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Edited Transcript of PFI.NZ earnings conference call or presentation 21-Feb-21 9:00pm GMT

·34 min read

Full Year 2020 Property for Industry Ltd Earnings Call Wellington Feb 22, 2021 (Thomson StreetEvents) -- Edited Transcript of Property for Industry Ltd earnings conference call or presentation Sunday, February 21, 2021 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Craig Peirce Property For Industry Limited - Chief Finance & Operating Officer * Simon Woodhams Property For Industry Limited - CEO ================================================================================ Conference Call Participants ================================================================================ * Adam Lilley Craigs Investment Partners Limited, Research Division - Research Analyst * Nick Mar Macquarie Research - Analyst * Rohan Koreman-Smit Forsyth Barr Group Ltd., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Property For Industry's Full Year Results Presentation. (Operator Instructions) Please be advised that today's conference is being recorded. I now will hand the conference over to your speaker today, CEO, Mr. Simon Woodhams. Thank you. Please go ahead. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [2] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to Property for Industry's 2020 Annual Results Briefing. As the presenter said, it's Simon speaking. And alongside me today is Craig Peirce, our Chief Finance and Operating Officer. This morning, Craig and I are going to speak to the topics outlined in the Contents page on Slide 2 of the presentation. I'm going to begin by reviewing the highlights of 2020 then give an overview of the portfolio and its performance, along with a summary of the key leasing transactions throughout the period. Craig is then going to take you through the 2020 annual results and the section on capital management before giving a brief update on the market. I'll then review our priorities before I close the presentation, after which there'll be an opportunity for people listening to ask any questions you have. So I'm going to start on Page 4 of the presentation, and that's period highlights. In the future, when people look back on 2020, I think the enduring memory will undoubtedly be the onset of COVID-19 and the global fallout that followed. Against this backdrop, it is therefore particularly satisfying to report that the company performed exceptionally well throughout 2020. Highlights that Craig and I will expand on throughout the presentation included another busy year of portfolio activity, which resulted in us paying an increased cash dividend, continued valuation gains leading to an increase in our NTA, leaving our balance sheet in a very strong position with our year-end gearing sitting at just 30%. And finally, with the post-balance date divestment of Carlaw Park, we made significant progress on repositioning the portfolio back to a pure industrial vehicle. If we turn to Slide 6, here, the portfolio snapshot where we have a snapshot of the portfolio statistics. You can see the company owns a well-diversified portfolio of 94 properties that's leased to 144 tenants. Over the last 12 months, the value of the portfolio has increased by approximately $155 million to $1.63 billion. Pleasingly, we grew contract rent by close to $5 million. We also maintained both our high level of occupancy, we finished at 99.4%, and our weighted average lease term or WALT at 5.28 years. It's also worth noting that while our weighting to industrial property improved slightly to 91.7% through the period, once the sale of Carlaw Park is completed, the portfolio will be comprised of 98% industrial property. Turning to Slide 7. We include this graph each year to continue highlighting the fact that industrial property as an asset class traditionally enjoys very high levels of occupancy. Since 2011, PFI has had the year-end average of 98.5% occupancy with an average WALT of over 5 years. These 2 key metrics are very much the lifeblood of PFI and have allowed the company to deliver stable growing returns to our shareholders over the last decade. If you move on to Slide 8 into valuations. While at the half year, we reported a flat valuation result due to the uncertainty of COVID-19, we have seen a strong surge in demand for industrial assets over the back half of the year, which has resulted in the portfolio increasing in value by $72.5 million or 4.7% to $1.63 billion. As has been the case in recent years, asset management over the year was reflected in a number of individual property values increasing. We estimate that approximately 1/3 of this increase was as a result of rental growth within the portfolio. The continued demand for industrial property saw further cap rate compression in the market, with our portfolio cap rate firming 22 basis points to 5.53%. That's accounting for the other 2/3 of the increase in the portfolio's value. As noted on the slide, our values estimate that our portfolio is slightly underrented by approximately 2.6%. Moving on to Slide 9. Here, we highlight some of the larger leasing transactions that took place during the period. As denoted, we leased over 90,000 square meters of area for an average term of 7.5 years. Approximately 70% of these were with existing tenants, with 6 agreements resulting from COVID-19 deferrals or abatements being converted through into additional lease term. Throughout the market, an increase in leasing incentives were seen in specific deals as the uncertainty of COVID-19 saw all landlords looking to secure good income. This resulted in an average incentive for PFI through the period settling at around 2.5 weeks per year of lease term we committed. Moving on to Slide 10. During the period, the team completed 94 rent reviews, which delivered an annual uplift of approximately 3.4% over $51 million of contract rent. While 3.4% represents a good level of growth, it was down from the annual average uplift of 4.6% we experienced through 2019 and again reflects the uncertainty COVID '19 had especially through quarters 2 and 3 as we were dealing with our tenants. The market reviews we undertook delivered an annualized increase of 2.8% over an average review period of 2.5 years. CBRE are forecasting annual rental growth of between 2.3% and 2.5% over the next 5 years, which PFI is well positioned to capture via a mixture of fixed and market reviews coming up next year -- sorry, this year. In fact, almost 83% of the portfolio is subject to some form of lease event during 2021. Moving on to Slide 11. Looking at the bar graph, you can see that we have just 3.3% of contract rent due to expire this year. This is well below recent years where historically, we have had around 10% due to expire at the start of the year. The 2022 and 2023 years are more typical, and obviously, 2024 has a large expiry profile, the majority being with Fisher & Paykel plant within East Tamaki. As usual, the team will be focusing on smoothing its profile out over the next 12 to 24 months. And with industrial vacancy still running at historic lows, well below 2% here in Auckland, we're confident we will continue to manage the leasing as well as we have in recent years. The tree map on the right-hand side illustrates that there are no large expiries this year. The largest is with Go Logistics who paid $530,000 per year. Now I'm going to hand the presentation over to Craig who will run you through the results. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [3] -------------------------------------------------------------------------------- Oh, good morning, everyone, and thanks, Simon. As mentioned earlier, PFI has recorded a robust annual result with annual profit after tax of $113.5 million; funds from operations earnings up 6.6% to $0.0967 per share; adjusted funds from operations earnings up 3.1% to $0.0803 per share; and cash dividends of $0.077 per share, up from the prior year. So let's dig into those numbers a bit. Please turn to Slide 13. First stop, we take a look at net rental income, which at $84.2 million, is just a touch above the prior year, $83.3 million. One item to call out is COVID-19-related support for our tenants, which included $0.9 million of abatement and $0.6 million of deferral, a combined 1.7% of annual rent, with this support being directed for our most vulnerable tenants. These COVID-19-related deals resulted in a $1.5 million decrease in net rental income when compared to the prior year, with accounting increases as a result of those same deals made us to record $1.3 million of income not received, resulting in a change to reported net rental income of just $0.2 million. That's IFRS for us. So moving to Slide 14. Here, we show how the activity for 2020 has translated into funds from operations and adjusted funds from operations. As I mentioned, FFO earnings were up $0.06 per share or 6.6%, and FFO earnings were up $0.024 per share or 3.1%. Looking at the drivers of those changes. Current tax was down $3 million following the reintroduction of depreciation deductions on building structures for commercial and industrial buildings. Interest expense and bank fees were also down, with an increase in borrowings more than offset by a reduction in the company's weighted average cost of debt, which is now just 3.75%. Maintenance CapEx was also down a touch at 19 basis points. On the other side of the ledger, as mentioned earlier, accounting entries for COVID-19-related abatement and deferral totaled $1 million. And we adjust those out of FFO earnings. If you could please turn to Slide 15. Looking at dividends. The Board today resolved to pay a fourth quarter dividend of $0.0225 per share, up $0.01 per share from the dividend paid in the prior year. The fourth quarter dividend will take dividends for the year to $0.077 per share, also up $0.01 per share or 1.3%. The FFO dividend payout ratio is 80%, and the AFFO dividend payout ratio is 96%, down from 84% and 98% in the prior year. The dividend reinvestment scheme is operated for the first 3 quarters of the year and will operate for this fourth quarter dividend, too. Our average FFO dividend payout ratio has been 100% since we began disclosing this metric in 2016. And now that dividends are comfortably FFO covered, we're pleased to advise a lift in forecast dividends of $0.015 to $0.020 per share, a dividend for next year of between $0.0785 and $0.079 per share, which is an increase of around 2% to 2.5%. We expect 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 our dividend policy. And of course, this guidance is subject to there being no material adverse changes in conditions or unforeseen events, including no material tenant failures or further significant COVID-19 restrictions. Turning to #16. Looking now at the balance sheet. Here, we provide more detail on the change in the value of PFI's investment properties, which included assets held for sale at the end of the year. The increase from $1.47 billion at the end of '19 was driven by $73 million valuation gain that Simon talked about earlier as well as the addition of the $65 million industrial estate at 528 to 558 Rosebank Road. Our projects at 59 Dalgety Drive and 314 Neilson Street drove the majority of our $19.2 million of CapEx, with tenants secured during the year for both of these projects. Turning to Slide 17 where we look at NTA. NTA per share at the end of the year was $2.209 per share, up 7.5% or $0.154 per share from the beginning of the year, with the aforementioned $73 million valuation gain the main contributor to the increase. On Slide 18, we present PFI's 2020 results in the context of the longer term, picking some of the key metrics over the last 5 full financial years. As noted on the slide, the company has seen a strong growth in earnings and values while keeping gearing at conservative levels and maintaining a higher ratio of interest cover, which is now consistently over 4x. Speaking of interest cover, let's turn to the capital management section of the presentation on Slide 20. In response to the risks associated with the COVID-19 pandemic, in March last year, we secured a new $50 million liquidity facility in one of our key banking partners, CBA. The new 18-month facility was in addition to the bonds and syndicated bank facility we already had in place. In November, we decided to increase this facility to $100 million and to extend the expiry to March 2022. And securing this additional liquidity has given us in excess of $110 million of undrawn facilities at the end of the year. Another item to draw out from the slide is the large fall in float interest rates that contributed to a 0.88% reduction in the weighted average cost of debt to 3.75% during 2020. These low interest rates as well as liquidity from a diverse range of sources and headroom to covenant levels provide PFI with a strong funding position going forward. Moving to Slide 21, I want to highlight 2 points on this slide. The first is that while we have a couple of FY '22 funding expiries, the first being $100 million in March 2022 and the second being $150 million in November 2022, the contract into the divestment of Carlaw Park, which is due to settle near the end of this year, will give us some flexibility in how we deal with our funding requirements moving forward. The second callout is from the bottom chart, and that chart illustrates that the hedging profile gives us an average of around 63% of debt to be hedged at an average of around 2.91% during 2021, with the remainder on those incredibly low floating interest rates. Turning now to Slide 23 for a bit of an update on the market. Industrial property has been a strong performer during 2020 with macro trends supporting long-term growth. A well-documented shift to online spending, as illustrated in the top graph on this slide, has only been accelerated by the COVID-19 pandemic. In turn, this has boosted tenant demand for well-located industrial property close to transport links. A good example of this trend benefiting PFI is our team securing Store Rite Logistics at 59 Dalgety Drive 59 in Wiri whilst we were refurbishing this property. The ANZ Heavy Traffic Index, which is shown in the bottom graph, illustrates the continuance of pre-pandemic themes after the 2020 lockdown restrictions were eased, with GDP rebounding strongly. Finally, low interest rates are contributing to a demand for industrial property investment that continues to outstrip supply, with forecast short- and long-term interest rates at incredibly low levels despite a recent pickup in some of those longer-term rates. On Slide 24, we lay out the findings from CBRE's December 2020 Auckland Property Market Outlook. In that report, their outlook for vacancy and yields has improved since December '19. There is a slightly softer growth outlook for rents as more generous incentives are offered to prospective tenants. Thinking about more recent transactions, including those since year-end, we're seeing the low interest rates I mentioned earlier, stable cash flows and a return of depreciation on building structures all contributing to strong investor demand for industrial property. Look, that's all for me from now. I'll hand you back to Simon. And of course, if you have any questions, I'm available at the end to answer these. Over to you, Simon. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [4] -------------------------------------------------------------------------------- Thanks, Craig. I'm now on Slide 26. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [5] -------------------------------------------------------------------------------- Good. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [6] -------------------------------------------------------------------------------- As we've previously articulated, our purpose here at PFI is to generate income for our investors as professional landlords. And we have the vision of being one of New Zealand's foremost listed property vehicles. To achieve this, we laid out a very clear strategy of, amongst other things, transitioning to a pure industrial property company, over time, increasing our Auckland focus, and the continuous improvement of the property and tenant fundamentals within our portfolio. Pleasingly, we've made significant progress with these strategies over the last 12 and 24 months, which I'll highlight shortly. Before I do that, I thought I'd just -- I would like to point out that we've also made some really good progress on defining and executing on our ESG objectives, which are summarized on the following slides. So in 2019, we developed a new ESG strategic framework. And despite the challenges of 2020, we're really pleased with the progress that we've made to start delivering against that framework. During 2020, we hired a dedicated sustainability, risk and compliance manager and established a new monthly management forum to help us to drive progress. Health and safety is a key ESG topic for PFI, so we established a health, safety and well-being framework to further strengthen our health and safety management. Climate change is also becoming a critical area of focus. So we provided our first climate-related disclosures in our 2020 annual report, and we also responded to CDP for the first time and expanded the measurement of our carbon footprint during the period. Going forward, we have a number of initiatives underway across all of our strategic themes, but our key commitments are focused on our environmental impact. We are investing $2 million to upgrade our HVAC systems, which will enable us to phase out refrigerant gases that have a high climate impact. We are also committing to net 0 Scope 1, Scope 2 and selected Scope 3 emissions. We will be increasing our focus on sustainable building design, and we will continue to be transparent about our progress. If we move on to Slide 28. Here, we have a slide that summarizes the significant progress we've made over the last 24 months. You can see along the top line, we've invested in excess of $183 million into acquisitions and add-value capital projects within our portfolio, while at the same time, we've divested out of approximately $158 million of noncore, predominantly nonindustrial assets. The main transactions completed during 2020 and the early part of 2021 were 2 large acquisitions totaling close to $105 million, both on Rosebank Road here in Auckland, and we also show the post-balance date sale of Carlaw Park on the time line. Pleasingly, we've met our stated objective of matching the capital received from our divestments and not only maintaining but actually growing our cash dividends throughout this period. Moving on to Slide 29, where you can see that after all the planned divestments and acquisitions, PFI is well positioned to move forward with our areas of focus. After settlements, our pro forma gearing will be below 27%, and we have in excess of $185 million of borrowings headroom. Pleasingly, the portfolio will be 98% industrial property, the target we set ourselves 2 years ago. We see ourselves well positioned to continue working on add-value projects within the portfolio and also to take advantage of further acquisition opportunities as they come to market. Moving on to Slide 30. I just want to highlight the areas of continued focus for 2021. These include the day-to-day asset management of our existing portfolio with a particular aim of smoothing our leasing expiry profile out over the next 24 to 36 months; the sale of our last nonindustrial property located down in Wellington; targeting further acquisitions, as always, of quality industrial properties; and finally, advancing some of our add-value plans for properties we hold within our portfolio. Moving through the final slide on Page 32. I'll close by saying that in a year of uncertainty and significant volatility, our long-term approach to property ownership has held us in very good stead. We continue to own the right industrial properties in the right locations, leased to strong tenants, and this has been reflected in our results. We've managed to maintain our conservative levels of gearing while at the same time pay an increased cash dividend. Looking forward, we expect there may be further challenges, but we believe PFI is well-placed to respond to these. And just as importantly, we are ready to take advantage of the opportunities that will no doubt present themselves as well. Thank you. That concludes the presentations. Craig and I will welcome any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Nick Mar from Macquarie. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [2] -------------------------------------------------------------------------------- Can you just talk through the leasing of those 2 development sites of 59 Dalgety and 314 Neilson Street and whether or not the kind of leasing negotiations were any different post-COVID to what you were seeing before COVID? -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [3] -------------------------------------------------------------------------------- Yes. Well, both of them were actually negotiated through the middle of COVID. It's fair to say for 59 Dalgety, Store Rite Logistics have committed to a 12-year lease term, and we were talking to them before COVID hit. So originally, we had proposed a longer lease term where they -- we were going to extend the building firm. So when COVID hit, we sat down and we reaffirmed 12 years was acceptable to both parties. But the 4,000 meters that we were going to build for them, we've put on hold, so not to overcommit them, not to overcommit the tenant. But in terms of the incentives offered and the rental rates, they will remain the same. So that was pretty pleasing result to get through. In terms of 314 Neilson Street, again, it was done sort of through the middle of -- or probably more May, June, that was committed. So no real change on back of COVID in terms of incentives or rates. They were held firm really. So -- but good to get 2 good long-term tenants locked away prior to completion. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [4] -------------------------------------------------------------------------------- Great. And then 59 Dalgety, is that kind of available for lease now given that you guys recommenced it? Have you got any leads on that? -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [5] -------------------------------------------------------------------------------- That's 47a Dalgety Drive. It's a neighboring development you're talking about. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [6] -------------------------------------------------------------------------------- Sorry, 47 Dalgety, yes. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [7] -------------------------------------------------------------------------------- Yes. So it's available. So yes, we start on-site into this week back on-site with the -- sorry, with finished date due end of this year. So it's, yes, available for lease. We were out in the market now really. So nothing firm as of yet. But given the low vacancy rates, and we've got effectively 9 months to find someone, we're pretty confident. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [8] -------------------------------------------------------------------------------- Okay. Great. And then just one more question just on expenses. Could you just talk through the kind of level of cost investment over 2020 and where you're kind of landing in terms of MER versus the target when you internalized and what's changed there? -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [9] -------------------------------------------------------------------------------- Sorry, what was the first half of the question, Nick? I couldn't quite hear that. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [10] -------------------------------------------------------------------------------- So what the kind of circa 15% increase in costs was driven by in terms of what you guys invested in for your operating costs and then just how the MER kind of compares to what you're targeting when you internalized. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [11] -------------------------------------------------------------------------------- Yes, sure. So we took on 2 new team members during last year. As Simon mentioned, we took on a sustainability, risk and compliance manager, and we took on additional property resources as well. So obviously, that's been -- both of those have been good investments. And put that in perspective, during last year, we went from 12 to 14 people. And then earlier this year, we welcomed another 2 team members as well. So MER tracks at that high 0.3637% is where it's tracking, and that's pretty consistent since it's been internalized. -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [12] -------------------------------------------------------------------------------- Okay. So why are we not getting operating leverage given the extent of the revals as well that have come through the portfolio? -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [13] -------------------------------------------------------------------------------- So you're saying why are the costs going up on the bridge chart there, slide we're showing? -------------------------------------------------------------------------------- Nick Mar, Macquarie Research - Analyst [14] -------------------------------------------------------------------------------- Yes. Well, for example, if you backed out the last few years of revals and just kind of looked at the number of properties, you've probably gone to equivalent of about 41, 42 basis points. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [15] -------------------------------------------------------------------------------- I think it's 37 or 38. All right, yes, I understand what you're saying. Yes, so there's been -- like I said, a couple of resources that we took on last year is a couple of key themes that they are up to. As I mentioned, sustainability, risk and compliance has been a big change for us, and we're sort of investing heavily in the ESG space. And almost part of that as well is the property resource. There's been a lot of work going on around the seismic piece as well. So spending a huge amount of time and energy on that as well. So like your business and -- as is the same, there is actually a lot more compliance cost these days. And that's really the main driver of that change that you're seeing there. As I mentioned, we haven't seen a huge change in the number of people working here or anything like that. But we do have those additional compliance obligations that we're dealing with. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) Our next telephone question is from Rohan Koreman-Smit from Forsyth Barr. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Congratulations on getting 2020 done and dusted. First question, just the leasing spreads on the new leases and the renewals, are you able to give some color on what sort of gains you got there? -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [18] -------------------------------------------------------------------------------- In terms of the extensions on the backlog... -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Just the percentage increase in rental. Looks like you've got some pretty solid numbers given new leases were, what? There was 34 of them, and they gave you $0.5 million. Fixed rent reviews was only 0.4 -- sorry, $1 million versus $0.5 million. And fixed rent reviews was about -- almost 100 leases. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [20] -------------------------------------------------------------------------------- Oh, yes. Rohan, it's Craig speaking. So you're looking at the chart on Page 14, is that right? Sorry, 13, 13. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Just the guide, just when you say 37 new leases agreed, I'm just wondering what happened to rent -- passing rent versus the prior passing on the agreement of those new leases, so #9. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [22] -------------------------------------------------------------------------------- So I think if you look at Page 10, it sort of highlights that in terms of the annual growth across was 3.4%, the market growth annualized over that review period of 2.5 years was 2.8%. So I think what we saw last year was a reflection of how strong 2019 was. So everyone knew that rents had gone up. And when we were trying to actually commit tenants through that -- especially quarter 2, quarter 3 last year, there's a bit of uncertainty obviously with COVID. So a lot of the deals we did or some of the deals we did, they didn't have fixed reviews in place. We probably went for longer lease terms rather than bigger rent increases, and that's why the portfolio is slightly underrented at 2.6%. So we would anticipate picking that up over the next couple of years. But in terms of individual properties, it's all very much case by case. Some, we took on 15% increases over 3 years, but others we've held rents. We have tenants that proved that they needed a little bit of support to get through, and then in return, we took on longer lease terms. So it's a bit of a mixed bag really. But the consistent theme overall, I guess, was that nearly 3.5% annual growth across $50 million of rent that we reviewed. So we're pretty happy with that given what was going on at the time. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [23] -------------------------------------------------------------------------------- And the other one, Rohan, is if you look on that Slide 13, you can see that new leases contributed almost $1 million to the increase in rental income there. So I guess that gives you some sort of color as to how those leasing outcomes went. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Yes, yes, sure. Maybe we just take this one off-line because it might be a rambling discussion given I was wanting to know kind of the general uplift on those new leases and the market rent review. So it's not really like a re-leasing spread, whereas the market was kind of a review, but I think like... -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [25] -------------------------------------------------------------------------------- Yes, look forward to that conversation, yes. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Just looking at the gearing. One, will you be breaking swaps once Carlaw Park is divested? And two, is your gearing too low on the end of that on a pro forma basis? -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [27] -------------------------------------------------------------------------------- So in terms of breaking swaps, we've been monitoring our swap book on both inclusive and exclusive of Carlaw basis. So we've been comfortable on both bases. And it's probably why we have been a little bit lower hedged than you might ordinarily be because we were conscious that we could find ourselves, all of a sudden, quite a lot higher off the back of that sale. And yes, I mean I guess the other thing, secondly, your question -- oh, sorry. So no, there's no intention to do that, to break swaps. In terms of your -- secondly, your question, it's 26.5% where we're targeting gearing, well, no is probably the short answer there. I guess because it's plenty of firepower to go out and acquire... -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [28] -------------------------------------------------------------------------------- The thing that's important -- recognize that the divestment of Carlaw Park is timed for Q3, Q4 this year. So it gives us the ability to go out and transact before that actually completes, which if you look at that time line that we've put in the presentation, we've managed that over the last 24 months pretty effectively. So we're confident that we'll be able to go out and spend some of that money. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Okay. Sorry, maybe putting it another way, what sort of gearing would you be comfortable with? -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [30] -------------------------------------------------------------------------------- Well, I think historically, if you look at it, we've sat around that 30 to early 30s, and there's no reason why we wouldn't be comfortable in and around there. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Perfect. And then last one just on being able to buy assets on market. It's pretty competitive out there. Do you think you'll be able to kind of find what you're looking for? And talking about timing purchases with divestments, are you willing to be patient even though it might kind of slow earnings growth? -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [32] -------------------------------------------------------------------------------- I think if you look at our track record, firstly, we've been able to find assets both on- and off-market especially in the last 5 years. And so we're confident that we can carry on with it. That's what we targeted. That's our goal really. That's what we're paid to do. In terms of being patient, we've also shown that we are a patient strategic management team, and that's probably been the reason why we have performed so well especially in the last 3 years. We haven't sort of been floating around and looking at different things. We remain wholly, solely focused on industrial. So it's what we know. It's what we do. So we're pretty confident we can continue to deliver. -------------------------------------------------------------------------------- Rohan Koreman-Smit, Forsyth Barr Group Ltd., Research Division - Research Analyst [33] -------------------------------------------------------------------------------- Perfect. And then maybe just one on your ESG. You said you'd look to have selected zero Scope 3 emissions. My understanding of Scope 3 emissions is it's from your -- kind of outside of your direct control. Does that mean you're going to exclude some tenants, some type of tenants from the portfolio? -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [34] -------------------------------------------------------------------------------- No. That's -- again, if you want to take it off-line, but if you look at the disclosure to that end there, and I think we're looking at page -- let me find it. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [35] -------------------------------------------------------------------------------- 25 of the annual report. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [36] -------------------------------------------------------------------------------- Yes. Page 25 of the annual report, we've broken out Scope 3 into -- there's some downstream emissions. There's some upstream emissions. So downstream emissions under Scope 3 for us are operational waste and business travel, whereas upstream emissions are around capital expenditure and these sorts of things. So -- and again, there's a table there on 25 that sort of breaks all that out. So really, offsetting pieces, to just be clear about, which are our activities and which of those activities we'll offset, this is perhaps steel and concrete and things like this, which are on the upstream emissions, which we haven't offset. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [37] -------------------------------------------------------------------------------- Stuff we control. -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [38] -------------------------------------------------------------------------------- But yes. I mean it's quite a bit in the actual annual report itself, which you probably haven't had a chance to look at, including sort of full TCFD report. So have a bit of a look through that. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- (Operator Instructions) Our next telephone question is from Adam Lilley from Craigs Investment. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [40] -------------------------------------------------------------------------------- Just a question, just kind of sticking to the ESG kind of work. So the HVAC work, is that across the portfolio? Is it just limited assets that you're focusing on there to start? -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [41] -------------------------------------------------------------------------------- Yes. So the HVAC piece, there are a number of systems, a particular type of gas, which is -- got a very high global warming potential. [DBP], is that right? And so we're targeting those HVAC systems that have the highest global warming potential. And then we are starting with those systems which are closer to the end of life as well. I mean obviously, ripping out a HVAC system and putting a new one in, in and of itself has a carbon footprint to it. So yes, very much focusing on those with the wrong gas that are coming to the end of life and then working through those there. It's a similar process actually that one of the supermarket chains went through, not so long ago because perhaps slightly unglamorous, but these gases are much, much worse than just normal carbon dioxide. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [42] -------------------------------------------------------------------------------- Okay. And so is this kind of deemed maintenance CapEx? Just thinking about accounting for a second, like are these supposed to be deemed kind of maintenance CapEx and coming out of your FO as you start working through them? -------------------------------------------------------------------------------- Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [43] -------------------------------------------------------------------------------- Yes, for sure. Yes. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [44] -------------------------------------------------------------------------------- Yes, got it. And then kind of other key initiatives on that front, so you're saying there's $2 million of these works, but did you have like a pipeline or kind of a 10-year kind of plan in terms of other things that you can be targeting in regards to this? -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [45] -------------------------------------------------------------------------------- Again, as we sort of said, we've really just started this journey, so last year and then this year. So that's one of the goals this year, is to drill down into what other things we can do. So we're not saying we're there by any means yet, but we just wanted to highlight to you that we've taken it very seriously, increased resource in terms of within the office to do that. And yes, we're pretty pleased with how we have presented it in the annual report. -------------------------------------------------------------------------------- Adam Lilley, Craigs Investment Partners Limited, Research Division - Research Analyst [46] -------------------------------------------------------------------------------- Very good. And then just another one for me. So kind of getting there towards getting the full 100% industrial portfolio with Carlaw being disposed in Q '22 coming to market this year, it looks like. You have obviously a little bit of balance sheet headroom to redeploy at that stage. But are you kind of scoping up in terms of your direct portfolio, what assets -- or are there other like noncore assets that are industrial that you're kind of looking to recycle out of over the next few years? -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [47] -------------------------------------------------------------------------------- Yes. We always run a pretty critical eye over the portfolio. And you'll -- if you go back and look at the presentations over the last 5 or 6 years, we've actually been a pretty active seller of assets, not only nonindustrial but ones we consider noncore. Some of the out-of-Auckland ones that are a little bit smaller, a little bit older, we've been selling. In Auckland, we've sold 1 or 2 over the last couple of years. So we're always reevaluating. But we're pretty conscious of the fact that we need to maintain our cash flow and dividends to shareholders. So we're not going to just go and flog stuff for the sake of it. We want to maximize value when we do do it. But yes, it's an ongoing process. It never stops really. Continuous improvement of the portfolio is one of the strategic themes we run with. So yes, you'll see us continuing to sell stuff, but it will be business-as-usual stuff as opposed to repositioning the whole portfolio like we've done over the last 24 months. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. I would like to hand the call back to today's presenters for closing remarks. Please go ahead. -------------------------------------------------------------------------------- Simon Woodhams, Property For Industry Limited - CEO [49] -------------------------------------------------------------------------------- Okay. Hey, thanks very much for listening in, guys. I think we had about 40 people signed in, which is pleasing. We're catching up with a lot of you this afternoon or over the coming days, so we look forward to that. But as always, if you've got any questions that you need answered before that, feel free to get in touch with myself or Craig. And otherwise, we look forward to catching up with you. Thanks very much. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude the call for today. Thank you for participating. You may all disconnect. Goodbye.