Currakoto. Welcome to Shared Lunch. I'm Garth Bray and we're on location with the listed landlord that rents to some of New Zealand's big companies property for industry, builds, owns and manages two billion dollars worth of factory and warehouse space to some big global names, which also gives investors exposure to property assets without necessarily needing to talk to
a mortgage broker. CEO Simon Woodhams has invited us here to East Tamaki to show us two stages of development under construction and already rented, and to share his thoughts on property industry in the year to come. Before we hear that some important information you should always consider.
Investing involves the risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and here is current at the time of recording.
Well, Simon, thanks for inviting us here. I mean, as open homes go, this is pretty extra.
Yeah, it's a pretty big open home, isn't it twenty five thousand square meters So no, no, this is the latest facility that we've completed. So we're very very proud of it. So welcome, great to have you guys here.
Sure property, I guess as an investment class, it seems like it's something that an investor can kind of touch, feel, maybe understand a little bit more. Is that fair?
Yes, yep, definitely. So we've got four and a half thousand retail investors, and I think for a lot of them, particularly the ones that have been with us for twenty five years. Plus the fact that it's bricks and mortars, there's actually a physical aspect to it, is a really important aspect to why they invest with us. It's certainly why myself and a lot of the team have been involved for a long time. We'd like to be able
to create things and physically touch it. So no, no, I think that's probably one of the more important aspects of PFI.
So where are we right now and who's moved in? Who's moving in?
So we're at what we call seventy eight Springs Road. This is the Fisher and Pickle Appliants site. This is a ten and a half hectare site. So you think of rugby fields as an analogy ten rugby fields. We brought the site fifteen years ago from Fish and Pikele and what they call a sale and lease back transaction, so we brought the whole site off it and they rode a fifteen year lease to stay on the site
and rent the buildings that we had. Originally they used to manufacture their appliance as I think refrigerators, washing machines, drives on the site. About thirteen years ago higher the Chinese manufacturer brought Fish from Pikele and they went to a slightly different model where they manufacture offshore and they were using the buildings here to distribute, so'd be built in Mexico or Thailand, arrive here in Auckland, be stored here and then shot out to the Nollemans of the world.
About four years ago we started talking to the Fisher and Pikele appliants as exec team and with that change in business model they had they needed what we call a distribution center a DC. Yeah, we got into building this. So this is a state of the art, twenty five thousand square meter DC center. It's sustainably it's five Green star rated, so it's got all the boughs and whistles in terms of solar rainwater harvesting electric charges. You can see out there, and they've moved in and committed to
another fifteen years. So for us, it's an ongoing thirty year commitment, which is pretty pleasing.
That thirty year commitment. Is that a typical sort of investment horizon for p FI or is that a bit longer?
So our portfolio, we've got ninety properties, predominantly here in Auckland. It's fair led it just over two billion dollars. Our average weighted least term is five and a half years. When we build new like this, it's a big commitment both for ours olves but also for the tenant, so you tend to get a longer least term up front. Other recent developments have been twelve and fifteen years, so it's pretty common to get ten years plus on that
first initial commitment. So yeah, typical for the new builds.
But you are potentially now looking at stuff that you're not going to actually get to the end of its life cycle or get to the end of its tendency until the middle of the next decade kind of thing.
Yeah. Yeah, Well, we'd like to think this building's fit for purpose for the next fifty to sixty years. You don't want to be knocking buildings down in rebuilding them if they're perfectly good. So the design features that have gone in here is with the intention that needs to be fifty years plus. So yeah, we're a long term company. We've been around for thirty years. We celebrated thirty years,
been listed last year on the NXX. So's so many companies that can say that, and so every sort of decision that we make has that long term sort of view to it, which is again part of the attraction of investing in.
Property and pair five. So you're not an riit.
No, but it's a very common when they talk about rets, they're talking about listed property vehicles. So some people have different structures. Ours is a simple limited lability company.
How does that fundamentally differ from someone taking a direct investment, becoming a landlord themsel investing in a think scale.
Really, you know a lot of your investors it shares is will have a few hundred dollars to invest. The valuation on this building on completion is over one hundred million dollars. So as a landlord, very few people have access to that type of product. And even what we would consider a smaller asset. Our average asset size is about twenty million dollars. So again, the type of investor that can take that on personally is a very small
part of the population. So by having a limited liability company with a portfolio of assets, it allows the investor to own a share in a wide variety of buildings and tenants. We've got onels one hundred and thirty different tenants. A lot of them are government tenants or listed companies or international companies that sit within the portfolio. So it's a very low risk secure investment, is how we would describe ourselves.
Because you're diversified across not just one site, but across different different tenants, different cities. We're around the company.
Yep, so eighty five percent here in Auckland, but we've got property in Towering Napier, christ Church, Willington, New Plymouth, so yeah, it is the firstified by that, but eighty five percent based here in Auckland, which is the biggest, deepest, strongest market now of you, so you're pretty comfortable with that. But I'll get onto your take on that shortly.
But in terms of the investment, I suppose a little more liquid than literally owning a share or outright in a property too, yeah, exactly.
And by being listed you can trade your share on a daily basis, you can price it on a daily basis. So a lot of the property investments you see out there. If you want to buy a building by yourself and if you need to realize money, it takes a while to advertise the building, sell the building, settle the building. You've got property syndication which is a next step down where you buy one building with a group of investors,
but same thing. If you want to get your money out quickly, it can take a little bit of time. Whereas you know, the New Zealand Stock Shange trades five days a week.
You've got some experience in that unlisted property sector as well, haven't you. What are the advantages I suppose compared to the costs and compliance of floating.
That's probably touching a little bit on the history of PFI.
So PFI was originally set up in the early nineties by the original guy, Malcolm McDougall, who sold the management business that was running the portfolio at the time to amp Capital in Australia in nineteen ninety seven, I think it was and Malcolm then moved to Auckland he was based in Willington and set up another company called Direct Property Fund and that was an unlisted fund where they had a series of investors who built up a portfolio
of assets and that's where I got involved. So I turned up in two thousand and three worked for Malcolm another guy, Greg Reedy, and we grew that company to about four hundred million dollars. And then in late two thousand and must have been twenty ten, Greg jumped on a plane over to Australia and convinced AMP Capital sew the management contract for PFI to our group of investors. For a couple of years we ran an unlisted fund, which has benefits in that there's not as much compliance,
there's no listing regulations, et cetera. And we ran PFI as well, side by side, and then we merged the companies together in twenty and thirteen and that created this sort of an an entity of seven hundred and fifty million dollars which we've grown reasonably aggressively over the last decade through to where we are today two point one
billion dollars. And it's pleasing to say we regularly get emails and people turning up to the AGM of investors and PFI have been there for the full thirty years. It's incredible.
You sound like you understand them pretty well. And what it is that those PFI investors want sort a more conservative proposition than a growth rough a balanced kind of a thing. Is its chasing the income from the dividend stream rather than the capital growth.
Yeah, we call ourselves a dividend stock, so a dividend company, so people tend to invest into both unlisted properly enlisted property, So PFI for a regular dividend, So we pay a quarterly dividend and have done for thirty years. We've managed to grow that dividend over that period of time, so currently our dividends about four four and a half percent per andum. And then on top of that, we've had
capital growth throughout the period as well. So first and foremost we say invest for the dividends and then secondly the capital growth is the is the icon on top.
But if you look at over the thirty years, we've done total returns perum of around nine nine and a half percent, so it's a it's been pretty good ride the last three or four years has been a bit tougher as interest rates have gone the way they have grown, but you know, in terms of valuations, et cetera, that we've seen them stabilize in the last six to twelve months and hopefully in the near future will start to grow away. It's the plan.
You're not the only players in this game, now do you How do you compare against the competition?
How do you rate yourselves? Yeah, so there's probably I think there's about ten listed entities on the x X who we compare ourselves to. I guess one of the key strategic difference with PFI is we focus solely on industrial property. There's another competitor out there who do the
same and do it very well. Industrial property, particularly in the last five to ten years, has been the number one performing asset class, and by asset class, the other eset classes are obviously there's residential, there's commercial so you think office towers, there's shopping centers, and then there's health assets, so they're the mainseic classes in New Zealand, and industrial property, both on a rental growth and on a capital growth point of view, in the last decade has been number
one by a long way, so you've picked the right horse. So there's some themes there that have played into our particularly in and around the COVID area. So if you look at e commerce is a big one. So you know, people like retailers are moving away from having that store on Broadway and New Market to delivering direct from the warehouse. It has been massive demand growth for warehouses like the one we're sitting in here now, direct to consumer DC
discretion centers. So that's played to our into our hands.
Because at the moment, I would have thought most bricks and mortar investment into any other kind of space if it's office space, you see people being sort of begged to return to the office. Yeah, you must be looking at that going cracky, glad we're not too much or at all.
Yeah, yeah, we're not in that at all, which we're happy about that. I think what you've seen in the office sector is you're seen with the work from home thematic that there's no doubt that that's my view, that won't change. But the prime stuff, the A grade officers are doing very very well because people have to attract their staff back into the office. But the B and C grade stuff that the city fringe stuff that's struggling. You know, the stats will tell you that. So again,
work from home. That's a thematic that's played into It's pretty hard to run a warehouse from home. You need people in the office or in the warehouse.
So the more online we are and the more we are moving away from traditional sort of retail and stuff, the better you'd say your visit.
It's definitely a thematic that supports us. Your original question was, you know, how do we differentiate ourselves by being solely focused on industrial. That has played into our hands the team that we've built over the last decade. You know, we call ours sales industrial specialists, and that's all we do. So we don't do healthcare assets, we don't do residential. We're all focused and know this market particularly well. So yeah, that has been a strength of ours.
Let's talk a bit about the market and some of the people that you're dealing with in it. I imagine with one hundred.
And twenty odd yea thirty tenant YEA one.
Hundred and thirty tenants, mostly industrial, you'd be getting a pretty good sounding on how our economy is working at the moment right now, where the pressures.
Are, where the opportunities are yeah, right, yeah, We've got our sales a bit of a bell weather really by having that many tenants, and they're all in different industries. So we've got, you know, kitchen manufacturers next door. You know who manufactured kitchen. So when the residential markets struggling, these guys, we hear about it from those guys. When the residential market's doing really well, they're building wardrobes and baundry systems and kitchen so we know that's doing well.
We've got logistics companies that move freight around New Zealand all over New Zealand, you know, from DHL to Move Logistics, main freight, all the big guys. So we're tapped into this network of people that, you know, give us what's happening at the cold face, give us the goste. I think everyone said about twelve months ago, survived to twenty twenty five. From what we can see, it's going to be the end of twenty twenty five. It's still pretty
tough out there, but there's definitely some positivity. I think. I think there's a bit of hope from a political point of view that some of the rhetoric that you've been here in the last three to six months. Will start to see some action towards the middle of this year. Interst rates is a big driver of the property market. As they go up, property prices tend to go down. You know, everyone's watching what's going to happen in the end of February. Reserve Bank. Will there be a fifty
point basis cut or more or less there? There's some thematics there, the labor force. If you went back three years, a regular comment was we can't get good staff. Towards the middle of last year was how do we hold on to our good staff, as in, you know, we're downsizing. So yeah, I think there's a bit more pain to go through in the next six to nine months. But looking at our tenant base, a lot of them are large businesses that have been around for a long time
and do invest for the long term. I mean Fisher and Picle. You know, they've signed a fifteen year lease with us, so they're planning on being around for the long term, which is really good. Next door, we've got another development you can see the diggers working on it already, which is another company, my Tech, who have signed on for twelve years. So that building down there will be finished towards in the next year. So there are companies
making long term decisions and looking through the cycle. So for us, it's a question of you know, in our view, quality attracts quality. If we can get the product right in the right areas, then we should still continue to attract good quality tenants, which will ensure good cash flow, which means we can carry on pain and growing divid into our to shareholders. Yeah.
I think in your last results you were talking about p FI effectively. I think undercharging is that the right way to put it. That you under rented sixteen percent. That means there's extra value that you could be that relies on the ability of your tenants to be financially healthy enough and see the way forward to.
Pay that so exactly right. That comes back to the quality of your tenant, I guess. So we call it an under renting. So when you sign a long term lease, it's not unusual to have what we call fixed rent reviews. So for instance, this the least we've done with fish
from Pikele here. Every year the rent increases by a certain amount, and that's to try and stop neither the landlord or the tenant being in a position where you're out of market, where you know you're heavily under rented or heavily over rented, it's got to be fair for both parties. And what we found the last three years, particularly since COVID is in the industrial property market anyway, there's been massive rental growth. So we've seen rents go
up ten to fifteen percent per annum. So if you haven't had a rent review for three years, you could be thirty to forty five percent under rented. And so you have this rent review mechanism within the lease which allows you to bring the rent back up to a market. And conversely, if they're over rented, it brings the rent back down, so the tenant benefits there.
So sixteen percent achievable.
So across our portfolio, that's what the values are saying. We're under rented. Again, it's when you get access to that, when's the time and of that rent coming through. But yeah, the last couple of years we've been achieving a lot more than that in certain cases, so we had catch up rent reviews effectively or new leases. So yeah, we're pretty confident. If you look through our tenant profile again, businesses like main freight, fishrimpipal plants as DHR. These are
big companies. They know the trends or what's happening in the market. One way you could say it is it's under rented, but it could also you could turn around and say a tenant where you've benefited over the last three years from not paying the market rent. And as long as you're having these conversations early on in the piece and do it in a respectful manner, then yeah, it seems to be readily achievable, which is good.
We're talking about interest rates before. Do you have a personal view given where things are going? Do you claim any greater knowledge from listening to the people that you talk to.
I think if you went back six months when they started cutting the interest rates is a bit of a surprise, and now everyone's thinking they're going to go very, very low. I think what's happened the last two to three months. If you look what's happening off sure in America, etcetera, they might not go as low as people think they're going to go, and it might take a bit longer to get them down there. So there's still a little
bit of inflation floating around. I know our headline inflation's at two point one, but rates insurance that non tradable inflation is still pretty strong. So yeah, for what it's worth, Adrian Or seems to march the beat of his own drum, rightly or wrongly. So yeah, I don't think it's a dead suit that it's going to fall away aggressively over the next twelve months.
And no idea how long it'll stay like that.
Oh idea. Yeah, And that's why if you look at the leases that we sign, they have these fixed growth built into them. We have these opportunities to review the leases to market and primarily that's not just for the landladle, it's for both parties, landlord and the tenant. You've got to try and keep those rents out or around market. It doesn't really benefit anyone in the short term. It sounds great are getting these big rent reviews, but it just means you haven't been at market for the two
or three years earlier. And then if you're overcharging your tenant that's not a great scenario either. It just means at some point they'll be looking around. So yeah, it's got to be fair for both parties.
Australia as a market or as a potential place to invest for property. Is that ever crossed your minds?
How we've looked at it in the past, it's fair to say, and at times it's been attractive depending on exchange rates. There's a tax regime that at times looks quite attractive. But what we've found under is a little bit of stick to your knitting. There's some big boys in Australia that live there, breathe there, have operated there for a long time, you know, particularly in Auckland. It's a pretty big market here and we think there's plenty
of opportunities here. So you've really got to we want to knock it out of the park here in Auckland and New Zealand first and foremost. But never say never, you know, as part of a portfolio acquisition or you know, a partnership with a company that goes offshore, we wouldn't say no.
So let's bring it back right here where we are now. Then, So this is a green star building, you're saying, what does that mean?
So the New Zealand Green Building Council has a rating system. So yeah, we've designed the building. So right at the start you make the decision with all your consultants, your architects, the engineers that you want it to be rated by the Green Building Council, and there's a series of points that you achieve on the way through in design, in the recycling, the materials that you take away from the site,
and then the finished product. And as I said earlier, it's things like you get points for solar power, for rainwater harvesting, electric charges out there, and depending on how many points do you get, you need sixty points to achieve five green stars. And so this building at the moment sitting on about sixty four.
So who's asking for that.
It's a global thing, that is what we're seeing. So sustainability I don't need to lecture people on that, but globally what we've seen from both tenants, from insurance companies, from finance and governments. It's been pushed onto people over the last probably the last decade, effectively, but it's ramped up. We've seen it ramped up probably in the last six
or seven years. And we made a decision about four years ago that we wanted to be at the forefront of it, and we wanted to be part of the group that is now heading down that track and leading the market and that so any development we've done in the last three years has been targeting that five Green development. We've just finished another one in Mount Wellington too large buildings again one hundred million dollars plus and I've green Star rated and we're looking into a model where by
our existing buildings we can start to get rating. So we're working there's a group of us working with the Green Building Council to establish a regime on how do you take an existing building and get a rating. And eventually where we'll get to is tenants will be out to go right. We want to go into a four Green Star eighting or a five Green Star and there'll be a rental premium to come into a good building, is our view. That's where it's going to do it.
It's already there in the in the office buildings. You're starting to see. One of the agencies James lang Lasal did a research note middle of the last year it's between six and seven percent premium rents going into a green Star rated building. So eventually what will happen is the tenants will have a choice between Green Star non Green Star. They'll pay a different price and we think to be at the forefront. You want to be in the green Star rated buildings?
Are we at the forefront here from the government's point of view in terms of setting the playing field for this kind of stuff, because I understood there's a bit of a bit of a drift to here. Maybe they're going to prehead with some of those regulation. Yeah, it's easier.
I think it costs more to build a Green Star rted building. It's going to have access to capital. The compliance regime is pretty tough, so are the settings right. There's probably room for improvement, but you know, at the moment, just even getting hold of consultants that are green Star accredited is quite tough. So you know, as the market develops, there'll be more people attracted into that. I think you'll
start to see you know that right itself. The residential market, you're starting to see, you know, a gain a foothold there, so it will flow through I think industrial you know, we were talking about being the set class out the back getting the work done. No one really sees it. You know, it's very rare that you see a big shiny warehouse on the front page of the herald. But you know, you'll open a shopping center or an Ikea or you know, you know, a set of flats and
it's up in lights, which is fine by us. We're very happy being off the front page of the Herald. But that's the reality. So I think the industrial class is probably just out of the back a little bit. But time we'll catch it. And as I said earlier, and we're seeing in terms of finance, you talk about finance, green star rated buildings, you can get cheaper finance. So
it's starting to go that way. And I think a Laney speed up is more and more of us pushed it, and most of it go back to one of your original questions around the listed competitors jump on the websites. Everyone's all the listed guys that are into it now understand it and are pushing into it. So it's here. It's not going away.
Some would say we're in probably arguably the worst recession since nineteen ninety one, which is as long as I can remember. Anyway, maybe you two, I don't know whether you agree with that statement, but if you finish the sentence in now is the right time for.
P FI to be doing exactly what we're doing. Really, So we've got a portfolio of assets that are really well located. They've been built, portfolio has been built over thirty years. We've got a lot of inherent opportunity that
sit within the portfolio. An example is exactly here. You know, this was an underutilized site but in the middle of eat Tamie ten hectares and so we've you know, in pretty tough times, we've removed a building, we've built a world class facilidity least to a world class tenant on budget, under time, a head of schedule. So stick to our knitting. We've got plenty of opportunities within the portfolio that we're accessing and so as a shareholder you will enjoy the benefit of that going forward.
What about your runway?
Really enjoy what I do. We've built a great team. There's twenty six of us that sit in an office back in the city, but we all enjoy getting out to the sites, meeting with the tenants. You hear about their businesses, about their livelihoods, what they're doing, some good, some really good, some maybe not so good. But it's a real people's person sort of industry and that's something that I've always enjoyed. So yeah, whilst we've got a
young team that sort of want to keep going. Hopefully we can put projects in front of them and keep developing. P five. When I was when we brought the management contract, that was a three hundred and forty million dollar portfolio. It's now about to click over two point one billion. So you know, it's been a been an area that we've enjoyed some really good success. So I'm looking forward to some more that it never stop. So exactly right, but it never stops.
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