Report card: Watch the leases at Property For Industry

By David McEwen

Friday 31st May 2002

Property For Industry is unashamedly an income-producing company.

It pays out 100% of its profits in dividends, which is just as well as property values, and the company's share price, haven't appreciated much over the past five years.

The down part of the cycle now seems over and enthusiasm for property is on the rise.

In its latest annual report, PFI reveals its net asset backing per share rose 3% in the year to December 31, although after allowing for a final dividend the appreciation is a modest 0.89% to 75.1c per share.

However, at least the number is on the right side of zero and comes from "a positive revaluation of $0.79 million" of the company's $209 million in property assets.

For the first time in five years, PFI has been able to record an increase in the "value added" column of its performance review table. If buoyancy in the property sector continues, further improvements could eventuate.

The past year has not been without incident for the company, despite its generally positive tone.

It reveals that one of its clients went into receivership - a terrifying prospect for any landlord relying on predictable revenues from long leases.

Fortunately, the annual rental on the property being leased was $189,000, less than 1% of total rents.

PFI takes the opportunity to turn a negative into a positive by pointing out the value of its diversification policy.

"As a practice the company is careful to diversify investments across a range of tenants, industries, uses, sizes and locations so that the impact on shareholder returns of a single adverse event such as this is minimised," it says.

Once again, PFI has delivered a very detailed and useful report - even to the extent of putting in a glossary so readers can follow the jargon.

While descriptions of individual buildings and their lease details can bore even the most ardent shareholder, the report offers plenty of other information.

This includes statements of its strategic objective (increase shareholder wealth 10% a year) and plan for achieving it (buy good properties), a list of its top-10 tenants (blue-chip corporates) and an overview of the industrial property market (reasonably bullish).

It shows the mix of property types in its portfolio and even goes to the length of describing the differences; "Distribution centres have small office areas, large yards for manoeuvring trucks and higher stud heights ..."

This level of detail is all the more appealing given the company does not have a managing director, who normally has the role of having and communicating an exciting vision.

Rather, the company outsources its management functions to institutional investor AMP Henderson Global Investors, whose fees are partly dependent on producing a good performance (unlike managing directors).

AMP has appointed a general manager, Peter Alexander, who reports to a small but experienced board.

The directors have overseen a generally sound performance since the company listed in 1994, despite the sluggish property sector for much of that time.

A six-year performance review contains numbers not normally found in reports. These include "annual gross dividend yield on average share price" (8.3% last year against 7.7% in 1996), "gross shareholder returns since listing (annualised)" (7.2% against 4% in 1996) and "Portfolio gross income yield on valuation" (10.3% against 10.6% six years ago.)

One noticeable trend that emerges from the table is the decline in PFI's average unexpired lease term. This has gone from 10.1 years in 1996 to 6.8 years in 2001.

This is understandable since many of its tenants are on long leases that are gradually winding down but, unless that number goes up again, investors might start placing a risk premium on the company's shares to reflect the chance it could lose a big tenant.

Last year I commented that PFI had turned in a comprehensive and comprehendible annual report.

This year it has repeated the feat and other companies, not just in the property sector, could learn from its example.

David McEwen is managing director of investment advisory company McEwen & Co. Web: www.mcewen.co.nz; email: davidm@mcewen.co.nz

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