Property for Industry (NZSE: PFI) is a New Zealand based industrial property specialist. The firm invests in industrial real estate and rents/leases the properties – thereby acting as professional landlords. PFI’s portfolio of properties stands at 93. They serve over 140 tenants and their current occupancy stands at 99%.
PFI listed on the NZSE in 1995 with a market capitalisation of $74m. The firm has delivered a 11% p.a. return since inception with its current market capitalisation standing at $1.35b. The weighted average lease term of all its properties stand at 5.28 years.
During the second half of 2020, 0.8% of the properties have expiring leases. The impact of Covid-19 does increase the no-occupancy risk, however, PFI is in a good position as New Zealand will be one of the first countries that will recover from the pandemic.
The experienced management have developed a low-risk strategy that has been delivering consistent returns year-on-year. The firm focuses to generate as much revenue as it can from its assets, rather than be aggressive and invest for growth. The progress of PFI’s portfolio in 2019 is shown in the chart below.
The stock has rebounded remarkably since the March slump The low-risk business model with low levels of debt has been rewarded once the market bounced back, and is now trading close to its 52-week high – which was set in earlier this month.
The interim update released by the firm was positive with the firm showing that it has not been impacted much by the pandemic – emphasising the resilience of the business model. The firm has also taken risk mitigation measures to safeguard itself from the impacts of Covid19. PFI has added more liquidity by securing a $50m facility from Commonwealth Bank of Australia, $0.7m of rent has been deferred to support their tenants.
The firm is also to have considered the option of a bond issue in case the market conditions worsen due to the pandemic.
As the pandemic brings with it challenging economic conditions, unemployment has risen, and businesses are far more cautious. Spending and investment have decreased. The recovery will be slow as the economy will have to recover after the recovery from the pandemic.
As reserve banks further lower interest rates in an effort to boost the economy, demand will hopefully bounce bank. Deferred rents may continue to pile up for the firm as more businesses need assistance during these times.
The pandemic has also reduced the market values of properties as real estate demand has decreased. However, all this looks to be a temporary set back for PFI as the firm has a very reliable tenancy rate with 99% and a low-risk business model.
PFI reporting follows December 31st as the end of its year. The half-year report ended June 30th, 2020 has been released and will be analysed for this section of the report.
The firm has had a remarkably stable revenue growth rate with an average of 9.5% from 2016 through to 2019. The revenue has already increased by 4.2% in the half-year 2020. Operating expenses have been stable throughout the above period as well, resulting in an average EBITDA margin of 8-% over the past 5 years. This indicates high levels of performance of PFI’s assets as it is consistently able to generate revenues as it expands its business.
The net rental income has increased marginally even with the impact of Covid19. A $0.6m increase can be seen compared with the HY 2019 net income. The chart below shows us exactly how that was achieved.
PFI’s balance sheet is a sign of massive strength. Its net properties come in at $1.4b. The cash position of the firm is $3.2m. However, PFI does not have any short-term borrowings on its balance sheet. The total assets exceed the total liabilities by 3.2x – an indication of very low credit risk faced by the firm. With good long-term health, and capital management measures already undertaken, PFI is well positioned to weather the storm and continue its stable business once the economy rebounds.
The capital structure of the firm is extremely important when it comes to businesses that require heavy investments to generate revenue. PFI sits with a very healthy capitalisation with 70% equity and 30% debt.
The firm has a clear policy to payout dividends from the performance of the firm. The recent dividend payout stands at 8 cents per share at a current dividend yield of 3.28%. Historically, PFI has had a stable dividend payout and a constant increase in earnings per share.
PFI is a firm with a stable and low-risk business model. The risks posed by Covid19 do not seem to have affected the firm much due to its high occupancy rates. The firm is well positioned to mitigate any risks that may arise in these challenging economic conditions. The stock is also trading close to its 52-week high – set earlier this month. We give PFI a “Buy” recommendation on the long horizon to investors.