99.3% occupied and 9.4% of contract rent is due to
expire in 2019 (a total of 10.1%, FY17: 7.5%).
Simon Woodhams noted: “In recent communications, we have noted that leasing at PFI’s Auckland city-
fringe Carlaw Park office and mixed-use property has been more challenging than industrial leasing.
That being the case, we are pleased to announce that, during the second half of 2018, more than 2,300
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7
That is, total borrowings as a percentage of the most recent independent valuation of the property portfolio.
8
That is, the ratio of interest expense and bank fees to operating earnings excluding interest expense and bank fees.
9
Being ~17% of total contract rent.
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square metres of space has been leased to the Department of Internal Affairs for a six-year term, and
more than 900 metres of space has been leased to NZ Behavioural Health – part of the Acurity Health
Group – for a 10-year term. Renewals at two small retail tenancies were also secured.”
At year end, Carlaw Park represents 34% of PFI’s current vacancy and 2019 expiries.
Simon Woodhams continued: “We also have had a good start to 2019 at this property. An early renewal
of the Quest serviced apartments hotel has been secured post balance date, and terms have been
agreed with Jacobs for a reduced footprint. All told, over the past 14 months we have leased almost 70%
of this property, and dealing with the remainder of this property is a key priority in 2019.”
For more detail on PFI’s Carlaw Park property, please refer to the slide in the Company’s annual results
presentation, released today.
Acquisitions
PFI has maintained a cautious stance towards acquisition activity during the year. That said, the
Company did purchase two Auckland industrial properties in 2018: one in June, located at 306 Neilson
Street in Penrose, for $16.07 million, and the other in October, located at 12 Hautu Drive in Manukau,
for $12.36 million.
For more detail on these acquisitions, please refer to the slide in the Company’s annual results
presentation, released today.
Development
A successful marketing campaign secured Kiwi Steel in March 2018 on a 15-year term for $0.459 million
per annum to PFI’s new 2,500 square metre warehouse on surplus land at 212 Cavendish Drive,
Manukau. Completion of this project is expected April 2019.
Disposal
In December 2018, PFI announced the sale of the Company’s 50 Parkside Road property in Wellington
for a net sales price of $3.3 million. The property was marketed for sale by Bayleys and settlement took
place on 23 January 2019.
Market update
ANZ’s latest economic outlook sees annual GDP growth averaging 2.5% over the next couple of years,
but they don’t expect inflation pressures to intensify in this environment. They point to the ANZ
Truckometer indexes weakening in December, and the Quarterly Survey of Business Opinion released
in January, as two measures that suggest that momentum in the New Zealand economy is coming off
the boil. As a result, a continued low interest rate environment is forecast, with those monetary conditions
likely to be supportive of property values.
In their December 2018 Auckland Market Outlook, CBRE note that: “Our return forecasts have been
revised slightly upwards for some asset classes based on the more bullish short-term yield forecasts
and / or stronger rent growth.” Both secondary and prime industrial property have benefited from these
trends.
CBRE also report that secondary industrial continues as the market with the best return outlook: Their
forecast of annual returns over the next five years totals 11.0% per annum (June 2018: 10.7%),
comprising an income return of 6.3% (June 2018: 6.4%) and capital growth of 4.8% (June 2018: 4.2%).
Prime industrial ranks second in their forecasts, up from third in June 2018, with annual returns over the
next five years expected to total 8.7% per annum (June 2018: 7.8%), comprising an income return of
5.3% (June 2018: 5.5%) and capital growth of 3.4% (June 2018: 2.4%).
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18 February | 2019
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2019 priorities
Simon Woodhams notes: “Following a review of our Purpose, Vision and Strategy, we have set our
sights on being one of New Zealand’s foremost Listed Property Vehicles.
“In order to deliver on this Vision, in 2019 we plan to begin replacing PFI’s non-industrial assets with
quality industrial properties in sought-after areas, either via acquisitions or by value-add strategies within
the existing portfolio.
“As noted earlier, Carlaw Park is also a key priority for us in 2019, as is the leasing of our vacant and
expiring industrial spaces.
Simon Woodhams concludes: “With an excellent portfolio, a strong balance sheet, and favourable
market conditions, we are well positioned to deliver on our Purpose: creating strong, stable income for
investors and generating prosperity for New Zealand.”
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
147 tenants.
For further information please contact:
SIMON WOODHAMS CRAIG PEIRCE
Chief Executive Officer Chief Finance and Operating Officer
--- ---
Phone: +64 9 303 9652 Phone: +64 9 303 9651
Email: woodhams@propertyforindustry.co.nz 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
Annual Results Presentation
Annual Report
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18 February | 2019
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Appendices
Appendix 1 – Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO)
Funds / Adjusted Funds From Operations For the year
ended
For the year
ended
(unaudited, $000, unless noted)
31 December
2018
31 December
2017
Profit and total comprehensive income after income
tax attributable to the shareholders of the Company
110,094 51,684
Adjusted for:
Fair value gain on investment properties (66,370) (43,595)
Material damage insurance income - (504)
Gain on disposal of investment properties (53) (1,949)
Fair value (gain) / loss on derivative financial instruments (2,009) 1,230
Amortisation of tenant incentives 2,330 2,287
Straight lining of fixed rental increases (1,203) (490)
Deferred taxation 3,314 (2,142)
Termination of management agreement - 42,869
Adjustment to current taxation for the deductibility of the termination
of the management agreement
(1,994) (10,010)
Funds From Operations (FFO) 44,109 39,380
FFO per share (cents) 8.84 8.57
FFO dividend pay-out ratio (%) 85% 87%
Maintenance capex (4,476) (2,641)
Incentives and leasing fees given for the period (2,426) (2,316)
Other (10) (12)
Adjusted Funds From Operations (AFFO) 37,197 34,411
AFFO per share (cents) 7.46 7.49
AFFO dividend pay-out ratio (%) 101% 99%
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Appendix 2 – Distributable Profit
Distributable Profit For the year
ended
For the year
ended
(unaudited, $000, unless noted)
31 December
2018
31 December
2017
Profit / (loss) and total comprehensive income after income
tax attributable to the shareholders of the Company
110,094 51,684
Adjusted for:
Fair value gain on investment properties (66,370) (43,595)
Material damage insurance income - (504)
Gain on disposal of investment properties (53) (1,949)
Tax on depreciation claw-back on disposals of investment properties - 34
Fair value (gain) / loss on derivative financial instruments (2,009) 1,230
Deferred taxation 3,314 (2,142)
Movement in fixed rent reviews (1,203) (490)
Termination of management agreement - 42,869
Adjustment to current taxation for the deductibility of the termination
of the management agreement
(1,994) (10,010)
Other (10) (12)
Distributable profit 41,769 37,115
Distributable profit per share (cents) 8.38 8.08
Dividends paid relating to period reported 37,654 35,536
Pay-out ratio (%) 90% 96%
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NZX and media
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18 February | 2019
Property for Industry Limited (PFI)
Results for announcement to the market
Reporting period Twelve months to 31 December 2018
Previous reporting period Twelve months to 31 December 2017
Amount (000s) Percentage change
Revenue from ordinary
activities
$NZ 158,248 +23.6%
Profit from ordinary activities
after tax attributable to
shareholders
$NZ 110,094 +113.0%
Net profit attributable to
shareholders
$NZ 110,094 +113.0%
Interim/final dividend Amount per security Imputed amount per security
Final dividend $NZ 0.021000 $NZ 0.004417
Record date 4 March 2019
Dividend payment date 13 March 2019
Comments: 1. “Profit from ordinary activities after tax” and “Net profit
attributable to shareholders” in the previous reporting period
includes the “termination of management agreement”
expense of $NZ 42,869k. Excluding this one off expense, net
of tax, from the prior year, “Profit from ordinary activites after
tax” and “Net profit attributable to shareholders” would have
increased by 33.4% in 2018 as compared to the prior year.
2. This dividend is fully credited with imputation credits to the
extent permitted by the imputation credit rules and to the
extent that the directors of PFI determine were available.
3. This announcement is extracted from PFI’s audited financial
statements as at and for the year ended 31 December 2018.
A copy of these audited financial statements are included in
the annual report, which has been released today and is
attached to this announcement.
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APPENDIX 7 – NZSX Listing Rules
Number of pages including this one
(Please provide any other relevant
NZSX Listing Rule 7.12.2. For rights, NZSX Listing Rules 7.10.9 and 7.10.10. details on additional pages)
For change to allotment, NZSX Listing Rule 7.12.1, a separate advice is required.
Full name
of Issuer
Name of officer authorised to
Authority for event,
make this notice
e.g. Directors' resolution
Contact phone
Contact fax
numbernumber
Date
Nature of event
BonusIf ticked,
Rights Issue
Tick as appropriate
Issue
state whether:Taxable
/ Non TaxableConversionInterestRenouncable
Rights IssueCapitalCallDividend
If ticked, stateFull
non-renouncable
change
X
whether:
InterimYear
X
SpecialDRP Applies
EXISTING securities affected by this
If more than one security is affected by the event, use a separate form.
Description of theISIN
class of securities
If unknown, contact NZX
Details of securities issued pursuant to this eventIf more than one class of security is to be issued, use a separate form for each class.
Description of theISIN
class of securities
If unknown, contact NZX
Number of Securities toMinimum
Ratio, e.g
be issued following eventEntitlement
1 for 2 for
Conversion, Maturity, Call
Treatment of Fractions
Payable or Exercise Date
Tick if
provide an
pari passu
ORexplanation
Strike price per security for any issue in lieu or date
of the
Strike Price available.
ranking
Monies Associated with Event
Dividend payable, Call payable, Exercise price, Conversion price, Redemption price, Application money.
Source of
Amount per security
Payment
(does not include any excluded income)
Excluded income per security
(only applicable to listed PIEs)
Supplementary
Amount per security
Currencydividendin dollars and cents
details -
NZSX Listing Rule 7.12.7
Total monies
TaxationAmount per Security in Dollars and cents to six decimal places
In the case of a taxable bonusResident
Imputation Credits
issue state strike priceWithholding Tax(Give details)
Foreign
FWP Credits
Withholding Tax(Give details)
Timing
(Refer Appendix 8 in the NZSX Listing Rules)
Record Date 5pmApplication Date
For calculation of entitlements -Also, Call Payable, Dividend /
Interest Payable, Exercise Date,
Conversion Date.
Notice DateAllotment Date
Entitlement letters, call notices,For the issue of new securities.
conversion notices mailedMust be within 5 business days
of application closing date.
OFFICE USE ONLY
Ex Date:
Commence Quoting Rights:Security Code:
Cease Quoting Rights 5pm:
Commence Quoting New Securities:Security Code:
Cease Quoting Old Security 5pm:
4 March, 201913 March, 2019
$0.021000
Date Payable
13 March, 2019
$0.004417
In dollars and cents
Retained earnings
$0.011358
$0.009642
$NZ$0.002004
Enter N/A if not
applicable
Ordinary SharesNZPFIE0001S5
EMAIL: announce@nzx.com
Notice of event affecting securities
1
Property for Industry Limited
Craig PeirceDirectors' Resolution
+ 64 21 248 6301+ 64 9 303 965718022019
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PRESENTING TODAY
2
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
Simon Woodhams
Chief Executive Officer
Craig Peirce
Chief Finance and Operating Officer
2018 HIGHLIGHTS
5
▪Increased earnings and dividends: profit after tax up $58.4 million, 3.2% increase in Funds From Operations
(FFO)
1
earnings per share, Adjusted Funds From Operations (AFFO) earnings per share in line with the prior
year, cash dividend up 1.3% to 7.55 cents per share
▪Valuation gains: $66.4 million or 5.3% increase in the value of the property portfolio from independent
valuations, net tangible assets (NTA) per share up 14.5 cents or 8.9% to 177.7 cents per share
▪Strong balance sheet: second $100 million senior secured fixed rate 7-year bond issue, refinancing of $37.5
million of bank facilities, gearing of 30.3%
▪Significant portfolio activity: over 100,000 square metres or 15% of the portfolio leased during the year to 30
tenants for an average increase in term of 6.2 years
▪Auckland industrial acquisitions: two properties acquired for $28.4 million
▪Management changes: former General Manager, Simon Woodhams, appointed as Chief Executive Officer,
former Chief Financial Officer, Craig Peirce, appointed as Chief Finance and Operating Officer, former Managing
Director, Greg Reidy, to transition to Non-Executive Director by June 2019
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
1.Funds From Operations and Adjusted Funds From Operations 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 slide 35 for further details.
PORTFOLIO SNAPSHOT
7
31 December 201831 December 2017
Book value
$1,322.0m$1,210.8m
Number ofproperties
9492
Number of tenants148148
Contract rent$82.0m$79.6m
Occupancy99.3%99.9%
Weighted average lease term
5.39 years5.33 years
Auckland property
83.1%82.4%
Industrialproperty
87.3%86.4%
▪PFI’s portfolio is diversified across 94 properties and 148 tenants, with 99.3% occupancy and a
weighted average lease term of 5.39 years, weighted towards Auckland industrial property
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
8
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
HISTORICAL OPERATIONAL PERFORMANCE
▪Since 2009, PFI has achieved a year end average occupancy of 98.6% and WALT of 4.88 years
VALUATIONS & LEASING ACTIVITY
9
▪Valuations:
▪Annual increase from independent valuations of $66.4 million or 5.3% to $1,322.0 million
▪Around one-third of valuation outcome was due to rental growth
▪Passing yield firmed from 6.57% to 6.21%, no over or under renting on a portfolio basis
▪Leasing activity:
▪30 leases agreed over ~102,000 sqm of space for an average term of 6.2 years
▪Lease renewals accounted for almost 70% of the contract rent secured
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
TenantAddressTermArea
% Rent
Roll
Mainfreight36 Neales Road, East Tamaki5.0 years12,563 sqm1.4%
Fletcher Building232 Cavendish Drive6.0 years16,832 sqm1.3%
NestleCarlaw Park Office Complex, Parnell6.0 years1,720 sqm1.3%
Ballance Agri-Nutrients124a HewlettsRoad11.0 years10,497 sqm1.2%
Department of Internal AffairsCarlaw Park Office Complex, Parnell6.0 years2,438 sqm1.1%
Peter Hay Kitchens47 DalgetyDrive, Manukau6.0 years8,860 sqm1.1%
24 other transactionsVarious6.4 years~49,000 sqm7.1%
30 leasing transactionsVarious6.2 years~102,000 sqm14.5%
RENT REVIEWS & 2019 LEASE EVENTS
10
▪100 rent reviews delivered an average annual uplift of ~2.5% on ~$46.4 million of contract rent
▪17 market rent reviews delivered an annualised increase of 2.3% over an average review period
of 3.5 years on $5.8 million of contract rent
▪~75% of PFI’s portfolio is subject to some form of lease event during 2019
▪CBRE predict industrial rental growth over the next five years to average 3.1% per annum for
prime properties and 4.1% per annum for
secondary properties
▪PFI will continue to access projected market rental
growth as ~22% of the Company’s 2019’s lease
events are market related
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
2019 LEASE EXPIRIES
11
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
Tenant % RentRoll
Carlaw ParkJacobs3.0%
2 Pacific RiseHewlett-Packard 1.2%
6 DonnorPlaceWickliffe1.1%
6-8 Greenmount DriveBridon0.8%
9 NesdaleAvenueBrambles0.8%
OtherVarious2.5%
Total9.4%
▪Carlaw Park represents 34% of PFI’s
current vacancy and 2019 expiries, terms
agreed with Jacobs post balance date,
Carlaw Park is a key priority in 2019 (see
next slide)
▪Portfolio is 99.3% occupied (0.7%
vacancy) and 9.4% of contract rent is due
to expire in 2019, a total of 10.1% (FY17:
7.5%)
CARLAW PARK, PARNELL
12
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
▪Acquired by PFI in 2013 via the merger with Direct Property Fund, development of the property was completed in
March-2009, initial lease terms expiring 2018 / 2019
▪Significant leasing progress during 2018 and early 2019:
▪Nestle secured in H1 2018 for 14.4% of the property on a six year term
▪Four leases secured in H2 2018: 18.9% or $1.4 million leased
▪Early renewal of Quest serviced apartments hotel secured post balance date
▪Terms agreed with Jacobs for a reduced footprint post balance date
TenantSpaceTermArea
% Property’s
Rent Roll
Nestle
Office, Building 1, Level 3
6.0 years1,720 sqm14.8%
Department of Internal Affairs
Office, Building 2, Ground and Level 1
6.0 years2,438 sqm13.2%
NZ Behavioural Health
Office, Building 2, Part Level 3
10.0 years908 sqm5.4%
RetailTenancies (2)
Gateway, Ground Floor Retail
6.0 and 3.0 years221 sqm0.9%
Quest (signed)
Gateway, Hotel
10.0 years42 rooms10.6%
Jacobs (terms agreed)
Office, Building 1 & 2, Part Level 1, Level 2
7.0 years4,307 sqm24.4%
7 leasing transactions7.3 years9,504 sqm +69.3%
Note: Please refer to slide 36 for floor plans of this property.
13
ACQUISITIONS
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
306 Neilson Street,
Penrose
12 HautuDrive,
Manukau
Purchase price
$16.0m$12.3m
Tenant
Trade DepotKiwi Steel
Property description
Generic industrialGeneric industrial
Purchase yield
5.50%5.35%
Lease term on settlement
10 years, triple-net11 years
Rent reviews
Fixed rent reviews,
2.25% annually
Fixed rent reviews,
3.00% annually
▪PFI has maintained a cautious
stance towards acquisition
activity during 2018, but did
purchase two Auckland industrial
properties during the year
DEVELOPMENT AND DISPOSAL
14
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
▪Kiwi Steel secured in March 2018
on a 15-year term for a new 2,500
square metre warehouse on surplus
land at 212 Cavendish Drive,
Manukau
▪Completion of this project is
expected April 2019
▪50 Parkside Road, Wellington sold
December 2018 for a net sales
price of $3.3 million
▪Settlement took place on 23
January 2019
NET RENTAL INCOME
16
▪Net rental income of
$79.1 million up $6.1
million or 8.4%
▪Increases due to
acquisitions ($4.9
million) and positive
leasing activity ($3.0
million)
▪Decrease due to
increased intra-period
vacancy ($1.8 million)
▪Average occupancy
during 2018 of 98%
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
ADJUSTED FUNDS FROM OPERATIONS(CENTS PER SHARE)
17
▪Profit after tax up $58.4
million to $110.1 million
▪Cost savings offset a
reduction in net rental
income (on a per share
basis), resulted in a
3.2% increase in FFO
earnings per share
▪Maintenance capex
increased from 23 basis
points in 2017 to 35
basis points in 2018,
resulted in AFFO
earnings per share in
line with the prior year
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
EARNINGS, DIVIDENDS, GUIDANCE
18
▪Funds From Operations earnings: up 0.27 cps or 3.2% from the prior year
▪Adjusted Funds From Operations earnings: in line with the prior year
▪2018 dividend: totals 7.55 cps, up 0.10 cps or 1.3% from the prior year
▪Dividend policy: 80-90% of FFO and 95-100% of AFFO
▪2019 dividend guidance: 7.60 cps, up 0.05 cps or 0.7% from 2018
▪2019 earnings guidance: 2019 dividend of 7.60 cps forecast to equate to 95%-100% of AFFO
Earnings2018 CPS2017 CPSChange
Funds From Operations8.848.573.2%
Adjusted Funds From Operations7.467.49-0.4%
Distributable Profit
1
8.388.083.7%
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
Dividend Pay-outPolicy2018 Pay-out Ratio2017 Pay-out Ratio
Funds From Operations80 –90%85%87%
Adjusted Funds From Operations95 –100%101%99%
Distributable Profit95 –100%90%96%
1.Distributable profit is non-GAAP financial information previously used by the PFI Board to assist in determining dividends to shareholders. Please refer to slide 37 for further details.
INVESTMENT PROPERTIES
19
▪Portfolio value of ~$1.32
billion
▪Annual increase from
independent valuations
$66.4 million or 5.3%
▪Two industrial properties
purchased in 2018, 306
Neilson Street in
Penrose ($16.07 million)
and 12 HautuDrive in
Manukau ($12.36
million)
▪50 Parkside Road in
Wellington sold, settled
January 2019
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
1.Investment properties as at 31 December 2018 exclude 50 Parkside Road, Wellington, as this property had been moved to “non-current assets classified as held for sale”.
NET TANGIBLE ASSETS(CENTS PER SHARE)
20
▪Net tangible assets
(NTA) per share
increased by 14.5 cents
per share or 8.9%
▪Change in NTA per
share driven by the
increase in the fair value
of investment properties
(+13.3 cps), retained
earnings (+0.8 cps) and
the decrease in the net
fair value liability for
derivative financial
instruments (+0.4 cps)
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
21
FIVE YEAR FINANCIAL SUMMARY
($m, unless noted)
Dec-14Dec-15Dec-16Dec-17Dec-18
Operating revenue
63.866.971.173.579.9
Total operating earnings
36.936.643.147.653.9
Total comprehensive income after tax
59.972.8123.482.6
1
110.1
Total assets
906.91,027.21,121.81,242.21,358.9
Total liabilities
341.9369.2365.7399.2443.8
Totalequity
565.0658.0756.1842.9915.1
Banking covenants:
Loan-to-value ratio (covenant: <50%)
35.8%33.3%30.1%30.8%30.3%
Interest cover ratio (covenant: >2.0x)
3.0x2.9x3.4x3.7x3.9x
▪The last five years has seen strong growth in rents and valueswhilst keeping gearing at low levels
and maintaining a high ratio of interest cover
1.Total comprehensive income excludes the impact of the 2017 internalisation, please see “Appendix 2 –Earnings and net tangible assets excluding the impact of the internalisation payment, net
of tax” in the 12 February 2019 annual results announcement (see here: https://www.nzx.com/announcements/313996) for a reconciliation of this figure.
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
FUNDING, COVENANTS, INTEREST RATES
23
December 2018December 2017
Funding
Syndicated bank facility drawn (excluding overdraft)
$201.1m $272.7m
Syndicated bank facility limit
$275.0m$375.0m
Syndicated bank facilities headroom
$74.0m$102.3m
Fixed rate bonds
$200.0m$100.0m
Funding term (average)
4.0 years3.7 years
Syndicated bank facilitybanks
ANZ, BNZ, CBA, WestpacANZ, BNZ, CBA, Westpac
Covenants
Loan-to-value ratio (covenant: <50%)
30.3%30.8%
Interest cover ratio (covenant: >2.0x)
3.9 times3.7 times
Interest rates
Weightedaverage cost of debt (including margin and fees)
4.86%4.96%
Fixed rate payer interestrate hedging (excl. forward starting hedging, $m / rate / duration)
$220m/ 4.16% / 2.1 years$220m/ 4.37% / 2.6 years
Fixed rate payer interestrate hedging (forward starting hedging, $m / rate / duration)
$210m / 3.43% / 3.5 years$155m / 3.55% / 3.7 years
▪PFI carried out several capital management initiatives during the second half of 2018
▪Second $100 million 7-year bond issue in October, rate of 4.25%, margin of 1.60% per annum
▪$100 million of bank facilities cancelled in October, $37.5 million of bank facilities refinanced in December
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
MATURITY PROFILE, HEDGING
24
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
▪Debt facility maturity profile
(graph on LHS): average term to
expiry of 4.0 years, $74 million
of unutilised bank facility
capacity
▪Fixed rate payer hedging profile
(graph on RHS): cover profile
provides for an average of ~54%
of debt to be hedged at an
average fixed rate of ~4.01% for
the duration of FY19
MARKET UPDATE: ECONOMY
26
▪ANZ predict annual GDP growth to average ~2.5% over the next couple of years, inflation pressures not
expected to intensify in this environment
▪ANZ Truckometerindexes (December) and Quarterly Survey of Business Opinion (January) are two
examples of measures that suggest
that momentum in the New Zealand
economy is coming off the boil
▪As a result, a continued low interest rate
environment is forecast
▪Those monetary conditions likely to be
supportive of property values
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
Graph sources: Historical: RBNZ, Forecasts: ANZ
MARKET UPDATE: PROPERTY
27
▪CBRE December 2018 Auckland Market Outlook:
▪“Our return forecasts have been revised slightly upwards for some asset classes based on the
more bullish short-term yield forecasts and / or stronger rent growth.”
▪Both prime and secondary industrial property have benefited from these trends
▪Prime industrial improved in CBRE rankings and now ranks second(June 2018: third) out of 12
property classes in their returns forecasts
▪Forecast five year returns of 8.7% per annum comprising income of 5.3% and capital of 3.4%,
(June 2018: total of 7.8%, income 5.5%, capital 2.4%)
▪Secondary industrial continues as CBRE’s pick of the market with the best return outlook: ranking
of firstout of 12 property classes in their returns forecasts retained
▪Forecast five year returns total 11.0% per annum comprising income 6.3% and capital 4.8% (June
2018: total of 10.7%, income 6.4%, capital 4.2%)
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
PURPOSE, VISION & STRATEGY
29
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
Our Purpose
PFI generates income for investors as professional landlords to
the industrial economy, generating prosperity for New Zealand.
Our Vision
PFI will be one of New Zealand’s foremost listed property vehicles.
Our measures will be performance, quality, scale and reputation.
Our Strategy
We will build on what we have and be true to who we are. But we
will be more intentional; more proactive.
▪Recognising the changing governance and reporting landscape both here in New Zealand and
globally, during 2018 we spent some time considering our Purpose, Vision and Strategy
▪Looking forward, we will continue working on integrating our Purpose, Vision and Strategy,
together with our ESG vision, across all aspects of PFI, including reporting to our stakeholders
▪Learn more about our Purpose, Vision and Strategy on page 68 of our annual report
30
▪In order to deliver on our Vision, our 2019 priorities are:
▪Disposals: begin disposing PFI’s non-industrial assets
▪Acquisitions: recycle capital from disposals into quality industrial properties in sought-after
areas
▪Value-add strategies:recycle capital from disposals into value-add strategies within the
existing portfolio
▪Asset management: Carlaw Park a key priority, as is leasing of vacant and expiring
industrial spaces
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
2019 PRIORITIES
31
▪PFI’s portfolio includes a number of properties with low site coverage and / or low land and building rates
▪Value-add strategies for these properties include development of surplus land / refurbishment on lease
expiry
▪Surplus land opportunities include 47 and 59 DalgetyDrive, Manukau
▪Refurbishment opportunities include 59 DalgetyDrive, Manukau, 6 DonnorPlace and 2 Pacific Rise, Mount
Wellington
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
VALUE-ADD STRATEGIES
47 DalgetyDrive, Manukau
2 Pacific Rise, Mount Wellington
33
▪With an excellent portfolio, a strong balance sheet, and favourable market conditions, we are
well positioned to deliver on our Purpose: creating strong, stable income for investors and
generating prosperity for New Zealand
▪2018 highlights:
▪Increased earnings and dividends
▪Valuation gains
▪Strong balance sheet
▪Significant portfolio activity
▪Auckland industrial acquisitions
▪Management changes
▪Questions?
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
REVIEW & QUESTIONS
APPENDIX1:FFO AND AFFO
35
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
(Unaudited, $000, unless noted)YE December 2018YE December 2017
Profit and total comprehensive income after income tax attributable to the shareholders of the Company
110,09451,684
Adjusted for:
Fair value gain on investment properties
(66,370)(43,595)
Material damage insurance income
-(504)
Gainon disposal of investment properties
(53)(1,949)
Fair value (gain) / losson derivative financial instruments
(2,009)1,230
Amortisation of tenant incentives
2,3302,287
Straight lining of fixed rental increases
(1,203)(490)
Deferred taxation
3,314(2,142)
Termination of management agreement
-42,869
Adjustment to current taxation for the deductibility of the termination of the management agreement
(1,994)(10,010)
Funds From Operations (FFO)
44,10939,380
FFO per share (cents)
8.848.57
FFO dividend pay-out ratio (%)
85%87%
Maintenance capex
(4,476)(2,641)
Incentives and leasing fees given for the period
(2,426)(2,316)
Other
(10)(12)
Adjusted Funds From Operations (AFFO)
37,19734,411
AFFO per share (cents)
7.467.49
AFFO dividend pay-out ratio (%)
101%99%
APPENDIX2: CARLAW PARK OFFICE
36
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
APPENDIX3: DISTRIBUTABLE PROFIT
37
PROPERTYFORINDUSTRY 2018 ANNUAL RESULTS BRIEFING
(Unaudited, $000, unless noted)YE December 2018YE December 2017
Profit and total comprehensive income after income tax attributable to the shareholders of the Company
110,094 51,684
Adjusted for:
Fair value gain on investment properties
(66,370)(43,595)
Material damage insurance income
-(504)
Gain on disposal of investment properties
(53)(1,949)
Tax on depreciation claw-back on disposals of investment properties
-34
Fair value (gain) / loss on derivative financial instruments
(2,009)1,230
Deferred taxation
3,314(2,142)
Movement in fixed rent reviews
(1,203)(490)
Termination of management agreement
-42,869
Adjustment to current taxation for the deductibility of the termination of the management agreement
(1,994)(10,010)
Other
(10)(12)
Distributable profit
41,769 37,115
Distributable profit per share (cents)8.388.08
Dividends paid relating to period reported37,65435,536
Pay-out ratio (%)90%96%
DISCLAIMER
38
The information included in this presentation is provided as at 18 February 2019 and should be read in conjunction with the NZX results
announcement, NZX appendix 1, NZX appendix 7 and annual report (including financial statements) issued on that same day.
Property for Industry Limited (PFI) does not guarantee the repayment of capital or the performance referred to in this presentation.
Past performance is not a reliable indicator of future performance.
The presentation includes a number of forward looking statements. Forward looking statements, by their nature, involve inherent risks and
uncertainties. Many of those risks and uncertainties are matters which are beyond PFI’s control and could cause actual results to differ
from those predicted. Variations could either be materially positive or materially negative.
While every care has been taken in the preparation of this presentation, PFI makes no representation or warranty as to the accuracy or
completeness of any statement in it including, without limitation, any forecasts.
This presentation has been prepared for the purpose of providing general information, without taking account of any particular investor’s
objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the
information in this presentation, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
This presentation is solely for the use of the party to whom it is provided.
PROPERTYFORINDUSTRY 2018 INTERIM RESULTS BRIEFING
---
RELATIONSHIPS
THE
LANDLORD
ISSUE
ROBUST
+
Property
for
Industry
Limited
Annual
Report
31 December
2018
A YEAR IN REVIEW
INCOME FOR INVESTORS
MANAGEMENT SUCCESSION
PROFESSIONAL INDUSTRIAL
LANDLORDS
GOOD TO DO
BUSINESS WITH
PFI.CO.NZ
“As professional landlords to the industrial economy, PFI works
with tenants to find structured occupancy solutions that work
and allow us to maintain the relationships we’ve built, into the
future. For over twenty years, we’ve partnered with Fletcher
Building, ensuring that the many premises they lease from us
continue to meet their varied needs.”
Ewan Cameron
PFI – Asset and Development Manager
FEATURED:
PFI Asset and Development
Manager, Ewan Cameron
(right), with Fletcher Building’s
Head of Property, New Zealand,
Vinnie Miles (left).
1
CONTENTS / SNAPSHOT
READ MORE
p.04
2018 REVIEW
A strong return to
shareholders and a
management transition.
READ MORE
p.06
MANAGEMENT
CHANGES
General Manager Simon
Woodhams is now Chief
Executive Officer and Chief
Financial Officer Craig Peirce
is now Chief Finance and
Operating Officer.
2
SECTION
PFI generates income for investors as
professional landlords to New Zealand’s
industrial economy. In this Annual Report,
we explore more fully what it means to be
a professional landlord and why many of
New Zealand’s leading companies choose
to partner with PFI.
Strong, stable returns from strong,
stable relationships.
READ MORE
p.08
PROFESSIONAL
LANDLORDS
PFI’s property team talk about
successfully managing tenant
relationships.
3
SECTION
READ MORE
p.10
PFI’S TOP
TENANTS
PFI tenants talk about
what they value from
working with PFI.
4
SECTION
SECTION
02
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
MEET THE
PFI TEAM
Profiles of our team members
can be found on our website at
pfi.co.nz/people
GREG REIDY
Executive Director
HUMPHRY ROLLESTON
Independent Director
ANTHONY BEVERLEY
Chairman and Independent
Director
SUSAN PETERSON
Independent Director
SIMON WOODHAMS
Chief Executive Officer
CRAIG PEIRCE
Chief Finance and
Operating Officer
DAVID THOMSON
Independent Director
STABILITY AND
PROSPERITY
Managing the business
to ensure stability.
5
READ MORE
p.14
SECTION
6
READ MORE
p.16
NOTEWORTHY
PFI’s performance and
industrial property market
trends at a glance.
SECTION
03
GENERAL MANAGER SIMON WOODHAMS is now Chief
Executive Officer, and Chief Financial Officer Craig
Peirce is now Chief Finance and Operating Officer.
Greg Reidy is transitioning from Managing Director
to Non-Executive Director. “Another example of the
Board’s long term and careful approach to succession
planning,” says PFI Chairman, Anthony Beverley.
The dividend is 7.55 cents per share, up on last
year’s dividend of 7.45 cents per share, and the
highest level of dividend in the past five years.
Underpinning the financial result is an 8.4% increase
in net rental income, the outcome of a busy year of
tenancy reviews and new leases. 102,000 sqm of space
was leased, for an average term of 6.2 years, for a total
rent of in excess of $12.0million. In this annual report
we look in-depth at PFI’s role as professional landlords
to New Zealand’s industrial economy and explore how
it is that PFI successfully retains existing tenants
(73% retention in 2018). The property team remains
focused on PFI’s Carlaw Park complex: ten years on,
a number of leases have expired and some turnover is
inevitable. Five new leases have been secured at this
property during the year, and two more leases have
been agreed since the end of the year.
Income was up, but expenses were largely flat.
The savings from the internalisation of management
continue, offset somewhat by higher borrowing costs.
There were two acquisitions during the year: in
June, we purchased 306 Neilson Street, Penrose, for
$16 million (see the Interim Report for the full story)
and, in October, 12 Hautu Drive, Manukau, for
For more information on our
annual results, please visit :
https://www.propertyforindustry.
co.nz/investor-centre/results-
centre/
REVIEW 2018
01
A STRONG RETURN
TO SHAREHOLDERS
AND A MANAGEMENT
TRANSITION.
INCOME FOR INVESTORS
2018 ENDS WITH PFI DELIVERING
ON ITS PROMISE OF STRONG
STABLE INVESTOR RETURNS AND
IMPLEMENTING A MANAGEMENT
TRANSITION TO ENSURE SUCH
PERFORMANCE CONTINUES.
$12.3 million, with Kiwi Steel as tenants. Those
acquisitions, and a 5.3% uplift in the market valuation
of the portfolio, take the portfolio value to in excess of
$1.322 billion. As a result, NTA per share is up 8.9% to
$1.78. There are now 94 properties in the PFI portfolio
(up from 92 a year ago).
In October, PFI allotted a second $100 million of
retail bonds, cancelling $100 million of bank facilities.
In December, $37.5 million of bank facilities were
refinanced. At year-end, the LVR is 30.3% (PY 30.8%).
There were changes to the PFI Board during 2018.
In February, David Thomson joined the Board and
in May, long-serving Board Member and Chairman,
Peter Masfen, retired. Previous Deputy Chair,
Anthony Beverley was appointed PFI’s Chairman.
KIWI STEEL
12 Hautu Drive
Manukau
—
04
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
DIVIDENDS
(cents per Share)
For 6.2 years and a total rent
of $12.0 million
73% RETENTION
Of tenants whose leases
were due for renewal
ANTHONY BEVERLEY announces
PFI’s management changes
in December
“So, thank you Peter,
for your outstanding
contribution to PFI, and
for never letting us forget
that the reason for
everything we do is to
deliver strong, stable
returns to shareholders.”
ANTHONY BEVERLEY farewells retiring
Chairman, Peter Masfen, at PFI’s
Annual Meeting in May
... positive progress
of PFI and its
positioning as a leader
in industrial property
investment in
New Zealand.
Up from 92 a year ago
94
PURCHASED
306 Neilson Street, Penrose
for $16 million
12 Hautu Drive, Manakau,
for $12 million
7. 5 5
$1.322 BILLION
Year-end market value of
PFI’s portfolio
2018
2017
2016
2015
2014
PETER MASFEN
PROPERTIES
IN THE PFI
102,000
SQM LEASED
1 7 7.7
7.25
7.30
7.35
7.45
2018
2017
2016
2015
2014
7.55
Net Tangible
Assets
(cents per share)
130.2
140.5
160.7
163.2
177.7
Portfolio
05
As 2018 drew to
a close, PFI announced changes
to its management team.
General Manager Simon
Woodhams is now Chief
Executive Officer, and Chief
Financial Officer Craig Peirce
is now Chief Finance and
Operating Officer. Managing
Director, Greg Reidy, will
transition to Non-Executive
Director by June 2019.
“This is a positive and
planned progression,” says PFI
Chairman, Anthony Beverley,
“and follows the internalisation
of the management contract
in 2017. Greg, Simon and Craig
02
PFI CONTINUES TO MANAGE
CHANGE AND REGENERATION
IN A PLANNED AND ORDERLY
MANNER, MAINTAINING STABILITY
AND STRATEGIC CONTINUITY.
MANAGED
have been integral to PFI’s
growth and positive progress,
and this reallocation of roles
and responsibilities provides
continuity and regeneration.”
Simon joined Direct
Property Fund (DPF) in 2005
as a Development Manager and
became a General Manager of
PFI after the DPF merger in 2013.
Craig joined DPF in 2009 and
became PFI’s CFO and Company
Secretary in 2012 when the
management of PFI was taken
over from AMP.
“It’s an exciting time to be
taking on this responsibility,” says
Simon. “Our vision is for PFI to
be one of New Zealand’s foremost
Listed Property Vehicles. We’re
well on our way already, but we
plan to be even more intentional
PROGRESSION
and proactive. I’m looking
forward to that.”
“It’s about building on
what we have and being true to
who we are,” says Craig Peirce.
“There’s no change of direction.
Our purpose remains the same:
creating income for investors
and prosperity for New Zealand.
There’s no doubt that the scale
PFI now has will enable us to be
more influential than ever.”
“Simon and Craig are
very experienced executives,”
says Anthony Beverley. “They
have a deep knowledge and
understanding of our business
and the sector in which we
operate. This is of great value
to PFI as we continue to
consistently deliver strong,
stable returns to investors.”
06
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Very experienced executives
with a deep knowledge
and understanding of
our business.
ANTHONY BEVERLEY,
PFI Chairman
PROGRESSION
07
One of the key components
to being a landlord is listening
to and understanding your
tenants and working with them
in order that they can get on
and do what they do best.
JODIE WARMAN,
PFI Property Manager
03
PFI’S PROPERTY TEAM TALK
ABOUT SUCCESSFULLY MANAGING
TENANT RELATIONSHIPS.
08
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
PROFESSIONAL LANDLORDS
What needs doing
gets done,” says PFI Property
Manager Jodie Warman,
explaining what it means to be
a professional landlord. “We’re
not sitting in some ivory tower
counting the rent, we have good
relationships with our tenants,
and with our contractors and
service providers. If there are
any issues, our tenants pick up
the phone and talk to us and
we sort it.”
“We’re not in a suit-and-tie
sector of the economy,” says
Michael Rippon, also a PFI
Property Manager. “Our tenants
are in manufacturing and
logistics, and they expect us
to be out there, where the work
gets done, aware of what’s
going on in their businesses
and where they are headed.
We’re a small team at PFI — not
some multi-layered hierarchy
— and that means we’re nimble.
Things get done.”
For PFI’s Asset and
Development Manager, Ewan
Cameron, ‘Firepower’ is key.
“The whole point of leasing
rather than owning premises is
that you take property off your
balance sheet and get on with
what you’re good at. Property
is not a liquid asset and yet a
business is constantly evolving.
Working with PFI gives our
tenants flexibility. As they grow,
we can reconfigure spaces,
or find them a new location,
and we can restructure the
lease to suit.”
“Being fair,” says Jodie.
“Our focus is on building and
maintaining long-term
relationships with our tenants:
retention is our goal. And so, we’re
not going to say, ‘that’s what you
signed up for, so that’s what you
get.’ We’re going to work with
them. Change things. I do think
we have a reputation of being
good to do business with. People
say they prefer to deal with us,
because we’re the good guys.”
“It is the PFI culture,” agrees
Michael. “To achieve strong,
stable returns for our investors,
we build strong, stable
relationships with our tenants.
We make sure we look after the
day-to-day management of the
property and we look to the long
term as well.”
“We are professional
landlords to New Zealand’s
industrial economy,” says Ewan.
“It’s a specialist field that we
understand well. In 2018, we
retained more than 70% of
tenants whose tenancy was
up for renewal. I’m proud of
that: an excellent outcome for
our investors.”
09
PFI’S TOP TENANTS
LANDLORD OF CHOICE /
PFI TENANTS TALK ABOUT WHAT THEY VALUE FROM WORKING WITH PFI.
04
In the end, the
relationship can be
the defining factor.
VINNIE MILES,
Head of Property, New Zealand,
Fletcher Building
TIL LOGISTICS
11 Sheffield Street
Blenheim
—
10
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Occupy 28 properties, or 29.8%,
of a total of 94 properties.
$30.416 M, 37% in annual rent
comes from our top ten clients.
03. Top ten clients contribution
to our portfolio
05. Biggest and smallest
06. Longest tenant relationship
02. Top ten scale
01. Top ten tenants occupy 28 properties
across New Zealand
04. Top tenants by number
of properties
Fisher & Paykel are
our biggest tenant with
41,000sqm in Springs Road,
Auckland (nearly five rugby
pitches). Rockgas’ fuel holding
cell in New Plymouth
is our smallest.
We’ve been working with
Fletcher Building for over
twenty years.
41,000
37
%
28
8
16
6
7
SQM
Are located in 8 centres across New Zealand
They occupy 16 locations in Auckland
Fletcher Building tenant 6 properties
in Auckland
TIL logistics have 7 locations nationally
Fletcher Building
TIL Logistics
EBOS
DHL
Mainfreight
Ballance
F&P Appliances
Jacobs
Southern Spars
Goodman Fielder
Fisher & Paykel Appliances occupy
one location that yields 7.2 % of our
total rent revenue
7. 2
%
Fisher & Paykel Appliances 1 5,920 7.2
Fletcher Building 8 5,238 6.4
TIL Logistics 7 4,377 5.3
EBOS 3 3,094 3.8
Jacobs 1 2,494 3.0
DHL 2 2,469 3.0
Mainfreight 2 1,921 2.3
Ballance 2 1,897 2.3
Southern Spars 1 1,614 2.0
Goodman Fielder 1 1,392 1.7
TOTAL 30,416 37
Number of propertiesAnnual Rent ($000’s)% of Total
28
Blenheim1
Napier
1
Auckland
16
Mt Maunganui
2
Wellington
2
Christchurch
3
New Plymouth
2
Nelson
1
JACOBS
Carlaw Park
Parnell
—
8
7
3
2
2
2
1
1
1
1
11
There’s a new breezeway at
58 Richard Pearse Drive, in the
Auckland International Airport
industrial precinct. A breezeway
is a large canopy extending from
the building over the yard,
providing shelter from the
elements: keeping precious cargo
cool and dry during loading and
unloading. When you are
warehousing and distributing
pharmaceutical products, as PFI
tenant Healthcare Logistics does,
that matters.
As a PFI investor, you might
stop one day and take a look. Not
to better understand what a breezeway is, necessarily, but to better
understand how it is that PFI attracts and retains top tenants like
Healthcare Logistics: a subsidiary of the EBOS Group, a $7 billion
enterprise employing more than 3,200 employees in 52 locations across
Australasia. Three of those locations are owned by PFI; 58 Richard
Pearse Drive is a warehouse facility with in excess of 10,500 sqm of
space worth over $22 million.
“PFI are responsive to our needs,” says Healthcare Logistics
Operations Manager, Steve Tolich. “We prefer to lease our premises,
rather than own — our focus is using the asset — but for that to work,
you need a landlord who understands your business and who’s willing
to customise the premises to suit you. PFI is very good like that.”
Over on the North Shore, at Argus Place, off Sunnybrae Road,
Brett Hopwood, General Manager and Director of Pharmapac Ltd,
agrees. “Ours is a family owned business and the secret to success has
been understanding our customers inside out. PFI knows this too.
T
EBOS
58 Richard Pearse Drive
Auckland International Airport
—
FLETCHER BUILDING PRODUCTS
232 Cavendish Drive
Manakau
—
EBOS
58 Richard Pearse Drive
Auckland International Airport
—
MAINFREIGHT
36 Neales Road
East Tamaki
—
12
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
PFI are responsive
to our needs.”
STEVE TOLICH,
Operations Manager, Healthcare Logistics
They have modified the building to suit our requirements and service-
wise they are really good. There is an ongoing programme to maintain
the quality of the asset.”
“They understand the operational drivers of our businesses,” says
Vinnie Miles, Head of Property, New Zealand, for Fletcher Building.
Fletcher Building leases eight properties from PFI: in Auckland,
Wellington and Christchurch, and have been PFI tenants for longer
than any other. “Each of our businesses is unique. PFI understand that
and work with us to ensure the premises continue to meet our needs.
We might need to upgrade the yard, or put in bigger roller doors,
because the current configuration doesn’t suit. PFI will help us
make it work operationally and make it work financially.”
“It starts with the fundamentals,” says Vinnie. “We have some
non-negotiables like seismic strength and no asbestos, but PFI have
those too. Then there’s the quality of the asset: is it fit for purpose?
But in the end, on a like-for-like basis, the relationship can be the
defining factor. Do we know these guys, do we like doing business
with them, do we trust them?
“The industrial property market has become a lot more
sophisticated. Because vacancy rates are so low, you have to be
more proactive than ever and thinking ahead; planning your space
requirements. You want to work with people who can respond and
will work with you on managing transitions. That’s the relationship
we have with PFI.”
The new breezeway at 58 Richard Pearse Drive is emblematic of
PFI’s approach to attracting and retaining top tenants. Ewan Cameron,
PFI’s Asset and Development Manager, puts it like this: “We work with
our tenants to find structured occupancy solutions that work and allow
us to maintain the relationships we’ve built, into the future. Tenants’
requirements change over time and so this will often require more
‘bespoke’ solutions, requiring the reconfiguration of space, new
development or restructuring lease terms.”
SOUTHERN SPARS
15 Jomac Place
Avondale
—
BALLANCE
124a Hewletts Road
Mount Maunganui
—
13
“WE CONTINUALLY talk about
‘strong and stable’ returns,”
says PFI Chief Finance and
Operating Officer, Craig Peirce,
“and it’s appropriate, I think, to
explore the distinction between
the two, because they are not
the same but they are related,
and they equally inform our
decision-making.
“Investors depend on PFI
for income and the expectation
is that we will do that, year-in,
LOAN TO
VALUE
RATIO
STABILITY
05
MANAGING THE
BUSINESS TO
ENSURE STABILITY.
year-out, almost regardless of
the economic cycle. And so we
are more conservative than we
might be if we were simply
pursuing growth.
“Take gearing. At year-end,
our Loan to Value Ratio is
around 30%. That’s well within
our self-imposed covenants and
people might say ‘why don’t we
take advantage of headroom?’
My answer would be that
accumulating more properties
30.3
%
may well generate more income,
but if we buy while prices
are high and then they fall,
that would stress the business
and might compromise our
ability to consistently pay
acceptable dividends.
“It comes back to purpose.
Because PFI’s purpose is
generating income for
investors, stability of those
returns is just as important
as strength.”
14
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
PROSPERITY
TODAY, THERE ARE around
three million New Zealanders
in KiwiSaver and every month
now the IRD collects around
half a billion dollars in KiwiSaver
contributions. We’ve got a silent
revolution going on,” says PFI
Chief Finance and Operating
Officer, Craig Peirce.
That ‘silent revolution’ is
part of the explanation for PFI’s
second $100 million bond issue
in 2018. “New Zealanders are
getting serious about saving
and fund managers need
opportunities to put those savings
to work. They are keen to invest
in New Zealand, they like to have
property in the mix, and — for
some of their portfolios — they
need the security of fixed returns.
And so bonds are in demand.”
Craig says.
PFI has used the money from
the bond issue to repay bank
funding. “Bonds are giving us
diversification,” says Craig, “We’ll
continue to rely on bank debt,
because it offers greater flexibility,
but it makes sense not to be solely
dependent on the banking sector.
What’s more, bonds typically have
a longer maturity profile, which is
helpful: in this case seven years
as opposed to five for the typical
bank facility. And bonds have
become easier to issue and are
currently price-competitive
with bank debt.
“This was our second bond
issue. It gives New Zealanders,
and their fund managers, another
option for investing in PFI and
it’s extending the role PFI plays
in creating prosperity for
New Zealand.”
MILLION BOND
ISSUE
100
15
SEVEN THINGS YOU SHOULD
KNOW ABOUT THE INDUSTRIAL
PROPERTY SECTOR AND PFI...
02. ANZ Bank estimate the
New Zealand economy grew
around 2.5% in 2018 and
anticipate 2019 will be similar.
2.6%
ECONOMIC
GROWTH
06
PFI’S PERFORMANCE
AND INDUSTRIAL
PROPERTY MARKET
TRENDS AT A
GLANCE.
01. Auckland industrial land
values have increased by 4.4% in
the first half of 2018, resuming
the strong growth trend observed
since June 2015. (CBRE).
4.4%
INCREASE IN LAND
VALUES
04. At reporting date,
occupancy of the PFI
portfolio continues to sit
above 99%.
99.3%
PFI
OCCUPANCY
03.
The overall Auckland
regional industrial vacancy rate
reached 1.7% in August 2018, the
lowest level in the 23-year history
of the survey. (Colliers).
23YEARS
RECORD LOW AUCKLAND
INDUSTRIAL VACANCIES
NOTE
— PFI Property
manager Jodie
Warman, focussed
on client retention.
16
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
1. Cash dividends plus change in share
price, assuming dividends are
reinvested. Source: Datastream.
05. WALT remains at a
similar level to last year
and the highest it has been
since 2013.
5.39YEARS
WEIGHTED AVERAGE
LEASE TERM (WALT)
06.
Acquisitions and
revaluations have increased
the portfolio value by 5.5%
on a year ago and by 38% on
five years ago.
$1.322B
PORTFOLIO
VALUE
07. Over the 24 years since PFI
listed in 1994, annual returns
to shareholders have averaged
9.3% per annum.
1
9.3%
P.A. ANNUAL RETURN
SINCE INCEPTION
WORTHY
— Strong and lasting relationships
rely on active listening and
clear communication.
— We’re as much a
part of our tenants’
business as they
are of ours.
— We are professional
landlords to New Zealand’s
industrial economy
17
Property
for
Industry
Limited
Financial
Statements
31 December
2018
FINANCIAL
STATEMENTS.
18
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2018
ALL VALUES IN $000SNOTE20182017
INCOME
Rental and management fee income2.3 89,710 81,952
Licence income6.8 100 50
Interest income 6 28
Fair value gain on investment properties2.1 66,370 43,595
Gain on disposal of investment properties 53 1,949
Fair value gain on derivative financial instruments 2,009 –
Material damage insurance income – 504
Total income 158,248 128,078
EXPENSES
Property costs2.4 (12,507) (10,859)
Interest expense and bank fees (18,766) (17,768)
Administrative expenses6.1 (4,679) (2,891)
Management fees6.8 – (2,919)
Fair value loss on derivative financial instruments – (1,230)
Termination of management agreement5 – (42,869)
Total expenses (35,952) (78,536)
Profit before taxation 122,296 49,542
Income tax (expense) / benefit6.2 (12,202) 2,142
Profit and total comprehensive income after income tax attributable to the shareholders of
the Company4.1 110,094 51,684
Basic and diluted earnings per share (cents)4.1 22.08 11.25
The accompanying notes form part of these financial statements.
19
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2018
Cents
per Share
(cents)
No. of
Shares
(#)
Ordinary
Shares
($000s)
Retained
Earnings
($000s)
Total
Equity
($000s)
Balance as at 1 January 2017– 452,458,592 493,220 262,918 756,138
Total comprehensive income–– – 51,684 51,684
Issue of shares
Rights issue – 45,337,280 67,690 – 67,690
Dividends and reinvestment
Q4 2016 final dividend – 8/3/2017 2.05 – – (9,275) (9,275)
Q1 2017 interim dividend – 29/5/2017 1.75 – – (7,918) (7,918)
Q2 2017 interim dividend – 1/9/2017 1.75 – – (7,918) (7,918)
Q2 2017 dividend reinvestment – 927,458 1,519 – 1,519
Q3 2017 interim dividend – 22/11/2017 1.80 – – (8,977) (8,977)
Balance as at 31 December 2017– 498,723,330 562,429 280,514 842,943
Total comprehensive income–– – 110,094 110,094
Dividends and reinvestment
Q4 2017 final dividend – 7/3/2018 2.15 – – (10,723) (10,723)
Q1 2018 interim dividend – 31/5/2018 1.80 – – (8,977) (8,977)
Q2 2018 interim dividend – 31/8/2018 1.80 – – (8,977) (8,977)
Q3 2018 interim dividend – 28/11/2018 1.85 – – (9,225) (9,225)
Balance as at 31 December 2018– 498,723,330 562,429 352,706 915,135
The accompanying notes form part of these financial statements.
20
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018
ALL VALUES IN $000SNOTE20182017
CURRENT ASSETS
Cash at bank 1,652 605
Accounts receivable, prepayments and other assets6.3 1,239 1,295
Taxation receivable – 32
Total current assets 2,891 1,932
NON–CURRENT ASSETS
Investment properties2.1 1,318,655 1,210,805
Property, plant and equipment 62 95
Derivative financial instruments3.2 4,891 272
Goodwill6.5 29,086 29,086
Total non–current assets 1,352,694 1,240,258
Non–current assets classified as held for sale2.2 3,313 –
Total assets 1,358,898 1,242,190
CURRENT LIABILITIES
Derivative financial instruments3.2 94 372
Accounts payable, accruals and other liabilities6.4 10,460 8,261
Taxation payable 8,805 –
Total current liabilities 19,359 8,633
NON–CURRENT LIABILITIES
Borrowings3.1 398,222 370,635
Derivative financial instruments3.2 13,982 11,095
Deferred tax liabilities6.2 12,200 8,884
Total non–current liabilities 424,404 390,614
Total liabilities 443,763 399,247
Net assets4.2 915,135 842,943
EQUITY
Share capital 562,429 562,429
Retained earnings 352,706 280,514
Total equity 915,135 842,943
These Group financial statements are signed on behalf of Property for Industry Limited and were authorised for issue on 18 February 2019.
Anthony Beverley Susan Peterson
Chairman Chair, Audit and Risk Committee
The accompanying notes form part of these financial statements.
21
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2018
ALL VALUES IN $000S20182017
CASH FLOWS FROM OPERATING ACTIVITIES
Property and management fee income received 90,610 81,355
Material damage insurance income – 504
Licence income 100 50
Net GST received 55 95
Interest received 6 28
Interest and other finance costs paid (19,170) (19,244)
Payments to suppliers and employees (17,806) (15,303)
Income tax paid (49) (2,611)
Termination of management agreement – (42,869)
Net cash flows from operating activities 53,746 2,005
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment properties 85 21,765
Acquisition of investment properties (28,369) (84,283)
Acquisition of assets relating to a business combination – (106)
Acquisition of property, plant and equipment (22) (15)
Expenditure on investment properties (14,800) (12,769)
Capitalisation of interest on development properties (41) –
Net cash flows from investing activities (43,147) (75,408)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayment of) / proceeds from syndicated bank facility (71,650) (61,000)
Proceeds from the issue of fixed rate bonds 100,000 100,000
Proceeds from the issue of new shares – 67,690
Proceeds from institutional credit facility – 61,400
Repayment of institutional credit facility – (61,400)
Dividends paid to shareholders (37,902) (32,569)
Net cash flows from financing activities (9,552) 74,121
Net increase / (decrease) in cash and cash equivalents 1,047 718
Cash and cash equivalents at beginning of year 605 (113)
Cash and cash equivalents at end of year 1,652 605
Cash and cash equivalents at end of year comprises:
ALL VALUES IN $000S20182017
Cash at bank 1,652 605
Cash and cash equivalents at end of year 1,652 605
The accompanying notes form part of these financial statements.
22
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH FLOWS FROM OPERATING ACTIVITIES
FOR THE YEAR ENDED 31 DECEMBER 2018
ALL VALUES IN $000S20182017
Profit for the year after income tax 110,094 51,684
Non cash items:
Fair value gain on investment properties (66,370) (43,595)
Gain on disposal of investment properties (53) (1,949)
Fair value (gain) / loss on derivative financial instruments (2,009) 1,230
Deferred taxation 3,316 (2,142)
Depreciation 55 26
Provision for doubtful debts (18) 67
Movements in working capital items:
Accounts receivable, prepayments and other assets (689) (1,250)
Accounts payable, accruals and other liabilities 583 545
Taxation payable / (receivable) 8,837 (2,611)
Net cash flows from operating activities 53,746 2,005
The accompanying notes form part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
23
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2018
1. GENERAL INFORMATION25
1.1. Reporting entity25
1.2. Basis of preparation25
1.3. Group companies25
1.4. Basis of consolidation25
1.5. New standards, amendments and interpretations25
1.6. Critical judgements, estimates and assumptions25
1.7. Accounting policies26
1.8. Adoption of new standards26
1.9. Significant events and transactions26
2. PROPERTY27
2.1. Investment properties27
2.2. Non-current assets classified as held for sale40
2.3. Rental and management fee income40
2.4. Property costs40
2.5. Net rental income41
3. FUNDING41
3.1. Borrowings41
3.2. Derivative financial instruments42
4. INVESTOR RETURNS AND INVESTMENT METRICS43
4.1. Earnings per share43
4.2. Net tangible assets per share43
5. INTERNALISATION OF MANAGEMENT44
6. OTHER44
6.1. Administrative expenses44
6.2. Taxation45
6.3. Accounts receivable, prepayments and other assets47
6.4. Accounts payable, accruals and other liabilities47
6.5. Goodwill47
6.6. Financial instruments48
6.7. Financial risk management48
6.8. Related party transactions50
6.9. Operating segments51
6.10. Capital commitments51
6.11. Subsequent events51
24
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
1. GENERAL INFORMATION
IN THIS SECTION This section sets out the basis upon which the Group’s Financial Statements are prepared.
Specific accounting policies are described in the note to which they relate.
1.1. Reporting entity
These financial statements are for Property for Industry Limited (the Company) and its subsidiary P.F.I. Property No. 1 Limited (PFI No. 1) (together,
the Group). The Company is a limited liability company incorporated in New Zealand and is registered under the New Zealand Companies Act 1993.
The Company is a FMC reporting entity under Part 7 of the Financial Markets Conduct Act 2013 and these audited consolidated financial statements
have been prepared in accordance with the requirements of the NZX Main Board Listing Rules. The Company is listed on the NZX Main Board (NZX: PFI).
The Group’s principal activity is property investment and management in New Zealand.
1.2. Basis of preparation
The financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP), the Financial
Reporting Act 2013 and the Financial Markets Conduct Act 2013. They comply with New Zealand Equivalents to International Financial Reporting
Standards (NZ IFRS) and other applicable Financial Reporting Standards as appropriate for profit oriented entities. The financial statements also
comply with International Financial Reporting Standards (IFRS).
The financial statements have been prepared on the historical cost basis except where otherwise identified. All financial information is presented
in New Zealand dollars and has been rounded to the nearest thousand.
1.3. Group companies
As at 31 December 2018 and 31 December 2017, PFI No. 1 is the only controlled entity and is wholly owned.
1.4. Basis of consolidation
The consolidated financial statements comprise the Company and the entity it controls. All intercompany transactions are eliminated on consolidation.
1.5. New standards, amendments and interpretations
At the date of authorisation of these financial statements the following relevant standard was in issue and effective however, it has not been applied
in preparing these financial statements since it is effective for accounting periods beginning on or after 1 January 2019.
NZ IFRS 16 ‘Leases’: this standard will replace the current guidance in NZ IAS 17. Under NZ IFRS 16, a contract is, or contains, a lease if the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Under NZ IAS 17, a lessee was required to
make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). NZ IFRS 16 now requires a lessee to recognise
a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. Included is an optional exemption for certain
short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees.
For lessors, the accounting for leases under NZ IFRS 16 is almost the same. However, as the guidance on the definition of a lease has been updated
(as well as the guidance on the combination and separation of contracts), lessors will also be affected by the new standard.
The Group will adopt NZ IFRS 16 on its effective date of 1 January 2019.
The Group has assessed the impact of adopting NZ IFRS 16. As a lessor, there are no changes to the Group’s current accounting treatment and
disclosure of leases. As a lessee, the Group will apply NZ IFRS 16 using the simplified retrospective approach. Under this approach, the Group will
recognise a right of use asset and lease liability of approximately $403,000 as at 1 January 2019, representing the present value of the remaining
lease cash flows.
1.6. Critical judgements, estimates and assumptions
In applying the Group’s accounting policies, the Board and Management regularly evaluate judgements, estimates and assumptions that may have an
impact on the Group. The significant judgements, estimates and assumptions made in the preparation of these financial statements are as follows:
2.1. Investment properties Page 27
3.2. Derivative financial instruments Page 42
5. Internalisation of Management Page 44
6.2. Taxation Page 45
6.5. Goodwill Page 47
25
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
1.7. Accounting policies
No changes to accounting policies have been made during the year, other than following the adoption of new standards outlined in section 1.8,
which follows below, and policies have been consistently applied to all years presented.
Significant accounting policies have been included throughout the notes to the financial statements.
Other relevant policies are provided as follows:
Share capital
All shares on issue are fully paid, carry equal voting rights, share equally in dividends and any surplus on wind up and have no par value. All shares are
recognised at the fair value of the consideration received by the Company. Incremental costs directly attributable to the issue of new shares are shown
in equity as a deduction from the proceeds.
Measurement of fair values
A number of the Group’s accounting policies and disclosures require the measurement of fair values. The Board and Management have overall
responsibility for overseeing all significant fair value measurements and transfers between levels of the fair value hierarchy. The Group’s policy
is to recognise transfers into and out of fair value levels as of the date of transfer or change in circumstances that caused the transfer.
The carrying values of all balance sheet financial assets and liabilities approximate their estimated fair values, apart from the fixed rate bonds
(refer Note 3.1 (iii) for further details).
The Board and Management review significant unobservable inputs and valuation adjustments. If third party information is used to measure fair values,
then the Board and Management assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the
requirements of NZ IFRS, including the level of the fair value hierarchy in which such valuations should be classified.
Goods and services tax
These financial statements have been prepared on a goods and services tax (GST) exclusive basis except for the accounts receivable balance, accounts
payable balance and other items where GST incurred is not recoverable. These balances are stated inclusive of GST.
1.8. Adoption of new standards
The Group has adopted both NZ IFRS 9 ‘Financial Instruments’ and NZ IFRS 15 ‘Revenue from contracts with customers’, as required. There have been
no changes required to these financial statements by NZ IFRS 9.
Implementation of NZ IFRS 15 has required a change in the presentation of service charges in the consolidated statement of comprehensive income.
Previously the Group showed the income generated from service charges as an offset to service charge expenses within non-recoverable property costs.
With the implementation of NZ IFRS 15, it has been necessary to separate these components between income and expense. As a result, the 2017
comparatives have been restated as follows: Rental and management fee income increased by $8,502,000 and property costs increased by $8,502,000.
These have also had a flow on impact to the statement of cash flows where property income received has increased by $8,502,000 and payments to
suppliers and employees has also increased by $8,502,000.
1.9. Significant events and transactions
The financial position and performance of the Group was affected by the following events and transactions that occurred during the reporting period:
Investment property acquisitions and disposals
On 31 May 2018, the Group purchased an investment property located at 306 Neilson Street, Penrose, for a net purchase price of $16.0 million.
On 31 October 2018, the Group purchased an investment property located at 12 Hautu Drive, Manukau, for a net purchase price of $12.3 million.
On 13 December 2018, the Group announced the sale of an investment property located at 50 Parkside Road, Wellington, for a net sales price of
$3.3 million. Settlement took place on 23 January 2019. The property has been separately classified as a non-current asset classified as held for
sale in the 2018 financial statements.
Bond Issue
On 1 October 2018, PFI issued $100 million of fixed rate bonds with a 7 year term expiring 1 October 2025, paying an interest rate of 4.25%.
For further details, refer Note 3.1 (iii).
1. GENERAL INFORMATION (CONTINUED)
26
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NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
2. PROPERTY
IN THIS SECTION This section shows the real estate assets used to generate the Group’s trading performance which are considered to be the most
relevant to the operations of the Group.
2.1. Investment properties
ALL VALUES IN $000S20182017
Opening balance1,210,805 1,083,300
Capital movements:
Additions28,369 84,283
Disposals(32) (12,188)
Transfer to non-current assets classified as held for sale(3,313)–
Capital expenditure13,629 10,422
Capitalised interest
a
41 –
Movement in lease incentives, fees and fixed rental income2,786 1,393
41,480 83,910
Unrealised fair value gain66,370 43,595
As at 31 December1,318,655 1,210,805
a The effective interest rate applied to capitalised interest was 4.81% (2017: no interest capitalised to investment properties).
The 2018 capitalised interest relates to the new development at 212 Cavendish Drive.
27
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
2. PROPERTY (CONTINUED)
2.1. Investment properties (continued)
ALL VALUES IN $000’S UNLESS NOTEDKey tenantOccupancy (%)Yield on valuation (%)Contract rent
Lettable area
(sqm) Valuer
Carrying
value
Capital
movements
Fair value
adjustment
Carrying
value
2018201820172018201720182017201820182017201820182018
Avondale:
15 Copsey PlaceCanterbury 100%100%5.6%5.9% 767 751 6,878 JLL 12,660 15 1,105 13,780
15 Jomac PlaceSouthern Spars 100%100%6.6%6.7% 1,614 1,614 9,378 JLL 24,000 (53) 553 24,500
61-69 Patiki RoadBidvest 98%100%6.2%7.0% 1,127 1,174 9,767 Savills 16,750 125 1,375 18,250
320 Rosebank RoadDoyle Sails 100%100%5.7%6.0% 679 679 6,625 CBRE 11,400 (26) 526 11,900
686 Rosebank RoadNew Zealand Comfort 100%98%6.2%7.0% 2,489 2,447 21,565 Savills 35,000 123 4,877 40,000
100%99%6.2%6.7% 6,676 6,665 54,213 99,810 184 8,436 108,430
East Tamaki:
17 Allens RoadTSB Living 100%100%6.1%6.7% 1,050 1,034 9,926 CBRE 15,500 132 1,668 17,300
43 Cryers RoadAstron Plastics 100%100%5.8%6.1% 721 721 6,068 Savills 11,750 (23) 773 12,500
6-8 Greenmount DriveBridon 100%100%6.4%7.7% 644 644 6,590 JLL 8,375 5 1,620 10,000
92-98 Harris RoadGrainCorp 100%100%8.9%8.6% 1,354 1,309 10,687 CBRE 15,250 (103) 103 15,250
36 Neales RoadMainfreight 100%100%5.3%6.3% 1,147 1,160 12,563 Colliers 18,400 243 3,057 21,700
1 Ron Driver PlaceStewart Scott Cabinetry 100%100%5.2%5.3% 403 403 4,032 JLL 7,600 (37) 237 7,800
78 Springs RoadFisher & Paykel Appliances 100%100%7.1%6.9% 5,920 5,748 41,536 Colliers 82,800 656 (456) 83,000
10c Stonedon DriveChemical Freight Services 100%100%6.3%7.0% 857 824 8,711 JLL 11,700 122 1,778 13,600
11 Turin PlaceThermakraft Industries 100%100%5.8%6.0% 925 925 8,501 Savills 15,500 292 208 16,000
12 Zelanian DriveCentral Joinery 100%100%5.2%5.5% 582 564 6,098 JLL 10,275 – 865 11,140
23 Zelanian DriveExclusive Tyre Distributors 100%100%6.0%6.2% 426 416 3,811 Savills 6,750 – 350 7,100
100%100%6.5%6.7% 14,029 13,748 118,523 203,900 1,287 10,203 215,390
Manukau:
212 Cavendish Drive
a
Mainfreight 100%100%6.5%6.1% 1,929 1,368 26,067 JLL 22,400 6,305 945 29,650
232 Cavendish Drive
a
Fletcher Building Products 100%100%5.1%6.7% 1,100 1,354 16,832 Colliers 20,200 726 824 21,750
47 Dalgety Drive
a
Peter Hay Kitchens 100%100%5.8%7.3% 885 979 8,860 Savills 13,500 (1,049) 2,789 15,240
59 Dalgety DriveGoodman Fielder 100%100%8.3%8.1% 1,392 1,345 8,649 Savills 16,700 (187) 187 16,700
1 Mayo RoadTransdiesel 100%100%6.1%6.5% 552 542 6,361 Savills 8,350 76 674 9,100
61 McLaughlins RoadTIL Logistics 100%100%5.0%5.3% 1,150 1,150 13,347 Colliers 21,800 197 803 22,800
9 Nesdale AvenueIron Mountain 100%100%5.9%6.1% 633 622 14,163 Colliers 10,200 14 586 10,800
12 Hautu DriveKiwi Steel 100%n/a5.1%n/a 646 n/a 6,492 JLL – 12,355 345 12,700
9 Narek PlaceZ Energy 100%100%5.2%5.3% 538
530 5,663 Savills 10,000 (12) 262 10,250
100%100%5.9%6.4% 8,825 7,890 106,434 123,150 18,425 7,415 148,990
a
Excludes development land shown separately.
28
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PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
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FOR THE YEAR ENDED 31 DECEMBER 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
2. PROPERTY (CONTINUED)
2.1. Investment properties (continued)
ALL VALUES IN $000’S UNLESS NOTEDKey tenantOccupancy (%)Yield on valuation (%)Contract rent
Lettable area
(sqm) Valuer
Carrying
value
Capital
movements
Fair value
adjustment
Carrying
value
2018201820172018201720182017201820182017201820182018
Mt Wellington:
30-32 Bowden RoadFletcher Building Products 100%100%6.2%6.6% 1,685 1,672 17,047 JLL 25,350 (4) 1,654 27,000
50 Carbine RoadFletcher Building Products 100%100%4.8%5.3% 190 202 2,592 CBRE 3,800 108 92 4,000
54 Carbine Road & 6a Donnor PlaceEBOS 100%100%6.1%6.5% 1,749 1,723 17,015 CBRE 26,400 (24) 2,224 28,600
76 Carbine RoadAtlas Gentech 100%100%5.2%5.5% 433 433 5,080 JLL 7,850 33 517 8,400
7 Carmont PlaceCMI 100%100%5.0%5.6% 621 588 5,336 JLL 10,500 37 1,863 12,400
6 Donnor PlaceWickliffe 100%100%6.0%5.6% 900 840 14,555 CBRE 15,100 25 (25) 15,100
4-6 Mt Richmond DriveBrambles 100%100%5.5%5.5% 835 805 7,946 Colliers 14,750 58 392 15,200
509 Mt Wellington HighwayFletcher Building Products 100%100%5.8%6.2% 1,023 985 8,744 Savills 16,000 153 1,347 17,500
511 Mt Wellington HighwayBremca Industries 100%100%5.9%5.8% 461 443 3,247 JLL 7,600 (40) 190 7,750
515 Mt Wellington HighwayStryker 100%100%5.1%5.4% 266 259 1,708 CBRE 4,800 12 413 5,225
523 Mt Wellington HighwayBGH Group 100%100%5.2%5.5% 228 220 1,677 Savills 4,000 13 387 4,400
1 Niall Burgess RoadR L Button & Co 100%100%5.4%5.7% 230 230 1,742 JLL 4,060 4 211 4,275
2-6 Niall Burgess RoadMcAlpine Hussmann 100%100%6.2%6.2% 920 813 6,874 JLL 13,200 (32) 1,632 14,800
3-5 Niall Burgess RoadElectrolux 100%100%5.4%5.9% 1,072 1,038 9,373 JLL 17,650 125 2,225 20,000
7-9 Niall Burgess RoadDHL Supply Chain 100%100%6.7%6.8% 2,148 2,108 23,565 Savills 31,000 312 688 32,000
10 Niall Burgess RoadOutside Broadcasting 100%100%5.2%6.1% 250 258 1,725 Savills 4,200 49 551 4,800
2 Pacific RiseHewlett-Packard 100%100%11.0%10.7% 972 944 2,757 JLL 8,850 16 (16) 8,850
5 Vestey DrivePPG Industries 100%100%5.5%5.6% 223 223 1,269 Savills 4,000 16 34 4,050
7 Vestey DriveTrue North 100%100%4.8%5.3% 516 516 4,598 CBRE 9,650 9 1,141 10,800
9 Vestey DriveMultispares 100%100%5.0%5.5% 212 212 1,600 Savills 3,850 (38) 388 4,200
11 Vestey DriveN & Z 100%100%5.5%5.5% 441 431 3,470 Savills 7,800 243 (43) 8,000
15a Vestey DriveHills 100%100%5.9%6.2% 562 553 3,261 Savills 8,900 16 534 9,450
36 Vestey DriveHose Supplies 100%100%5.1%5.3% 163 159 1,120 JLL 3,000 32 168 3,200
100%100%6.0%6.2% 16,100 15,655 146,301 252,310 1,123 16,567 270,000
30
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PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
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)
FOR THE YEAR ENDED 31 DECEMBER 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
ALL VALUES IN $000’S UNLESS NOTEDKey tenantOccupancy (%)Yield on valuation (%)Contract rent
Lettable area
(sqm) Valuer
Carrying
value
Capital
movements
Fair value
adjustment
Carrying
value
2018201820172018201720182017201820182017201820182018
North Shore:
2-4 Argus PlacePharmapac 100%100%5.0%5.2% 430 419 3,560 JLL 8,100 24 551 8,675
47 Arrenway DriveDevice Technologies 100%100%5.3%5.5% 231 225 1,245 JLL 4,110 4 256 4,370
51 Arrenway DrivePacific Hygiene 100%100%5.0%5.1% 384 376 2,680 JLL 7,400 34 211 7,645
229 Dairy Flat HighwayMassey University 100%100%6.7%6.9% 1,874 1,857 6,719 Colliers 27,000 85 915 28,000
15 Omega StreetWesfarmers 100%100%5.1%6.6% 498 567 3,498 JLL 8,600 17 1,083 9,700
322 Rosedale RoadBSGi NZ Limited 100%100%5.8%6.2% 1,095 1,078 7,936 Savills 17,500 54 1,446 19,000
41 William Pickering DriveInnopak Global 100%100%5.3%5.7% 437 419 3,027 CBRE 7,400 22 778 8,200
100%100%5.8%6.2% 4,949 4,941 28,665 80,110 240 5,240 85,590
Penrose:
4 Autumn PlaceRyco Hydraulics 100%100%4.8%5.5% 152 148 1,210 CBRE 2,710 4 461 3,175
6 Autumn PlaceMOTAT 100%100%4.9%6.1% 174 171 1,718 CBRE 2,790 (11) 746 3,525
10 Autumn PlaceMOTAT 100%100%5.2%5.7% 666 653 7,646 CBRE 11,500 66 1,134 12,700
122 Captain Springs RoadNew Zealand Crane Group 100%100%5.7%5.9% 521 496 7,431 Savills 8,400 (14) 814 9,200
8 Hugo Johnston DriveArgyle Schoolwear 100%100%6.2%6.0% 683 658 4,359 Colliers 10,900 – 200 11,100
12 Hugo Johnston DriveW H Worrall 100%100%5.8%5.9% 337 337 2,639 Colliers 5,760 (4) 44 5,800
16 Hugo Johnston DriveNewflor Industries 100%100%5.3%5.8% 379 373 2,619 JLL 6,400 183 567 7,150
80 Hugo Johnston DriveBoxkraft 100%100%5.5%6.0% 469 457 3,872 CBRE 7,600 36 914 8,550
102 Mays RoadGo Logistics 100%100%5.9%6.4% 525 513 7,588 CBRE 8,000 118 832 8,950
304 Neilson StreetFletcher Building Products 100%100%5.9%6.6% 737 720 13,438 Savills 10,950 319 1,131 12,400
306 Neilson StreetTrade Depot 100%n/a5.5%n/a 883 n/a 6,301 Savills – 16,070 130 16,200
312 Neilson StreetTransport Trailer Services 100%100%5.2%5.6% 346 344 3,862 JLL 6,150 11 439 6,600
314 Neilson StreetWakefield Metals 100%100%5.3%5.7% 562 551 5,818 Savills 9,660 24 916 10,600
12 Southpark PlaceStorepro Solutions 100%100%5.0%5.5% 500 490 5,477 JLL 8,850 (29) 1,124 9,945
100%100%5.5%5.9% 6,934 5,911 73,978 99,670 16,773 9,452 125,895
2. PROPERTY (CONTINUED)
2.1. Investment properties (continued)
32
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PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
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)
FOR THE YEAR ENDED 31 DECEMBER 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
ALL VALUES IN $000’S UNLESS NOTEDKey tenantOccupancy (%)Yield on valuation (%)Contract rent
Lettable area
(sqm) Valuer
Carrying
value
Capital
movements
Fair value
adjustment
Carrying
value
2018201820172018201720182017201820182017201820182018
Other Auckland:
58 Richard Pearse Drive, MangereEBOS 100%100%5.2%6.0% 1,174 1,174 12,759 Colliers 19,600 2,410 690 22,700
Carlaw Park Gateway Building, ParnellQuest 100%100%7.0%7.2% 2,481 2,545 2,369 CBRE 35,500 193 (193) 35,500
Carlaw Park Office Complex, ParnellJacobs 95%100%7.0%7.2% 4,462 4,484 11,434 CBRE 62,100 2,821 (1,121) 63,800
170 Swanson Road, SwansonTransportation Auckland 100%100%5.4%5.3% 1,068 994 37,601 JLL 18,720 80 1,000 19,800
97%100%6.5%6.8% 9,185 9,197 64,163 135,920 5,504 376 141,800
North Island (outside Auckland):
124 Hewletts Road, Mt MaunganuiRMD Bulk Storage 100%100%6.0%6.3% 2,853 2,814 29,270 Colliers 45,000 (37) 2,237 47,200
124a Hewletts Road, Mt MaunganuiBallance Agri-Nutrients 100%100%5.8%7.6% 1,013 1,013 10,497 Colliers 13,380 372 3,648 17,400
124b Hewletts Road, Mt MaunganuiBallance Agri-Nutrients 100%100%6.0%6.1% 885 875 8,867 Colliers 14,350 – 450 14,800
3 Hocking Street, Mt MaunganuiDrymix 100%100%6.4%7.1% 159 120 1,211 Colliers 1,680 221 599 2,500
558 Te Rapa Road, HamiltonDEC Manufacturing 100%100%6.8%6.8% 461 461 4,606 Savills 6,750 62 (62) 6,750
39 Edmundson Street, NapierTIL Logistics 100%100%7.6%7.9% 220 220 8,540 Colliers 2,800 36 64 2,900
20 Constance Street, New PlymouthAviagen 100%100%11.9%11.4% 394 388 1,366 Colliers 3,400 – (100) 3,300
330 Devon Street East, New PlymouthTIL Logistics 100%100%7.0%7.5% 112 112 482 Colliers 1,500 18 82 1,600
28 Paraite Road, New PlymouthTIL Logistics 100%100%7.6%7.7% 1,195 1,195 15,636 Colliers 15,600 203 (3) 15,800
2 Smart Road, New PlymouthNew Zealand Post 100%100%7.3%7.4% 320 320 2,359 Colliers 4,300 14 86 4,400
Shed 22, 23 Cable Street, WellingtonShed 22 Hospo 100%100%6.3%6.2% 851 831 2,809 CBRE 13,300 89 61 13,450
143 Hutt Park Road, WellingtonEBOS 100%100%7.1%7.1% 1,200 1,200 11,372 Colliers 16,800 14 186 17,000
8 McCormack Place, WellingtonFletcher Building Products 59%100%4.8%11.2% 435 848 6,406 CBRE 7,600 691 709 9,000
50 Parkside Road, Wellington
a
Waste Management 100%100%n/a9.9% 340 335 7,104 CBRE 3,400 (2,957) (443)–
48 Seaview Road, Wellington
a
Goughs Gough & Hamer 100%100%9.2%9.4% 583 573 8,996 Colliers 6,080 (16) 246 6,310
97%100%6.8%7.2% 11,021 11,305 119,521 155,940 (1,290) 7,760 162,410
a
Excludes development land shown separately.
2. PROPERTY (CONTINUED)
2.1. Investment properties (continued)
34
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PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
ALL VALUES IN $000’S UNLESS NOTEDKey tenantOccupancy (%)Yield on valuation (%)Contract rent
Lettable area
(sqm) Valuer
Carrying
value
Capital
movements
Fair value
adjustment
Carrying
value
2018201820172018201720182017201820182017201820182018
South Island:
11 Sheffield Street, BlenheimTIL Logistics 100%100%7.5%7.8% 490 490 10,823 Colliers 6,300 82 118 6,500
15 Artillery Place, NelsonTIL Logistics 100%100%7.0%7.4% 540 540 18,052 Colliers 7,300 89 311 7,700
8a & 8b Canada Crescent, ChristchurchPolarcold Stores 100%100%7.4%7.6% 1,172 1,129 9,500 CBRE 14,775 – 975 15,750
41 & 55 Foremans Road, ChristchurchTIL Logistics 100%100%6.5%6.7% 670 670 14,710 Colliers 10,000 131 119 10,250
44 Mandeville Street, ChristchurchFletcher Building Products 100%100%8.5%8.4% 1,124 1,118 11,154 CBRE 13,240 222 (212) 13,250
127 Waterloo Road, ChristchurchDHL Supply Chain 100%100%7.3%7.0% 321 314 4,055 CBRE 4,490 – (90) 4,400
100%100%7.5%7.6% 4,317 4,261 68,294 56,105 524 1,221 57,850
Investment properties - subtotal99%100%6.2%6.6% 82,036 79,573 780,092 1,206,915 42,770 66,670 1,318,655
Development land:
212 Cavendish Drive, Manukau JLL 2,200 (2,200) – –
232 Cavendish Drive, Manukau Colliers 750 – – 750
50 Parkside Road, Wellington CBRE 320 (350) 30 –
47 Dalgety Drive Savills – 1,260 – 1,260
48 Seaview Road, Wellington Colliers 620 – (330) 290
Development land – subtotal 3,890 (1,290) (300) 2,300
Investment properties – total 1,210,805 41,480 66,370 1,318,655
2. PROPERTY (CONTINUED)
2.1. Investment properties (continued)
36
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PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
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)
FOR THE YEAR ENDED 31 DECEMBER 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
2. PROPERTY (CONTINUED)
2.1. Investment properties (continued)
Recognition and Measurement
Investment properties are held to earn rental income and for long term capital appreciation. After initial recognition at cost including directly
attributable acquisition costs, investment properties are measured at fair value, on the basis of valuations made by independent valuers on at least
an annual basis. Gains or losses arising from changes in the fair values of investment properties are included in the Consolidated Statement of
Comprehensive Income in the year in which they arise.
Subsequent expenditure is charged to the asset’s carrying amount only when it is probable that future economic benefits associated with the item
will flow to the Group and the cost of the item can be measured reliably.
The fair value of investment property reflects the Directors’ assessment of the highest and best use of each property and amongst other things,
rental income from current leases and assumptions about rental income from future leases in light of the current market conditions. The fair value
also reflects the cash outflows that could be expected in respect of the property.
No depreciation or amortisation is provided for on investment properties. However, for tax purposes, depreciation is claimed on building fit-out and a
deferred tax liability is recognised where the building component of the registered valuation exceeds the tax book value of the building. The deferred
tax liability is capped at the amount of depreciation that has been claimed on each building.
Investment properties under construction are carried at cost until it is possible to reliably determine their fair value, from which point they are carried
at fair value less costs to complete.
Gains or losses on the disposal of investment properties are recognised in the Consolidated Statement of Comprehensive Income in the period in
which the investment properties are derecognised when they have been disposed.
Borrowing costs are capitalised if they are directly attributable to the acquisition or construction of a qualifying property. Capitalisation of borrowing
costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalisation of
borrowing costs will continue until the asset is substantially ready for its intended use. The rate at which borrowing costs are capitalised is determined
by reference to the weighted average borrowing costs of the Group and the average level of borrowings by the Group.
Key estimates and assumptions: Investment properties
The fair value of investment properties are determined from valuations prepared by independent valuers using Level 3 valuation techniques.
All investment properties were valued as at 31 December 2018 and 2017 by CB Richard Ellis (CBRE), Colliers International (Colliers), Jones Lang
LaSalle (JLL) or Savills. CBRE, Colliers, JLL and Savills are independent valuers and members of the New Zealand Institute of Valuers.
As part of the valuation process, the Group’s management verifies all major inputs to the independent valuation reports, assesses movements
in individual property values and holds discussions with the independent valuer.
The fair value was determined using Level 3 valuation techniques via a combination of the following approaches:
• Direct Capitalisation: The subject property rental is divided by a market derived capitalisation rate to assess the market value of the asset.
Further adjustments are then made to the market value to reflect under or over renting, additional revenue and required capital expenditure.
• Discounted Cash Flow: Discounted cash flow projections for the subject property are based on estimates of future cash flows, supported by the
terms of any existing lease and by external evidence such as market rents for similar properties in the same location and condition, and using
discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows.
38
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
2. PROPERTY (CONTINUED)
2.1. Investment properties (continued)
Significant inputs used together with the impact on fair value of a change in inputs:
RANGE OF SIGNIFICANT
UNOBSERVABLE INPUTSMEASUREMENT SENSITIVITY
20182017Increase in inputDecrease in input
Market capitalisation rate (%)
1
4.75 – 10.50 5.13 – 10.50 Decrease Increase
Market rental ($ per sqm)
2
28 – 370 26 – 420 Increase Decrease
Discount rate (%)
3
6.50 – 12.00 6.75 – 12.00 Decrease Increase
Rental growth rate (%)
4
1.71 – 2.94 1.61 – 2.93 Increase Decrease
Terminal capitalisation rate (%)
5
5.00 – 12.00 5.25 – 12.00 Decrease Increase
1 The capitalisation rate applied to the market rental to assess a property’s value, determined through analysis of similar transactions taking into account location, weighted average
lease term, tenant covenant, size and quality of the property.
2 The valuers assessment of the net market income which a property is expected to achieve under a new arm’s length leasing transaction. Includes both leased and vacant areas.
3 The rate applied to future cash flows reflecting transactional evidence from similar properties.
4 The rate applied to the market rental over the future cash flow projection.
5 The rate used to assess the terminal value of the property.
The estimated sensitivity of the fair value of investment property to changes in the market capitalisation rate (under the Direct Capitalisation valuation
approach) and discount rate (under the Discounted Cash Flows valuation approach) is set out in the table below:
ALL VALUES IN $000SFair valueMarket capitalisation rate Discount rate
2018+0.25%–0.25%+0.25%–0.25%
Valuation1,318,655
Change(52,000) 56,000 (40,000) 43,000
Change (%)(4%)4%(3%)3%
ALL VALUES IN $000SFair valueMarket capitalisation rate Discount rate
2017+0.25%–0.25%+0.25%–0.25%
Valuation1,210,805
Change(46,000) 49,000 (36,000) 38,000
Change (%)(3%)4%(3%)3%
Generally, a change in the assumption made for the adopted market capitalisation rate is accompanied by a directionally similar change in the adopted
terminal capitalisation rate. The adopted market capitalisation rate forms part of the direct capitalisation approach and the adopted terminal
capitalisation rate forms part of the discounted cash flow approach. Both valuation methodologies are considered when determining an investment
property’s fair value.
When calculating the direct capitalisation approach, the market rental has a strong interrelationship with the adopted market capitalisation rate given
the methodology involves assessing the total market rental income receivable from the property and capitalising this in perpetuity to derive a capital
value. In theory, an increase in the market rent and an increase in the adopted market capitalisation rate could potentially offset the impact to the fair
value. The same can be said for a decrease in the market rent and a decrease in the adopted market capitalisation rate. A directionally opposite change
in the market rent and the adopted market capitalisation rate could potentially magnify the impact to the fair value.
When assessing a discounted cash flow, the adopted discount rate and adopted terminal capitalisation rate have a strong interrelationship in deriving
a fair value given the discount rate will determine the rate at which the terminal value is discounted to the present value. In theory, an increase in the
adopted discount rate and a decrease in the adopted terminal capitalisation rate could potentially offset the impact to the fair value. The same can be
said for a decrease in the discount rate and an increase in the adopted terminal capitalisation rate. A directionally similar change in the adopted
discount rate and the adopted terminal capitalisation rate could potentially magnify the impact to the fair value.
39
NOTES TO THE FINANCIAL STATEMENTS
(
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)
FOR THE YEAR ENDED 31 DECEMBER 2018
2.2. Non-current assets classified as held for sale
Key estimates and assumptions: Non-current assets classified as held for sale
Non-current assets classified as held for sale comprises an investment property contracted for sale. The carrying value of the property is the
contracted sale price, net of sale costs, being the best indicator of fair value.
ALL VALUES IN $000S20182017
50 Parkside Road, Wellington 3,313 –
Total non-current assets classified as held for sale 3,313 –
2.3. Rental and management fee income
ALL VALUES IN $000S20182017
Gross rental receipts and service charge income recovered from tenants 87,717 81,200
Fixed rental income adjustments1,257 603
Capitalised lease incentive adjustments 88 (312)
Management fee income 648 461
Total rental and management fee income 89,710 81,952
Recognition and Measurement
Rental income from investment properties is recognised in the Consolidated Statement of Comprehensive Income on a straight line basis over the
term of the lease. Lease incentives are capitalised to investment properties in the Consolidated Statement of Financial Position and amortised on a
straight line basis in the Consolidated Statement of Comprehensive Income over the length of the lease to which they relate, as a reduction to rental
income.
Management fee income is recognised in the Consolidated Statement of Comprehensive Income in the period in which the services are rendered.
Future minimum rentals receivable under non-cancellable operating leases are as follows:
ALL VALUES IN $000S20182017
Within one year78,477 76,061
After one year but not more than five years231,606 218,152
More than five years130,738 129,840
Total440,821 424,053
2.4. Property costs
ALL VALUES IN $000S20182017
Service charge expenses (9,961) (8,502)
Bad and doubtful debts recovery 63 79
Other non-recoverable property costs (2,609) (2,436)
Total property costs (12,507) (10,859)
Other non-recoverable costs represents property maintenance not recoverable from tenants, property valuation fees and property leasing costs.
2. PROPERTY (CONTINUED)
40
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
2.5. Net rental income
ALL VALUES IN $000S20182017
Gross rental receipts and service charge income recovered from tenants87,717 81,200
Fixed rental income adjustments 1,257 603
Capitalised lease incentive adjustments 88 (312)
less: Service charge expenses (9,961) (8,502)
Net rental income 79,101 72,989
3. FUNDING
IN THIS SECTION This section outlines how the Group manages its capital structure, financing costs and exposure to interest rate risk.
3.1. Borrowings
(i) Net borrowings
ALL VALUES IN $000S20182017
Syndicated bank facility drawn down - non-current201,050 272,700
Fixed rate bonds – non-current200,000 100,000
Unamortised borrowings establishment costs (2,828) (2,065)
Net borrowings398,222 370,635
Weighted average interest rate for drawn debt (inclusive of current interest rate swaps, margins and line fees)4.86%4.96%
Weighted average term to maturity (years) 4.00 3.70
Recognition and Measurement
All borrowings are initially measured at fair value, plus directly attributable transaction costs, and subsequently measured at amortised cost using the
effective interest rate method. Under this method, directly attributable fees, costs, discounts and premiums are capitalised and spread over the
expected life of the facility. All other interest costs and bank fees are expensed in the period they are incurred.
(ii) Syndicated bank facility
The Group has facilities (A,B and C) with a banking syndicate comprising ANZ Bank New Zealand Limited (ANZ), Bank of New Zealand (BNZ),
Commonwealth Bank of Australia (CBA) and Westpac New Zealand Limited (Westpac) for $275,000,000.
Facility A for $50,000,000, Facility B for $187,500,000 and Facility C for $37,500,000 are provided by ANZ, BNZ, CBA and Westpac. The facilities are all
revolving facilities of a long term nature; Facility A expires 4 May 2020, Facility B expires 4 May 2021 and Facility C expires 4 May 2022.
ALL VALUES IN $000S20182017
ANZ 74,525 101,625
BNZ 66,825 91,125
CBA66,825 91,125
Westpac 66,825 91,125
Total facilities available 275,000 375,000
Syndicated bank facility drawn down - non-current 201,050 272,700
Undrawn facility available 73,950 102,300
Total facilities available275,000 375,000
2. PROPERTY (CONTINUED)
41
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
(iii) Fixed rate bonds
The following table provides details of the Group’s fixed rate bonds:
Value of IssueFair Value, $000S
NZX code$000SIssue DateMaturity DateInterest Rate20182017
PFI010 100,000 28-Nov-1728-Nov-244.59% 103,127 102,333
PFI020 100,000 1-Oct-181-Oct-254.25% 101,377 –
Total fixed rate bonds 200,000 204,504 102,333
The fair value of the fixed rate bonds is based on their listed market prices at balance date and is classified as Level 1 in the fair value hierarchy (2017:
Level 1). Interest on the PFI010 Bonds is payable quarterly in February, May, August and November in equal instalments, while interest on the PFI020
Bonds is payable quarterly in January, April, July and October; also in equal instalments.
(iv) Security
The syndicated bank facility and fixed rate bonds are secured by way of a security trust deed and registered mortgage security which is required to be
provided over Group properties with current valuations of at least $950,000,000 (31 December 2017: $950,000,000). In addition to this, the syndicated
bank facility agreement and the fixed rate bond terms also contain a negative pledge. The Company and PFI No. 1 are guarantors to the facility and fixed
rate bonds. As at 31 December 2018, investment properties totalling $1,309,968,000 (31 December 2017: $1,175,705,000) were mortgaged as security
for the Group’s borrowings.
3.2. Derivative financial instruments
(i) Fair values
ALL VALUES IN $000S20182017
Non-current assets 4,891 272
Current liabilities (94) (372)
Non-current liabilities (13,982) (11,095)
Total(9,185) (11,195)
(ii) Notional values, maturities and interest rates
20182017
Notional value of interest rate swaps – fixed rate payer – start dates commenced ($000S) 220,000 220,000
Notional value of interest rate swaps – fixed rate receiver
1
– start dates commenced ($000S) 200,000 100,000
Notional value of interest rate swaps – fixed rate payer – forward starting ($000S) 210,000 155,000
Total ($000S) 630,000 475,000
Percentage of borrowings fixed (%)55%59%
Fixed rate payer swaps:
Average period to expiry – start dates commenced (years) 2.10 2.62
Average period to expiry – forward starting (years from commencement) 3.53 3.65
Average (years) 2.80 3.04
Fixed rate payer swaps:
Average interest rate
2
– start dates commenced (%)4.16%4.37%
Average interest rate
2
– forward starting (% during effective period)3.43%3.55%
Average (%)3.80%4.03%
1 The Group has $200 million fixed rate receiver swaps for the duration of the two $100 million fixed interest bonds, the effect of the fixed rate receiver swaps is to convert the two $100
million bonds to floating interest rates.
2 Excluding margin and fees.
3. FUNDING (CONTINUED)
3.1. Borrowings (continued)
42
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
3. FUNDING (CONTINUED)
3.2. Derivative financial instruments (continued)
Recognition and Measurement
The Group is exposed to changes in interest rates and uses derivative financial instruments, principally interest rate swaps, to mitigate this risk.
The Group does not apply hedge accounting. Derivative financial instruments are entered into to economically hedge the risk exposure.
Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are
subsequently re-measured to fair value at each reporting date. Transaction costs are expensed on initial recognition and recognised in the
Consolidated Statement of Comprehensive Income. The fair value of derivative financial instruments is based on valuations prepared by
independent treasury advisers and is the estimated amount that the Group would receive or pay to terminate the derivative contract at reporting
date, taking into account current interest rates and creditworthiness of the derivative contract counterparties.
Key estimates and assumptions: Derivatives
The fair value of derivative financial instruments are determined from valuations prepared by independent treasury advisers using Level 2 valuation
techniques (2017: Level 2). These are based on the present value of estimated future cash flows accounting for the terms and maturity of each
contract and the current market interest rates at reporting date. Fair values also reflect the current creditworthiness of the derivative counterparty.
These values are verified against valuations prepared by the respective counterparties. The valuations were based on market rates at 31 December
2018 of between 1.97% for the 90 day BKBM (31 December 2017: 1.88%) and 2.65% for the 10 year swap rate (31 December 2017: 3.14%). There were
no changes to these valuation techniques during the reporting period.
4. INVESTOR RETURNS AND INVESTMENT METRICS
IN THIS SECTION This section summarises the earnings per share and net tangible assets per share which are common investment metrics.
4.1. Earnings per share
20182017
Total comprehensive income for the year attributable to the shareholders of the Company ($000) 110,094 51,684
Weighted average number of ordinary shares (shares) 498,723,330 459,600,237
Basic and diluted earnings per share (cents) 22.08 11.25
4.2. Net tangible assets per share
20182017
Net assets ($000) 915,135 842,943
Less: Goodwill ($000) (note 6.5) (29,086) (29,086)
Net tangible assets ($000) 886,049 813,857
Closing shares on issue (shares) 498,723,330 498,723,330
Net tangible assets per share (cents) 178 163
43
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
5. INTERNALISATION OF MANAGEMENT
On 22 June 2017, the Company’s shareholders approved the internalisation of the management of the Company. As a result, effective from 30 June 2017,
the Company terminated the management and administrative services contract that was undertaken by PFIM Limited (“PFIM”). PFIM had subcontracted
the property and administrative function to McDougall Reidy & Co Limited (“MRCO”), this management and administrative services contract was
also terminated.
The Company paid $41.9 million to PFIM for the termination of the management and administrative services contract. In addition the Company
acquired certain assets of PFIM and MRCO (comprising $0.1 million, for which a payment of $0.1 million was paid by the Company). Accordingly,
the net consideration for the termination of the management and administrative services contract and the purchase of certain assets was $42.0 million.
The previous employees of MRCO are now directly employed by the Company with the exception of three senior executives who, at that time, entered
into independent service contracts with the Company.
For further information on the internalisation of management, please refer to the consolidated financial statements as at and for the year ended
31 December 2017.
6. OTHER
IN THIS SECTION This section includes additional information that is considered less significant in understanding of the financial performance and
position of the Group, but is disclosed to comply with New Zealand Equivalents to International Financial Reporting Standards.
6.1. Administrative expenses
ALL VALUES IN $000SNOTE20182017
Auditors remuneration:
Audit and review of financial statements (148) (141)
Review of management fee calculations – (2)
Voting procedures over the annual shareholders’ meeting (3) (3)
Benchmarking of executive remuneration(7) –
Employee and independent contractor benefits expense (2,626) (1,310)
Directors’ fees6.8 (597) (360)
Office expenses (411) (253)
Rent (110) (55)
Depreciation (55) (26)
Other expenses(722) (741)
Total administrative expenses (4,679) (2,891)
44
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
6.2. Taxation
(i) Reconciliation of accounting profit before income tax to income tax (expense) / benefit
ALL VALUES IN $000S20182017
Profit before income tax 122,296 49,542
Prima facie income tax calculated at 28% (34,243) (13,872)
Adjusted for:
Non-tax deductible revenue and expenses (39) 115
Fair value gain on investment properties 18,584 12,207
Gain on disposal of investment properties 15 546
Depreciation2,620 2,391
Disposal of depreciable assets – (34)
Deductible capital expenditure 1,325 740
Lease incentives, fees and fixed rental income 491 213
Derivative financial instruments 570 (333)
Impairment allowance18 22
Current tax prior period adjustment (222) –
Current year tax losses utilised / (carried forward) 1,995 (1,995)
Current taxation expense (8,886) –
Current year tax losses (utilised) / carried forward (1,995) 1,995
Depreciation (242) 49
Lease incentives, fees and fixed rental income (491) (213)
Derivative financial instruments (570) 333
Impairment allowance (18) (22)
Deferred taxation benefit (3,316) 2,142
Total taxation reported in Consolidated Statement of Comprehensive Income (12,202) 2,142
Prior to the internalisation of management on 30 June 2017, the Group received a binding tax ruling from Inland Revenue on 22 May 2017 which
confirmed that the payment for the termination of the management agreement is deductible for tax purposes. This resulted in tax losses to be carried
forward in 2017 which have now been utilised in 2018.
(ii) Deferred tax
20162017201720182018
ALL VALUES IN $000S As at
Recognised
in profit As at
Recognised
in profit As at
Deferred tax assets
Losses carried forward – (1,995) (1,995) 1,995 –
Derivative financial instruments (2,809) (333) (3,142) 570 (2,572)
Impairment allowance (64) 22 (42) 18 (24)
Gross deferred tax assets (2,873) (2,306) (5,179) 2,583 (2,596)
Deferred tax liabilities
Investment properties 13,899 164 14,063 733 14,796
Gross deferred tax liabilities 13,899 164 14,063 733 14,796
Net deferred tax liability 11,026 (2,142) 8,884 3,316 12,200
6. OTHER (CONTINUED)
45
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
(iii) Imputation credit account
The amounts below represent the balance of the imputation credit account as at the end of the reporting period, adjusted for imputation credits that will
arise from the payment of taxation payable represented in the Consolidated Statement of Financial Position.
ALL VALUES IN $000S20182017
Opening balance38 2,257
Taxation paid / payable8,773 6
Imputation credits attached to dividends paid (6,608) (2,225)
Closing balance available to shareholders for use in subsequent periods 2,203 38
Due to the prior year tax loss, the Group did not generate imputation credits during the prior financial year through the payment of taxation.
Recognition and Measurement
The Company and Group are a listed Portfolio Investment Entity (PIE) for the purposes of the Income Tax Act 2007. Tax is accounted for on a
consolidated Group basis and the Group is required to pay tax to the Inland Revenue as required by the Income Tax Act 2007. Income tax expense
comprises current and deferred tax and is recognised in the Consolidated Statement of Comprehensive Income for the year.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date,
and any adjustment to tax payable in respect of previous years. Deferred tax is provided for temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is recognised on all temporary differences, including:
• The tax liability arising from accumulated depreciation claimed on investment properties, where applicable;
• The tax asset arising from the allowance for impairment;
• The tax liability arising from certain prepayments and other assets; and
• The tax asset / liability arising from the unrealised gains / losses on the revaluation of interest rate swaps.
Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that
have been enacted or substantively enacted by the reporting date. Deferred tax is not recognised for:
• Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects
neither accounting nor taxable profit or loss;
• Temporary differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable
future; and
• Taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to
income taxes levied by the same tax authority on the same taxable entity, or on different entities, but they intend to settle current tax assets
and liabilities on a net basis.
A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary differences
can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related
tax benefit will be realised.
Additional income tax arising from distribution of dividends is recognised at the same time as the liability to pay the dividend is recognised.
Key estimates and assumptions: Deferred tax
Deferred tax is provided on the accumulated depreciation claimed on the building component of investment properties. Investment properties are
valued each year by independent valuers (as outlined in note 2.1). These values include an allocation of the valuation between the land and building
components. The calculation of deferred tax on depreciation recovered places reliance on the land and building split provided by the valuers.
6. OTHER (CONTINUED)
6.2. Taxation (continued)
46
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
6.3. Accounts receivable, prepayments and other assets
ALL VALUES IN $000S20182017
Accounts receivable 952 1,163
Provision for doubtful debts (49) (67)
Prepayments and other assets 336 199
Total accounts receivable, prepayments and other assets 1,239 1,295
Recognition and Measurement
Accounts receivable are recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. Receivables
are assessed on an ongoing basis for impairment. The group applies the simplified approach to providing for expected credit losses prescribed by
NZ IFRS 9, which permits the use of lifetime expected loss provision for all trade receivables. In the prior year, a provision for doubtful debts was
established where there is evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable.
Those which are anticipated to be uncollectable are written off.
6.4. Accounts payable, accruals and other liabilities
ALL VALUES IN $000S20182017
Accounts payable 1,615 2,038
Accrued interest expense and bank fees 2,589 2,230
Accruals and other liabilities in respect of investment properties 2,996 1,381
Accruals and other liabilities 3,260 2,612
Total accounts payable, accruals and other liabilities 10,460 8,261
Recognition and Measurement
Expenses are recognised on an accruals basis and, if not paid at the end of the reporting period, are reflected as a payable in the Consolidated
Statement of Financial Position.
6.5. Goodwill
ALL VALUES IN $000S20182017
Goodwill 29,086 29,086
Recognition and Measurement
Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the fair value of the identifiable
net assets acquired.
Goodwill is measured at cost less accumulated impairment losses. It is tested annually for impairment or more frequently if events or changes in
circumstances indicate potential impairment. An impairment loss is recognised if the carrying amount exceeds the estimated recoverable amount.
Impairment losses are recognised in the Consolidated Statement of Comprehensive Income.
Goodwill is allocated to the Group’s cash generating units (CGU) identified according to the lowest level at which the goodwill is monitored.
To assess whether goodwill is impaired, the carrying amount of the CGU is compared to the recoverable amount, determined based on the greater
of its value in use and its fair value less costs of disposal.
Key estimates and assumptions: Goodwill
All goodwill relates to the Property for Industry Limited CGU.
The fair value of the Property for Industry Limited CGU for goodwill impairment testing is determined using Level 3 valuation techniques
(2017: Level 3). Fair value less costs of disposal is measured by calculating the fair value of the Property for Industry Limited CGU using a 1 day
volume-weighted average share price at the reporting date, applying a control premium (14.3%, as determined by a third party, 2017: 15.9%) and
deducting costs of disposal.
As at 31 December 2018 the estimated fair value less costs of disposal of the Property for Industry Limited CGU exceeded the carrying value
(2017: nil impairment).
6. OTHER (CONTINUED)
47
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
6.6. Financial instruments
The following financial assets and liabilities, that potentially subject the Group to financial risk, have been recognised in the financial statements:
ALL VALUES IN $000S20182017
Financial Assets
Financial assets at amortised cost
Cash at bank 1,652 605
Accounts receivable and other assets 903 1,096
Total – Financial assets at amortised cost 2,555 1,701
Financial assets at fair value through profit or loss
Derivative financial instruments 4,891 272
Total – Financial assets at fair value through profit or loss 4,891 272
Total Financial Assets 7,446 1,973
Financial Liabilities
Financial liabilities at amortised cost
Accounts payable, accruals and other liabilities 10,460 8,261
Borrowings 398,222 370,635
Total – Financial liabilities at amortised cost 408,682 378,896
Financial liabilities at fair value through profit or loss
Derivative financial instruments 14,076 11,467
Total – Financial liabilities at fair value through profit or loss 14,076 11,467
Total Financial Liabilities 422,758 390,363
6.7. Financial risk management
The Group’s activities expose it to a variety of financial risks: interest rate risk, credit risk, and liquidity risk. The Group’s overall risk management strategy
focuses on minimising the potential negative economic impact of unpredictable events on the Group’s financial well-being.
(a) Interest rate risk
The Group’s exposure to the risk of changes in interest rates relates primarily to the Group’s borrowings with a floating interest rate. The Group has an
interest rate hedging policy which has been reviewed by an external firm with expertise in this area. The policy calls for a band of the Group’s borrowings
to be at fixed interest rates, with a greater proportion of the near term to be fixed and a lesser percentage of the far dated to be fixed.
The Group uses derivative financial instruments, principally fixed rate payer interest rate swaps, to exchange its floating short term interest rate
exposure for fixed long term interest rate exposure in accordance with its policy bands. As the Group holds derivative financial instruments, there is a
risk that their fair value will fluctuate because of underlying changes in market interest rates. This is accepted as a by-product of the Group’s interest
rate hedging policy. The fair value of derivative financial instruments is disclosed in the Consolidated Statement of Financial Position (refer note 3.2).
The following sensitivity analysis shows the effect on profit before tax and equity if interest rates at balance date had been 50 basis points (0.50%) higher
or lower with all other variables held constant.
20182017
ALL VALUES IN $000S
Gain/(loss)
on increase
of 0.50%
Gain/(loss)
on decrease
of 0.50%
Gain/(loss)
on increase
of 0.50%
Gain/(loss)
on decrease
of 0.50%
Impact on profit before tax(1,171) 1,171 692 (692)
Impact on equity (843) 843 498 (498)
6. OTHER (CONTINUED)
48
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
(b) Credit risk
Credit risk represents the risk that the counterparty to a financial instrument will fail to discharge its obligations and the Group will suffer financial loss
as a result. Financial instruments which potentially subject the Group to credit risk consist of cash and cash equivalents, accounts receivable and other
assets and interest rate swap agreements.
With respect to the credit risk arising from cash and cash equivalents, there is limited credit risk as cash is deposited with ANZ Bank New Zealand
Limited, a registered bank in New Zealand with a credit rating of AA– (Standard & Poor’s). The Group considers both historical analysis and forward-
looking information in determining any expected credit loss, and infers from this strong credit rating that no loss allowance is deemed necessary.
With respect to the credit risk arising from accounts receivable, the Group only enters into lease arrangements over its investment properties with
parties whom the Group assesses to be creditworthy. It is the Group’s policy to subject all potential tenants to credit verification procedures and
monitor accounts receivable balances. Credit risk does not arise on property sale proceeds to be settled as title will not transfer until settlement.
With respect to the credit risk arising from interest rate swap agreements, there is limited credit risk as all counterparties are registered banks in
New Zealand. The credit ratings of these banks are all AA– (Standard & Poor’s).
The carrying amount of financial assets as per note 6.6 approximates the Groups maximum exposure to credit risk. For certain receivables the Group
holds bank guarantees, parent company guarantees or personal guarantees.
(c) Liquidity risk
Liquidity risk is the risk that the Group will have difficulty realising assets and raising sufficient funds to satisfy commitments associated with financial
liabilities.
The Group manages its liquidity risk by ensuring that it has committed funding facilities at a minimum of 105% of the projected peak debt level over
the next twelve months (excluding business acquisitions).
The maturities of the Group’s borrowings based on the remaining period is 4.0 years (2017: 3.7 years), with all borrowings due later than one year
(2017: later than one year). Further details of the Group’s borrowings, including the maturities of the Group’s borrowings, are disclosed in note 3.1
to the financial statements.
The table below analyses the Group financial liabilities (principal and interest) by the relevant contracted maturity groupings based on the remaining
period as at 31 December 2018 and 31 December 2017.
ALL VALUES IN $000S
Carrying
amount
Contractual cash flows
0– 1 year1– 2 years2– 5 years > 5 years Total
Financial liabilities
Accounts payable, accruals and other liabilities 10,460 10,460 ––– 10,460
Derivative financial instruments
1
9,185 2,765 2,429 3,645 506 9,345
Borrowings 398,222 14,150 63,111 174,724 209,550 461,535
Total as at 31 December 2018 417,867 27,375 65,540 178,369 210,056 481,340
Accounts payable, accruals and other liabilities 8,261 8,261 ––– 8,261
Derivative financial instruments
1
11,195 4,265 3,124 4,424 1,117 12,930
Borrowings 370,635 12,639 12,639 289,800 106,887 421,965
Total as at 31 December 2017 390,091 25,165 15,763 294,224 108,004 443,156
1 The carrying amount of derivative financial instruments shown is the net position of both derivative financial instrument assets and derivative financial instrument liabilities.
(d) Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern whilst maximising the return to
shareholders through maintaining an optimal balance of debt and equity. In order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Group’s capital structure includes borrowings and shareholders’ equity. The Group monitors capital on the basis of the loan to value ratio and
borrowing covenant compliance. The loan to value ratio is calculated as borrowings divided by investment properties. The Group’s strategy is to maintain
a loan to value ratio of no more than 40%. The covenants on all borrowings require a loan to value ratio of no more than 50%, and this was complied with
during the year.
The Group operates a Dividend Reinvestment Scheme (DRS) which allows eligible shareholders to reinvest dividends in shares. The Board, at its sole
discretion, may suspend the DRS at any time and/or apply a discount to which shares are issued under the DRS.
6. OTHER (CONTINUED)
6.7. Financial risk management (continued)
49
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
6.8. Related party transactions
The Company internalised its management on 30 June 2017 and paid $41.9 million to PFIM. For further details refer to Note 5.
Gregory Reidy was a Director of both PFIM and the Company, accordingly this transaction and the management fees detailed below were related
party transactions.
(i) Management fees
From 30 June 2017 no further base management fees or performance fees are payable. Instead the costs of managing the Company are incurred
directly.
Prior to the internalisation, PFIM was entitled to be paid base management and performance fees for the provision of management and administrative
services, pursuant to a management and administrative services contract.
(a) Base management fees
The base management fee was payable monthly and was calculated as one twelfth of:
• 0.725% of total tangible assets under management up to $425 million;
• 0.450% of total tangible assets under management above $425 million and below $775 million; and
• 0.350% of total tangible assets under management above $775 million.
During the prior year, the Group incurred base management fees totalling $2,919,000 from PFIM, for the provision of management and
administrative services.
(b) Performance fees
The performance fee was calculated and payable on a quarterly basis. The performance fee was calculated as 10% of the change in shareholder
returns above 10% per annum (2.5% per quarter) and under 15% per annum (3.75% per quarter). Where shareholder returns exceeded 3.75% in a
quarter, no payment was due for the actual amount of the increase above 3.75% but the amount of the increase above 3.75% was carried forward
and added to the calculation of shareholder returns in the next seven quarters. However, if shareholder returns were less than 2.5% in a quarter,
the deficit was carried forward and subtracted from the calculation of shareholder returns in the next seven quarters.
During the prior year, the Group incurred no performance fees from PFIM.
(ii) Key management personnel
ALL VALUES IN $000S20182017
Directors’ fees – annual fees 357 360
Directors’ fees – retirement allowance paid 135 –
Directors’ fees – retirement allowance accrued 105 –
Short-term independent contractors benefits 1,518 805
Key management personnel 2,115 1,165
(iii) Other related party transactions
On 30 June 2017, the Group entered into a lease agreement with McDougall Reidy & Co Limited (MRCO) to lease the head office for the Group. Gregory
Reidy, a senior executive who became an independent contractor with the Company on 30 June 2017 is also a Director of MRCO. During the prior year,
rental income of $39,000 was paid to MRCO and is included within other expenses. The head office was sold to an unrelated party on 6 November 2017.
On 30 June 2017, the Group entered into a licence agreement with MRCO enabling MRCO to operate its business from the Group’s premises, access the
Group’s IT and support systems and employees for its business. During the year, licence income of $100,000 was received from MRCO (2017: $50,000).
On 1 July 2017, Susan Peterson became a Director of ASB Bank Limited (ASB), a 100% subsidiary of CBA. During the year, the Group incurred $3,135,000
(2017: $2,120,000) of interest expense and bank fees and received $657,000 (2017: $48,000) of interest income from CBA. As at 31 December 2018:
$246,000 (31 December 2017: $499,000) was owing to CBA and included in accounts payable, accruals and other liabilities and $45,000 (31 December
2017: $48,000) was owing from CBA and included in accounts receivable. As per note 3.1(ii), CBA provided the Group with a facility of $66,825,000
(31 December 2017: $91,125,000) of which $48,855,150 (31 December 2017: $66,266,100) was drawn as at 31 December 2018. As at 31 December 2018,
interest rate swaps with the following notional values were held with CBA: $45,000,000 (31 December 2017: $60,000,000) current fixed rate payer
swaps, $60,000,000 (31 December 2017: $20,000,000) forward starting fixed rate payer swaps, $50,000,000 (31 December 2017: $50,000,000) current
fixed rate receiver swaps.
No related party debts have been written off or forgiven during the year (2017: nil).
6. OTHER (CONTINUED)
50
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
On 8 May 2018, Peter Masfen retired from the Board of Directors of the Company as Chairman and Independent Director. Mr Masfen was first elected
as a Director of the Company on 17 May 2002, and had held office as a Director of the Company since that date. At the 23 May 2008 Annual Meeting,
the Company confirmed that retirement payments (being the total remuneration of the retiring Director, in any three years chosen by the Company)
to eligible Directors (which includes Mr Masfen) will be calculated in respect of that Director’s remuneration prior to the increase approved at the
23 May 2008 meeting. As such, a retirement allowance of $135,000 was payable to Mr Masfen and was paid on his retirement.
At the 23 May 2008 meeting, it was also noted that no retirement remuneration will be paid to Directors who are appointed after 1 May 2004. It is noted
that Humphry Rolleston is the only other current Director who was appointed prior to 1 May 2004 and is eligible for a retirement allowance.
As at 31 December 2018, Directors of the Company held 1,041,371 (31 December 2017: 5,809,115) shares beneficially in the Company and 110,825
(31 December 2017: 408,741) shares non-beneficially in the Company.
6.9. Operating segments
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating
decision-maker has been identified as the Board of Directors. The Group is internally reported as a single operating segment to the chief operating
decision-maker.
6.10. Capital commitments
As at 31 December 2018, the Group had capital commitments totalling $2,891,000 (31 December 2017: $7,666,000) relating to work on investment
properties.
6.11. Subsequent events
On 18 February 2019, the Directors of the Company approved the payment of a net dividend of $10,473,000 (2.1000 cents per share) to be paid
on 13 March 2019. The gross dividend (2.5417 cents per share) carries imputation credits of 0.4417 cents per share. The payment of this dividend
will not have any tax consequences for the Group and no liability has been recognised in the Consolidated Statement of Financial Position as at
31 December 2018 in respect of this dividend.
As outlined in section 1.9, on 23 January 2019 the Group disposed of an investment property located at 50 Parkside Road, Wellington, for a net sales
price of $3.3 million.
6. OTHER (CONTINUED)
6.8. Related party transactions (continued)
51
NOTES TO THE FINANCIAL STATEMENTS
(
CONTINUED
)
FOR THE YEAR ENDED 31 DECEMBER 2018
Independent auditor’s report
To the shareholders of Property for Industry Limited
We have audited the consolidated financial statements which comprise:
• the consolidated statement of financial position as at 31 December 2018;
• the consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of changes in equity for the year then ended;
• the consolidated statement of cash flows for the year then ended;
• the reconciliation of profit after income tax to net cash flows from operating activities; and
• the notes to the consolidated financial statements, which include significant accounting policies.
Our opinion
In our opinion, the consolidated financial statements of Property for Industry Limited (the Company), including its controlled entity (the Group), present
fairly, in all material respects, the financial position of the Group as at 31 December 2018, its financial performance and its cash flows for the year then
ended in accordance with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting
Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs NZ) and International Standards on Auditing (ISAs).
Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements
section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners (PES 1)
issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Our firm carries out other services for the Group in the areas of voting procedures over the annual shareholders’ meeting and benchmarking of executive
remuneration. The provision of these other services has not impaired our independence as auditor of the Group.
Our audit approach
Overview
Materiality
Audit scope
Key audit
matters
An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material
misstatement.
Overall group materiality: $2,695,000
We agreed with the Audit and Risk Committee that we would report to them misstatements identified during our audit above
$134,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
We have two key audit matters:
• Valuation of investment properties; and
• Goodwill impairment assessment.
52
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Materiality
The scope of our audit was influenced by our application of materiality.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the
consolidated financial statements as a whole as set out above. These, together with qualitative considerations, helped us to determine the scope of
our audit, the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the
consolidated financial statements as a whole.
Overall group materiality
$2,695,000
How we determined it
Approximately 5% of profit before tax excluding valuation movements relating to investment properties and
interest rate derivatives.
Rationale for the materiality
benchmark applied
We applied this benchmark because, in our view, it is more reflective of the metric against which the
performance of the Group is most commonly measured.
Audit scope
We designed our audit by assessing the risks of material misstatement in the consolidated financial statements and our application of materiality.
As in all of our audits, we also addressed the risk of management override of internal controls including among other matters, consideration of whether
there was evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements
as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements
of the current year. We have two key audit matters: valuation of investment properties and goodwill impairment assessment. These matters were
addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.
Key audit matterHow our audit addressed the key audit matter
Valuation of investment properties
As disclosed in note 2.1 of the consolidated financial statements,
the Group’s Investment Properties at $1,319 million represent the
majority of the assets held by the Group as at 31 December 2018.
The valuation of the Group’s property portfolio is inherently
subjective due to, amongst other factors, the individual nature of
each property, location and the expected future rental income for
each respective property.
The existence of significant estimation uncertainty, coupled with
the fact that only a small percentage difference in individual
property valuation assumptions, when aggregated, could result in
material misstatement, is why we have given specific audit focus
and attention to this area.
The valuations were carried out by third party valuers, Colliers
International New Zealand Limited, Jones Lang LaSalle Limited,
CBRE Limited and Savills New Zealand Limited (the Valuers).
The Valuers were engaged by the Group, and performed their
work in accordance with International Valuation Standards and
the Australia and New Zealand Valuation and Property Standards.
The Valuers used by the Group are well known firms, with
experience in the markets in which the Group operates and
are rotated across the portfolio on a three-yearly cycle.
In determining a property’s valuation, the Valuers take into
account property specific information such as the current tenancy
agreements and rental income earned by the asset. They then
External valuations
We read the valuation reports for all properties and discussed the reports with
each of the Valuers. We confirmed that the valuation approach for each property
was in accordance with accounting standards and suitable for use in determining
the carrying value of Investment Properties at 31 December 2018.
It was evident from our discussions with management and the Valuers and
our review of the valuation reports that close attention had been paid to each
property’s individual characteristics and its overall quality, geographic location
and desirability as a whole.
We assessed the Valuers’ qualifications, expertise and their objectivity and we
found no evidence to suggest that the objectivity of any Valuer in their performance
of the valuations was compromised.
We carried out procedures, on a sample basis to test whether property-specific
information supplied to the Valuers by the Group reflected the underlying property
records held by the Group. For the items tested, the information was consistent.
Assumptions
Our work over the assumptions focused on the largest properties in the portfolio
and those properties where the assumptions used and/or year-on-year fair value
movement suggested a possible outlier versus market data. We also engaged our
own in-house valuation specialist to critique and challenge the work performed and
assumptions used by the Valuers. In particular, we compared the valuation metrics
used by the Valuers to recent market activity.
We concluded that the assumptions used in the valuations were supportable in
light of available market evidence.
Independent auditor’s report (continued)
53
Key audit matterHow our audit addressed the key audit matter
apply assumptions in relation to capitalisation rates and current
market rent and anticipated growth, based on available market
data and transactions, to arrive at a range of valuation outcomes,
from which they derive a point estimate. Due to the unique nature
of each property, the assumptions applied take into consideration
the individual property characteristics at a granular tenant by
tenant level, as well as the qualities of the property as a whole.
The Group has adopted the assessed values determined by
the Valuers.
Overall valuation estimates
Because of the subjectivity involved in determining the appropriate valuations for
individual properties with the existence of alternative assumptions and valuation
methods, we determined a range of values that were considered reasonable for
an individual property to evaluate the independent property valuations used by
management. If we find an error in a property valuation or determine that the
valuation is outside the reasonable range, we would evaluate the error or
difference against overall materiality to determine if there is a material
misstatement in the consolidated financial statements.
The valuations adopted by the Group were all within an acceptable range. We also
considered whether or not there was bias in determining individual valuations and
found no evidence of bias.
Goodwill impairment assessment
As disclosed in note 6.5 of the consolidated financial statements,
the goodwill balance of $29 million was recognised when the
Company merged with Direct Property Fund Limited and is
supported by an annual impairment review. No impairment
charge has been recorded against this balance in the current
financial year.
Management have used the fair value of the Group less costs of
disposal to support the continued carrying value for the goodwill
balance and this involves the application of subjective judgement
about the control premium. The control premium is considered
to be a key area of judgement.
We evaluated management’s process around testing for goodwill impairment and
performed the following procedures:
• Agreed the daily high and low trade prices for the Group’s shares at year end
to NZX trading data;
• With the assistance of our in-house valuation specialist, we assessed the
reasonableness of the control premium applied in the goodwill impairment
calculation as well as the costs of disposal estimate through examining
market evidence from past transactions; and
• Assessed management’s calculation that the fair value of the Group less cost
of disposal was in excess of the Group’s net assets as the 31 December 2018.
We also performed sensitivity analysis around the control premium assumption to
ascertain the extent of change that individually would be required for the goodwill
balance to be impaired. The control premium will need to fall by more than 75%
before there is an impairment issue.
Information other than the consolidated financial statements and auditor’s report
The Directors are responsible for the annual report. Our opinion on the consolidated financial statements does not cover the other information included
in the annual report and we do not express any form of assurance conclusion on the other information.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears
to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report,
we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of the Directors for the consolidated financial statements
The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of the consolidated financial statements in accordance
with NZ IFRS and IFRS, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to
liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Independent auditor’s report (continued)
54
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Independent auditor’s report (continued)
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements, as a whole, are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs NZ and ISAs will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions
of users taken on the basis of these consolidated financial statements.
A further description of our responsibilities for the audit of the consolidated financial statements is located at the External Reporting Board’s website at:
https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/
This description forms part of our auditor’s report.
Who we report to
This report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that we might state those matters which
we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we
have formed.
The engagement partner on the audit resulting in this independent auditor’s report is Samuel Shuttleworth.
For and on behalf of:
Chartered Accountants Auckland
18 February 2019
55
FIVE-YEAR PERFORMANCE SUMMARY
YEAR ENDED 31 DECEMBER 2018201720162015 2014
ALL VALUES IN $M UNLESS OTHERWISE NOTED
FINANCIAL PERFORMANCE
Operating revenue
1
79.973.571.166.963.8
Operating expenses
1
(26.0)(25.9)(28.0)(30.3)(26.9)
Total operating earnings53.947.643.136.636.9
Non-operating income and expenses68.41.988.943.029.0
Profit before taxation122.349.5132.179.665.9
Total taxation benefit / (expense)(12.2)2.1(8.7)(6.8)(6.0)
Total comprehensive income after tax110.151.7123.472.859.9
Weighted average number of ordinary shares ('000 shares)498,723459,600450,079422,275411,502
IFRS earnings per share (cents per share)22.0811.2527.4217.2514.55
DISTRIBUTIONS
Total comprehensive income after tax110.151.7123.472.859.9
Distribution adjustments(72.9)(14.6)(89.3)(41.5)(28.9)
Adjusted Funds From Operations (AFFO, '18) / Distributable profit ('14-17)37.237.134.131.331.0
Weighted average number of ordinary shares ('000 shares)498,723459,600450,079422,275411,502
AFFO ('18) / Distributable profit ('14-17) per share (cents per share)7.468.087.587.587.41
Gross dividends paid relating to the year reported (cents per share)9.337.459.249.069.04
Net dividends paid relating to the year reported (cents per share)7.557.457.307.307.25
AFFO ('18) / Distributable profit ('14-17) pay-out ratio (%)101.2%95.7%97.2%97.2%97.8%
FINANCIAL POSITION
Investment properties1,318.71,210.81,083.3986.6876.0
Goodwill29.129.129.129.129.1
Other assets11.22.39.411.51.8
Total assets1,358.91,242.21,121.81,027.2906.9
Borrowings398.2370.6332.9330.9312.8
Other liabilities45.528.632.738.329.1
Total liabilities443.8399.2365.7369.2341.9
Total equity915.1842.9756.1658.0565.0
Closing shares on issue ('000 shares)498,723498,723452,459447,692411,502
Net tangible (excluding goodwill) assets (cents per share)177.7163.2160.7140.5130.2
Gearing (%)30.3%30.8%30.1%33.3%35.8%
PROPERTY PORTFOLIO METRICS
Number of properties (#)9492838479
Number of tenants (#)148148143141134
Contract rent82.079.672.572.365.8
Occupancy (%)99.3%99.9%99.6%99.6%98.5%
Net lettable area including yard (sqm) 780,092 756,455 667,441 673,112 626,755
Weighted average lease term (years)5.395.334.795.185.26
Capitalisation rate (%)6.1%6.4%6.6%7.0%7.2%
1
Service charge income/expenses excluded from 2018 figures for comparability purposes
56
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Property
for
Industry
Limited
Annual
Report
31 December
2018
COMPANY
STRUCTURE
& STATUTORY
INFORMATION.
57
COMPANY STRUCTURE AND
STATUTORY INFORMATION
Property for Industry Limited (the Company, PFI) is a publicly listed company established in 1994. The Board currently has five Directors,
four of whom are independent.
More information on the PFI Board and Management Team is available on the PFI website at https://www.propertyforindustry.co.nz/about-pfi/
our-people-investors/.
PRINCIPAL ACTIVITY
PFI is a listed industrial property investment company. PFI and its subsidiary, P.F.I. Property No. 1 Limited (together, the Group), invest solely
in New Zealand. There has not been any change in the nature of the Company’s or Group’s business in the year ended 31 December 2018,
nor in the classes of business in which the Company has an interest.
GOVERNANCE
The Board of PFI is committed to the highest standards of business behaviour and accountability. The Board regularly reviews and assesses
the Group’s governance structures and processes to ensure they are consistent with best practice standards.
As part of the Board’s ongoing monitoring and review of the Group’s governance framework, the Board has developed a Corporate Governance
Manual (the manual) that forms the Group’s corporate governance framework. The manual was reviewed and revised by the Board during 2017
to reflect the new NZX Corporate Governance Code (the NZX Code). PFI notes the release of revisions to the NZX Corporate Governance Code
that will apply once PFI is subject to the new NZX Listing Rules. This report has been prepared on the basis of the existing NZX Code, and PFI
will report against the updated code in its annual report for the year ended 31 December 2019.
A copy of the manual is available on the PFI website at https://www.propertyforindustry.co.nz/about-pfi/governance/ and includes:
1. Code of Ethics;
2. Board Charter;
3. Audit and Risk Committee Charter;
4. Nomination and Remuneration Committee Charter;
5. Remuneration Policy;
6. Financial Products Trading Policy;
7. Continuous Disclosure Policy; and
8. Diversity Policy.
COMPLIANCE WITH NZX REQUIREMENTS
PFI considers that it complies with the NZX Code.
NZX CODE: KEY PRINCIPLES
This section sets out PFI’s corporate governance policies, practices and processes by reference to the NZX Code’s eight key principles and
supporting recommendations.
58
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Principle One : Code of Ethical Behaviour
Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable for these standards being
followed throughout the organisation.
Code of Ethics
The Board has developed a Code of Ethics that forms part of the manual. The Code of Ethics provides a framework for PFI’s Directors,
Independent Contractors (see below) and employees by which they are expected to conduct their duties by facilitating behaviour that is
consistent with PFI’s business standards.
PFI monitors compliance with the Code of Ethics through its management processes as well as through the whistleblowing procedures set out
in the Code of Ethics itself. All Directors, Independent Contractors and employees are informed of the content of the Code of Ethics prior to
commencing such roles, and will be informed of any future change to the Code of Ethics.
Financial Products Trading Policy
PFI is committed to transparency and fairness in financial product dealing and the rules for dealing in PFI’s listed securities are contained in its
Financial Products Trading Policy. The policy’s main purpose is to ensure no Director, Independent Contractor, employee or contractor uses their
position or knowledge of PFI or its business to engage in financial product dealing for personal benefit, or to provide a benefit to any third party.
The Financial Products Dealing Policy applies to Directors, Independent Contractors, employees and contractors of PFI and its subsidiary,
and trusts and companies controlled by those persons (Restricted Persons).
The key points of the policy are:
§
A prohibition on “insider trading”, meaning persons who hold
non-publicly available price-sensitive information must not pass on
that information, nor acquire or dispose of PFI’s listed securities;
§
Restricted Persons must obtain consent to trade PFI listed
securities at any time; and
§
No trading is permitted by Restricted Persons during “blackout
periods” from the balance date and the half-year balance date
until release of the relevant results to NZX.
Principle Two: Board Composition & Performance
To ensure an effective Board, there should be a balance of independence, skills, knowledge, experience and perspectives.
Board Charter
The Board has developed a charter that sets out its authority, duties and responsibilities. The Board, through a set of formal policies and procedures:
§
Establishes a clear framework for oversight and management
of PFI’s operations and for defining the respective roles and
responsibilities of the Board;
§
Structures itself to be effective in discharging its responsibilities
and duties;
§
Sets standards of behaviour expected of the Company’s
Management Team and representatives;
§
Safeguards the integrity of the Company’s financial reporting;
§
Ensures timely and balanced disclosure;
§
Respects and facilitates the rights of shareholders;
§
Recognises and manages risk;
§
Encourages Board and Management Team effectiveness;
§
Remunerates fairly and responsibly; and
§
Recognises the legitimate interests of all stakeholders.
The Board has an obligation to protect and enhance the value of the assets of PFI for the benefit of shareholders. It achieves this through approval
of appropriate corporate strategies, with particular attention to capital structure, acquisition and divestment proposals, capital expenditure and the
review of the performance of the Management Team on a regular basis.
The Board delegates implementation of the adopted corporate strategies to PFI’s Management Team.
Board Composition, Appointments, Independence & Operation
The constitution allows for between three and eight Directors. As at 31 December 2018, there were five Directors, four of whom are independent.
It is the Company’s policy that there should always be a majority of Independent Directors.
59
The Directors of the Company who held the office during the 12 months to 31 December 2018, their status, date of appointment and meeting
attendances follows:
DIRECTOR STATUS
DATE OF
APPOINTMENT
LAST
RE-ELECTED
DATE CEASED
TO BE A
DIRECTOR
MEETINGS
ATTENDED (NINE
MEETINGS HELD)
Anthony BeverleyBoard Chairman
Nomination and Remuneration
Committee Chairman
Independent Director
2 July 200122 June 2017N/A9
David ThomsonIndependent Director12 February 20188 May 2018N/A7
1
Humphry RollestonIndependent Director5 July 199422 June 2017N/A8
Susan PetersonAudit and Risk Committee Chair
Independent Director
24 May 201615 June 2016N/A9
Gregory ReidyExecutive Director20 January 20128 May 2018N/A9
Peter MasfenFormer Board Chairman
Former Independent Director
17 May 200215 June 20168 May 20182
2
1 Seven meetings were held following David Thomson’s appointment.
2 Three meetings were held prior to Peter Masfen’s retirement.
A profile of each Director outlining their experience, length of service and independence can be found on the PFI website.
Details of Directors’ relevant interests in the Company’s Financial Products as at 31 December 2018 can be found below.
The constitution provides that one third (or the nearest whole number to one third) of the Board must offer themselves for re-election
at a meeting of shareholders each year.
All current Directors are also Directors of the Company’s subsidiary, P.F.I. Property No. 1 Limited.
Where a Board vacancy arises or the Board otherwise determines a need to appoint a new Director, it is the responsibility of the Nomination
and Remuneration Committee to identify and nominate external candidates to fill Board vacancies as and when they arise (see Principle 3 below
for further information). PFI enters into a formal written agreement with all new Directors, which establishes the terms of their appointment.
Directors are encouraged to undertake continuing education to develop and maintain their skills and knowledge. The Chairperson meets
annually with Directors of the Company to discuss individual performance of Directors. The Board reviews its performance as a whole on
an annual basis.
Under the Board Charter (described in further detail above) any Managing Director of PFI is not eligible to be appointed as the Chair of the Board.
Gender and Diversity
The breakdown of the gender composition of PFI’s Directors and Officers as at the end of the previous two financial years is as follows:
FINANCIAL YEAR
MALE FEMALE
DIRECTORSOFFICERSDIRECTORSOFFICERS
Year ending 31 December 20174210
Year ending 31 December 20184210
The Board has established a Diversity Policy in accordance with the NZX Code. The PFI Board believes that a diverse and inclusive workforce
is essential for it to be able to deliver its strategic objectives and continue to meet its responsibilities to its customers, its employees, the
communities in which it works, and its shareholders. It is further noted that five members of the team of 12 are female (2017: six out of 10).
60
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Principle 3: Board Committees
The Board should use committees where this will enhance its effectiveness in key areas, while still retaining Board responsibility.
Audit and Risk Committee
The Board has established an Audit and Risk Committee in accordance with the NZX Code. The Audit and Risk Committee has developed a
written charter that outlines the committee’s authority, duties, responsibilities, relationship with the Board and a policy on audit independence.
The committee develops and monitors procedures to ensure the Board is properly and regularly informed and updated on corporate financial
matters. The Board is required to regularly review the performance of the Audit and Risk Committee.
The Audit and Risk Committee’s functions include:
§
Recommending the appointment and removal of external
auditors (see Principle 7 “Auditors” below for further detail);
§
Reviewing PFI’s financial reporting documents with the view
to ensuring PFI maintains accurate financial and accounting
records; and
§
Reviewing earnings releases and financial reports.
In addition to the committee’s audit and financial reporting related functions, it is also responsible for providing a view on PFI’s business and
financial risk management process, including the adequacy of the overall control environment, independence from management and controls
in selected areas representing significant risk.
The Audit and Risk Committee meets at least twice a year (or more frequently if required) with the Group’s auditor to review the outcome
of the interim review (30 June) and annual audit (31 December). Employees will only attend Audit and Risk Committee meetings at the
invitation of the Committee.
The Audit and Risk Committee must have a minimum of three Directors as members and the majority must be Independent Directors.
No executive or Managing Director may be a member of the Audit and Risk Committee. The Chair of the Board is not eligible to be chair
of the Audit and Risk Committee.
At 31 December 2018, the members of the Audit and Risk Committee were Susan Peterson (Chair of the Audit and Risk Committee), Anthony
Beverley and David Thomson. Susan Peterson and Anthony Beverley were members of the Committee at all times during 2018 and attended
the three meetings of the Audit and Risk Committee held during 2018. David Thomson joined the Audit and Risk Committee on 8 May 2018
and attended the two meetings held following his appointment, Peter Masfen was a member of the Audit and Risk Committee from the
beginning of the year until his retirement on 8 May 2018. He attended the one meeting held during this time.
Nomination and Remuneration Committee
The Board has also established a Nomination and Remuneration Committee in accordance with the NZX Code, whose role includes identifying
and recommending individuals for nomination to be members of the Board and its committees and regularly reviewing the remuneration policy
(for further information on remuneration, see Principle 5 “Remuneration” below). The Nomination and Remuneration Committee has developed
a written charter to assist it fulfil this purpose, which outlines the committee’s authority, duties, responsibilities and relationship with the Board.
The Board is required to regularly review the performance of the Nomination and Remuneration Committee and undertakes a formal review
annually of its objectives and activities.
When nominating candidates, the committee takes into account a range of factors as well as perceived needs of the Board at the time. Some of
these factors include qualifications, experience, requirements of the NZX Listing Rules and the ability to exercise and independent perspective
and informed judgment on matters that come before the Board. While the committee has the authority to obtain legal or other independent
professional advice, it may only nominate a person to be a Director of PFI with approval of the Board.
The Nomination and Remuneration Committee must have at least two members, all of whom must be Independent Directors.
At 31 December 2018, the members of the Nomination and Remuneration Committee were Anthony Beverley (Chairman of the Nomination
and Remuneration Committee) and Susan Peterson.
Other Committees
The Board does not consider that any additional Board committees as standing Board committees need to be established at this stage.
61
Principle Four: Reporting & Disclosure
The Board should demand integrity in non-financial reporting, and in the timeliness and balance of corporate disclosures.
Continuous Disclosure Policy
PFI is committed to its obligation to inform shareholders and market participants of all material information that might affect the price of its
listed securities in accordance with the NZX Listing Rules and the Financial Markets Conduct Act 2013. Accordingly, the Board has adopted
a Continuous Disclosure Policy which applies to PFI, its subsidiary (the Group) and their respective Directors, and all relevant Independent
Contractors and employees of PFI. The Board has also appointed the Chief Finance and Operating Officer to act as the Group Disclosure Officer.
The Group Disclosure Officer is responsible for ensuring policy compliance and for investigating any alleged breaches.
Corporate Governance Documents
PFI’s Board and committee charters, annual and interim reports, company announcements, the policies recommended in the NZX Code and
other investor-related material are available on PFI’s website.
Financial / Non-Financial Disclosure
PFI is committed to appropriate financial and non-financial reporting. Oversight of the Company’s financial reporting is applied through the
Audit and Risk Committee. PFI is also committed to non-financial reporting, in particular on the Company’s Purpose, Vision and Strategy,
and the Company’s material exposure to ESG (environmental, social and governance) risks and other key risks. You can find more information
on PFI’s approach to non-financial disclosure on pages 69 – 72 in this annual report.
Principle Five: Remuneration
The remuneration of Directors and executives should be transparent, fair and reasonable.
As noted previously under Principle 3, the Board, in setting the Directors’ remuneration, is to be guided by the Remuneration Policy that forms
part of the manual. The total remuneration pool that was approved at the 2016 PFI annual general meeting is $430,000. This comprised five
Independent Director fees of $70,000 each ($350,000 in total), an additional $50,000 for the Board Chair, an additional $10,000 for the Chair
of the Audit and Risk Committee, and an amount for specific payments, being $20,000, which provides flexibility to remunerate Directors who
assume additional responsibilities.
Other than noted in this report, neither the Company nor its subsidiary have provided any other benefits to a Director for services as a Director
or in any other capacity.
Neither the Company nor its subsidiary have made loans to a Director.
Neither the Company nor its subsidiary have guaranteed any debts incurred by a Director.
62
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
The table below sets out the total remuneration received by the Company’s Directors during the year to 31 December 2018.
DIRECTOR ROLE
FEES PAID
2018
$000
FEES PAID
2017
$000
Anthony BeverleyBoard Chairman 32 –
Deputy Board Chairman – –
Audit and Risk Committee Chairman 4 10
Nomination and Remuneration Committee Chairman – –
Independent Director 70 70
Amount for specific payments – 20
David Thomson (1)Independent Director 62 –
Humphry RollestonIndependent Director 70 70
Susan PetersonAudit and Risk Committee Chair 6 –
Independent Director 70 70
Gregory Reidy (2)Executive Director – –
Peter MasfenBoard Chairman 18 50
Independent Director 25 70
Retirement allowance (3) 135 –
Total 492 360
(1) David Thomson was appointed to the Board on 12 February 2018.
(2) No Directors’ fees were paid to Gregory Reidy during the year due to his role as Managing Director at that time. You can find further
information about Gregory Reidy’s remuneration in the “Employees” section below.
(3) On 8 May 2018, Peter Masfen retired from the Board of Directors of the Company as Chairman and Independent Director. Mr Masfen was
first elected as a Director of the Company on 17 May 2002, and had held office as a Director of the Company since that date. At the 23 May
2008 Annual Meeting, the Company confirmed that retirement payments (being the total remuneration of the retiring Director, in any three
years chosen by the Company) to eligible Directors (which includes Mr Masfen) will be calculated in respect of that Director’s remuneration
prior to the increase approved at the 23 May 2008 meeting. The rationale for this was that the fees paid to Directors at that time did not
reflect market rates, as they had remained unchanged since the incorporation of the Company over 14 years prior to that meeting. As such,
a retirement allowance of $135,000 was payable to Mr Masfen and was paid on his retirement.
At the 23 May 2008 meeting, it was also noted that no retirement remuneration will be paid to Directors who are appointed after 1 May 2004.
It is noted that Humphry Rolleston is the only other current Director who was appointed prior to 1 May 2004 and is entitled to this form of
payment. $105,000 has been accrued in the 2018 financial statements in this regard.
Directors’ Relevant Interests
There were no Directors’ dealings in the Company’s financial products between 1 January 2018 and 31 December 2018.
Details of Directors’ relevant interests in the Company’s financial products as at 31 December 2018 are as follows:
DIRECTOR NATURE OF RELEVANT INTEREST NUMBER OF SHARES
Humphry RollestonBeneficial holder17,875
Legal, but not-beneficial, holder 110,825
Susan PetersonBeneficial holder17,788
Gregory ReidyBeneficial holder1,005,708
Please note that no Director had a relevant interest in the Company’s bonds.
63
Employee Remuneration
On 30 June 2017, the management of the Company and its subsidiary was internalised. Following the internalisation, the Company employed
seven staff for the remainder of 2017, and as at 31 December 2018 the Company employed nine staff.
Also following the internalisation, Gregory Reidy, Simon Woodhams and Craig Peirce became Independent Contractors to the Company.
Their remuneration is set out in accordance with the terms of those contracts, which the Board and Nomination and Remuneration Committee
oversee. Their remuneration package comprises of a base amount as well as a performance bonus, which is measured quarterly and based
on shareholder return. A discretionary bonus was also paid to Simon Woodhams and Craig Peirce during the year ended 31 December 2018.
During the years ended 31 December 2018 and 31 December 2017, the remuneration of the Independent Contractors was as follows (please
note that, as PFI internalised on 30 June 2017, the amounts below for the year ended 31 December 2017 represent a half-year of remuneration,
as these arrangements did not exist prior to 30 June 2017):
NAMEPOSITIONYEAR
BASE
AMOUNT
$000
BONUSES
$000
TOTAL
$000
Gregory ReidyManaging Director201721256268
201842511436
Simon WoodhamsGeneral Manager201721256268
2018425116541
Craig PeirceChief Financial Officer201721256268
2018425116541
TOTAL2017636168804
20181,2752431,518
On 1 January 2019, Simon Woodhams and Craig Peirce ceased to be Independent Contractors. On that date, they were appointed as
Chief Executive Officer and Chief Finance and Operating Officer respectively, and they both became full-time employees of the Company.
During the years ended 31 December 2018 and 31 December 2017, the number of employees who received remuneration with a combined
total value exceeding $100,000 is set out below (please note that, as PFI internalised on 30 June 2017, the amounts below for the year
ended 31 December 2017 represent a half-year of remuneration, and that this table excludes the Managing Director, General Manager
and Chief Financial Officer):
REMUNERATION RANGENUMBER OF EMPLOYEES
20182017
$250,001 – $260,0001–
$150,001 – $160,0001–
$110,001 – $120,000–1
64
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Principle Six: Risk Management
Directors should have a sound understanding of the material risks faced by the issuer and how to manage them. The Board should regularly verify
that the issuer has appropriate processes that identify and manage potential and material risks.
The Board is responsible for identifying key risks and managing those risks through internal procedures, which the Audit and Risk Committee
regularly reviews (see Principle 3 “Board committees” above).
For example, the Audit and Risk Committee formally considers the Company’s risk register twice annually during the meetings of the Audit and
Risk Committee.
As identified on pages 71 and 72, health and safety is one of the highest priorities for our business. The Board is responsible for overseeing PFI’s
compliance with health and safety in accordance with industry best practice.
Principle Seven: Auditors
The Board should ensure the quality and independence of the external audit process.
Together with the Audit and Risk Committee (see Principle 3), the Board is responsible establishing the Company’s audit framework and that
communication is maintained with external auditors or accountants. Annexed to the Audit and Risk Committee Charter is a separate Policy
on Audit Independence, which covers the provision of services by external auditors.
Under the policy, it is the Audit and Risk Committee’s role to approve the appointment of PFI’s external auditors and assessing PFI’s internal
controls and systems the support external financial reporting.
PFI’s external auditors are subject to a rotation system, which requires the external auditor or lead audit partner to change every five years.
There is also a mandatory stand down period before those partners can next be engaged by PFI. Neither will a former Independent Contractor
or employee of PFI be engaged in an external audit role within two years of ceasing to be employed by PFI.
The external auditor attends PFI’s Annual Meeting each year to answer any questions relating to the audit.
The Audit and Risk Committee must pre-approve all audit services, as well as all non-audit services provided by the auditor. The Policy on Audit
Independence sets out a number of principles to guide the committee in assessing whether the services could be perceived as conflicting with
the independent role of the auditor. To illustrate, approval will not be granted to produce financial statements (such that they might be perceived
as auditing their own work), implement financial systems, or perform any function of management. This ensures that there is a clear separation
between internal and external audit roles. The Audit and Risk Committee monitors, and may limit, the amount of non-audit related work being
undertaken by the firm holding office as auditor, if that work may, in its opinion, impair the independence of the external auditor.
Principle Eight: Shareholder Rights & Relations
The Board should respect the rights of shareholders and foster constructive relationships with shareholders that encourage them to engage
with the issuer.
PFI encourages an open dialog with its shareholders and stakeholders. The manual, annual report, financial information, and all NZX
announcements are available on the Company’s website. PFI shareholders are encouraged to receive shareholder communications
electronically.
In respect of voting rights, PFI shareholders have one vote per share they hold in PFI, and will have the right to vote on major decisions
which may change the nature of PFI in accordance with the NZX Listing Rules.
In order for shareholders to fully participate in meetings, the Board endeavours to post the annual shareholders’ notice of meeting on
PFI’s website as soon as possible and at least 28 days prior to the meeting.
OTHER MATTERS
Directors’ Interests Register
During the year, the Board authorised the renewal of the Directors’ and Officers’ insurance cover as at 30 June 2018 for a period of 12 months
and has certified, in terms of section 162 of the Companies Act 1993, that this cover is fair to the Company.
65
As permitted by the Company’s constitution and the Companies Act 1993, the Company has also executed a deed indemnifying its Directors
against potential liabilities and costs they may incur for acts or omissions in their capacity as Directors of the Company and its subsidiary.
Please refer to the Directors’ Relevant Interests section above for information regarding the acquisition and disposition of relevant interests
in the Company’s financial products by its Directors.
No Director has sought authorisation to use Company information.
Section 140(1) of the Companies Act 1993 requires a director of a company to disclose certain interests. Under subsection (2) a director can
make disclosure by giving a general notice in writing to the company of a position held by a director in another named company or entity.
The following are details of Directors’ general disclosures entered in the Interests Register for the Company as at 31 December 2018,
and all entries were added by notices given by the Directors during the year ended 31 December 2018:
DIRECTOR POSITIONCOMPANY
Anthony BeverleyDirector; Chair of Audit and Risk CommitteeArvida Group Limited
Director; Chair of Audit and Risk Committee Ngai Tahu Property Limited
Director (ACC appointee)Harbour Quays A1, D4 and F1F2 Limited
ChairmanMassey University Property Foundation
MemberWCC Civic Revitalisation Steering Group
Humphry RollestonDirectorAsset Management Limited
DirectorInfratil Limited
DirectorMatrix Security Group Limited
DirectorSpaceships Limited
DirectorStray Limited
DirectorAIS Tourism Limited
TrusteeJL Hall Children’s Trust
Susan PetersonDirector; Chair of Audit and Risk CommitteeVista Group International Limited
DirectorXero Limited
DirectorASB Bank Limited
DirectorTrustpower Limited
DirectorOrganic Initiative Limited
TrusteeGlobal Women
Gregory ReidyDirectorMcDougall Reidy & Co Limited
DirectorMRC LP Limited
DirectorResidentiae Group Limited
DirectorThirty Enfield Limited
DirectorDMD (GP) Limited (as General Partner of
DMD Limited Partnership)
DirectorMRC2 Limited
DirectorRWP LP Limited
DirectorResidentiae (Edwin Street) GP Limited
(as General Partner of Residentiae
(Edwin Street) Limited Partnership)
TrusteeGrammar Rugby Incorporated
66
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
Other than noted in this report, there were no other interest register entries recorded for the Company or its subsidiary for the year ended
31 December 2018.
Donations
Neither the Company nor its subsidiary made any donations during the year. The Company became a sponsor of the Keystone New Zealand
Property Education Trust during the year ended 31 December 2018, and paid the Trust $10,000 by way of sponsorship during the year.
Substantial Productholders as at 31 December 2018
As at 31 December 2018, the total number of ordinary shares on issue was 498,723,330. The Company has only ordinary shares on issue.
The persons, who, for the purposes of section 293 of the Financial Markets Conduct Act 2013, were substantial productholders as at
31 December 2018 are:
SECURITY HOLDER NO. OF SHARES
% WHEN NOTICE
WAS FILED
ANZ New Zealand Investments Limited 36,194,7167.257%
Accident Compensation Corporation26,579,2575.329%
Forsyth Barr Investment Management Limited25,010,7935.015%
Details of Dividends Paid
DIVIDENDS DATE PAID
CENTS
PER SHARE
TOTAL PAID
2018
$000
TOTAL PAID
2017
$000
Q4 2016 final dividend8 March 20172.05–9,275
Q1 2017 interim dividend29 May 20171.75–7,918
Q2 2017 interim dividend1 September 20171.75–7,918
Q3 2017 interim dividend22 November 20171.80–8,977
Q4 2017 final dividend7 March 20182.1510,723–
Q1 2018 interim dividend31 May 20181.808,977–
Q2 2018 interim dividend31 August 20181.808,977–
Q3 2018 interim dividend28 November 20181.859,225–
Total dividends per statement of changes in equity 37,90234,088
NZX Waivers
The Company relied on a waiver granted by NZX Regulation on 13 September 2018 in respect of NZX Debt Market Listing Rule 7.11.1, for the
Company’s offer of bonds with NZX ticker code PFI020. The waiver allowed allotment of the bonds to occur within six business days after the
closing date of the offer.
67
PURPOSE, VISION, STRATEGY
We first listed in 1994. Now, more than
twenty years on, we have over 5,000
shareholders and a portfolio of over 90
properties valued at over $1.3 billion dollars.
Since inception, PFI has always invested in
high quality industrial property in sought-
after locations, believing that this investment
focus has the potential to deliver attractive
returns to shareholders with a low level
of volatility.
Recognising the changing governance
and reporting landscape both here in
New Zealand and globally, during 2018
we spent some time considering our Purpose,
Vision and Strategy.
Looking forward, we continue working on
integrating our Purpose, Vision and Strategy,
together with our ESG vision, across all
aspects of PFI, including our reporting to
our stakeholders.
OUR PURPOSE:
PFI GENERATES INCOME
FOR INVESTORS AS
PROFESSIONAL
LANDLORDS TO THE
INDUSTRIAL ECONOMY,
GENERATING
PROSPERITY FOR
NEW ZEALAND.
INCOME FOR
INVESTORS
People invest in PFI either
directly, or through an
institutional investor. Either
way, PFI’s commitment to
consistently delivering
strong returns is what
matters: investors are
relying on PFI for their
current or future income.
PROFESSIONAL
LANDLORDS
PFI tenants achieve greater
productivity because capital
that would otherwise be tied
up in property ownership is
more usefully applied to
their core business and
because having PFI on the
team means their
management can focus on
core business, not solving
property problems.
THE INDUSTRIAL
ECONOMY
PFI specialises in industrial
property. Our investors like
that: they understand our
role in the economy and
what we bring to their
investment portfolio.
Our tenants also like it:
it means PFI really
understands their needs
and the specialised market
in which we operate.
PROSPERITY FOR
NEW ZEALAND
PFI is part of New Zealand
Inc. We help make the
country better off, by
enabling our tenants to
achieve greater productivity:
helping them achieve a
better return on the capital
they have invested in their
businesses, and by providing
income for the thousands of
New Zealanders who benefit
directly or indirectly from
their investment in PFI.
OUR STRATEGY:
WE WILL BUILD ON
WHAT WE HAVE AND BE
TRUE TO WHO WE ARE.
BUT WE WILL BE MORE
INTENTIONAL; MORE
PROACTIVE.
BUILD ON WHAT
WE HAVE
We are not changing
direction, but we will now
play a different game.
Our scale allows us to
operate beyond the reach
ofDIY property investors.
PFI can and will acquire
larger properties or
portfolios of properties,
on more favourable terms.
BE TRUE TO
WHO WE ARE
Our purpose remains the
same: creating income for
investors. We will only grow
our portfolio if doing so
enables us to reliably
create strong stable
returns for more and more
investors. We remain
committed to industrial
property and intend
replacing all non-core
assets with quality
industrial properties in
sought-after areas.
We focus on brownfield,
rather than greenfield,
developments.
MORE
INTENTIONAL
And so, while we will
maintain our rigour –
continue to ensure each
and every transaction
contributes to our purpose
– we intend lifting our
heads more often and more
actively considering our
vision: where we are going
and how we are getting
there. We will become one
of New Zealand’s foremost
Listed Property Vehicles by
choice not chance.
MORE
PROACTIVE
Recognising that bigger
is different, we will evolve
the way we manage PFI,
anticipating and enabling
growth; ensuring
sustainability. We will
broaden the capability of
the team and encourage
and enable our leaders to
operate more strategically.
OUR VISION:
PFI WILL BE ONE OF
NEW ZEALAND’S
FOREMOST LISTED
PROPERTY VEHICLES.
OUR MEASURES WILL
BE PERFORMANCE,
QUALITY, SCALE AND
REPUTATION.
ONE OF NZ’S FOREMOST
We intend to be – and to be
regarded as – a leader.
When people talk about
New Zealand’s top Listed
Property Vehicles, PFI will
be on that list.
PERFORMANCE
The scale and quality
of PFI’s portfolio and
the robustness of PFI’s
tenant relationships
will ensure PFI continues
to consistently deliver
strong returns to investors.
QUALITY AND SCALE
PFI’s portfolio comprises of
high quality industrial
properties in sought-after
locations in Auckland and
elsewhere in New Zealand.
Already a significant Listed
Property Vehicle, PFI will
continue to grow to take
advantage of the benefits
of relevance and scale.
REPUTATION
PFI will continue to enhance
its reputation as a good
company to invest in, a good
company to do business
with and a good company
to work for. In every respect,
one of New Zealand’s
foremost.
68
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
OUR ESG VISION AND
MATERIALITY ASSESSMENT
OUR ESG VISION IS FOCUSED ON BEING A RESPONSIBLE AND
RESPONSIVE LANDLORD IN ORDER TO CREATE LONG TERM VALUE FOR
OUR KEY STAKEHOLDERS.
IMPORTANCE TO BUSINESS
IMPORTANCE TO STAKEHOLDER
HIGH
HIGHLOW
Building Safety
Diversity
Industry Leadership
Contaminated Land
Shareholder Rights
Environmental Compliance
Reporting & Transparency
Policies & Procedures
Energy
Management
Health and Safety
Community
Involvement
Environmental IssuesSocial IssuesGovernance Issues
The size of points represents the potential
scale of the impact on the business
We have followed a staged process to complete our materiality process. After identifying our stakeholders, individual interviews with various
representatives of our stakeholder groups helped us identify the material issues which are most important to them. Materiality will help us
ensure that we are reporting on matters that are relevant going forward. These material issues can be seen below.
How we know what’s
most important to
our business
In accordance with accepted
ESG assessment practise,
we have considered both
our internal and external
stakeholders’ ESG risks and
opportunities. We determined
our stakeholder groups as
the following:
OUR BOARD
OUR STAFF
OUR INVESTORS
REGULATORS
OUR TENANTS
OUR CONTRACTORS
OUR COMMUNITIES
69
ASSET
SELECTION
FINANCING /
STRUCTURING
PORTFOLIO
MANAGEMENT /
LETTING
REDEVELOPINGASSET
DIVESTMENT
GOVERNANCE /
MANAGEMENT
Contaminated land
■■■
Environmental compliance
■■
Energy management
■
Building safety
■■■
Health & safety
■■■■■■
Industry leadership
■
Diversity
■
Community involvement
■■
Policies & procedures
■■■■■■
Stakeholder rights
■■■■■■
Reporting & transparency
■■
After identifying our material
issues we prioritised them to
focus on the issues currently
of greatest importance to PFI.
Four of the eleven material issues
identified surfaced as the highest
priorities for our business.
§
Building Safety
§
Health & Safety
§
Policies and Procedures
§
Stakeholder Rights
These were prioritised on the
basis of combined highest
importance (top right quadrant
of the matrix) and also breadth
of impact across our value
chain (as can be seen in the
chart above).
Addressing our
material issues
In accordance with accepted ESG reporting practise, looking forward we are planning on reporting on our
material issues in detail, including developing performance measures.
Looking forward
70
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
SHAREHOLDER STATISTICS
20 LARGEST REGISTERED SHAREHOLDERS
AS AT 31 JANUARY 2019
HOLDER HOLDING
HOLDING
%
1Forsyth Barr Custodians Limited 33,756,040 6.77%
2Accident Compensation Corporation - NZCSD 29,016,088 5.82%
3BNP Paribas Nominees (NZ) Limited - NZCSD 25,070,426 5.03%
4ANZ Wholesale Trans-Tasman Property Securities Fund - NZCSD 21,727,019 4.36%
5FNZ Custodians Limited 20,953,095 4.20%
6Citibank Nominees (New Zealand) Limited - NZCSD 14,966,301 3.00%
7Custodial Services Limited (A/c 3) 14,230,210 2.85%
8HSBC Nominees (New Zealand) Limited - NZCSD 9,122,819 1.83%
9Custodial Services Limited (A/c 4) 8,274,556 1.66%
10ANZ Wholesale Property Securities - NZCSD 7,646,980 1.53%
11Investment Custodial Services Limited (A/c C) 7,435,805 1.49%
12MFL Mutual Fund Limited - NZCSD 7,322,392 1.47%
13Custodial Services Limited (A/c 2) 6,456,644 1.29%
14Messrs. Wildermoth and Wilson 6,303,638 1.26%
15Mr. Mckee and Ms. Mckee 5,566,373 1.12%
16Masfen Securities Limited 4,767,744 0.96%
17New Zealand Depository Nominee Limited <A/C 1> 4,518,709 0.91%
18Carlaw Heritage Trust Inc 4,115,481 0.83%
19TEA Custodians Limited Client Property Trust - NZCSD 4,098,336 0.82%
20Heatherfield Investments Limited 4,003,286 0.80%
Shares held by top 20 shareholders 239,351,942 47.99%
Balance of shares 259,371,388 52.01%
Total of issued shares 498,723,330 100.00%
SHAREHOLDER SPREAD
AS AT 31 JANUARY 2019
ORDINARY SHARES
NUMBER OF
HOLDERS HOLDING
HOLDING
%
Up to 4,999 856 2,175,832 0.44%
5,000 - 9,999 1,015 7,347,507 1.47%
10,000 - 49,999 2,382 50,852,588 10.20%
50,000 - 99,999 403 27,102,434 5.43%
100,000 - 499,999 290 56,861,097 11.40%
500,000 and above 103 354,383,872 71.06%
Total 5,049 498,723,330 100.00%
GEOGRAPHICAL SPREAD
AS AT 31 JANUARY 2019
ORDINARY SHARES HOLDING
HOLDING
%
Auckland & Northern Region 279,710,227 56.08%
Hamilton & Surrounding Districts 93,250,351 18.70%
Wellington & Central Districts 59,217,137 11.87%
Dunedin & Southland 49,212,055 9.87%
Nelson, Marlborough & Christchurch 15,458,049 3.10%
Overseas 1,875,511 0.38%
Total 498,723,330 100.00%
71
BONDHOLDER STATISTICS
BONDHOLDER SPREAD
AS AT 31 JANUARY 2019 - PFI010
BONDS
NUMBER OF
HOLDERS HOLDING
HOLDING
%
5,000 - 9,999 67 352,000 0.35%
10,000 - 49,999 464 9,254,000 9.25%
50,000 - 99,999 61 3,629,000 3.63%
100,000 - 499,999 35 4,972,000 4.97%
500,000 - 999,999 2 1,178,000 1.18%
1,000,000 and above 11 80,615,000 80.62%
Total 640 100,000,000 100.00%
BONDHOLDER SPREAD
AS AT 31 JANUARY 2019 - PFI020
BONDS
NUMBER OF
HOLDERS HOLDING
HOLDING
%
5,000 - 9,999 40 226,000 0.23%
10,000 - 49,999 230 4,762,000 4.76%
50,000 - 99,999 30 1,741,000 1.74%
100,000 - 499,999 32 4,738,000 4.74%
500,000 - 999,999 3 2,050,000 2.05%
1,000,000 and above 10 86,483,000 86.48%
Total 345 100,000,000 100.00%
72
PROPERTY FOR INDUSTRY LIMITED ANNUAL REPORT — 2018
2019
FEBRUARY
§
2018 Annual report released
MARCH
§
2018 Final dividend payment
MAY
§
2019 First-quarter announcement
§
2019 First-quarter dividend payment
§
Annual meeting
AUGUST
§
2019 Half-year announcement
§
2019 Interim report released
SEPTEMBER
§
2019 Half-year dividend payment
NOVEMBER
§
2019 Third-quarter announcement
§
2019 Third-quarter dividend payment
2020
FEBRUARY
§
2019 Full-year announcement
§
2019 Annual report released
MARCH
§
2019 Final dividend payment
ISSUER OF SHARES AND BONDS
Property for Industry Limited
Shed 24, Prince’s Wharf
147 Quay Street
PO Box 1147
Auckland 1140
Tel: +64 9 303 9450
Fax: +64 9 303 9657
propertyforindustry.co.nz
info@propertyforindustry.co.nz
DIRECTORS
Anthony Beverley (Chairman)
David Thomson
Humphry Rolleston
Susan Peterson
Gregory Reidy
CHIEF EXECUTIVE OFFICER
Simon Woodhams
Tel: +64 9 303 9652
woodhams@propertyforindustry.co.nz
CHIEF FINANCE AND
OPERATING OFFICER
Craig Peirce
Tel: +64 9 303 9651
peirce@propertyforindustry.co.nz
AUDITOR
PricewaterhouseCoopers
188 Quay Street
Private Bag 92162
Auckland 1142
Tel: +64 9 355 8000
Fax: +64 9 355 8001
CORPORATE LEGAL ADVISOR
Chapman Tripp
23 Albert Street
PO Box 2206
Auckland 1140
Tel: +64 9 357 9000
Fax: +64 9 357 9099
VALUATION PANEL
CBRE Limited
Colliers International New Zealand
Limited
Jones Lang LaSalle Limited
Savills (NZ) Limited
BANKERS
ANZ Bank New Zealand Limited
Bank of New Zealand
Commonwealth Bank of Australia
Westpac New Zealand Limited
SECURITY TRUSTEE
New Zealand Permanent Trustees
Limited
34 Shortland Street
PO Box 1598
Auckland 1140
Tel: 0800 371 471
BOND SUPERVISOR
Public Trust
34 Shortland Street
PO Box 1598
Auckland 1140
Tel: 64 9 985 5300
REGISTRAR
Computershare Investor Services
159 Hurstmere Road
Private Bag 92119
Auckland 1142
Tel: +64 9 488 8777
Fax: +64 9 488 8787
investorcentre.com/nz
This Annual Report is dated 18 February 2019 and signed
on behalf of the board by:
Anthony Beverley Susan Peterson
Chairman Chair, Audit and Risk Committee
DIRECTORYCALENDAR
insight
creative.co.nz
PFI125
73
www.propertyforindustry.co.nz
PROPERTY FOR INDUSTRY LIMITED
ANNUAL REPORT
31 DECEMBER 2018
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.
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