And welcome to the NZL Half-Year Results Call. Thank you very much for joining us. I see we've got a few people online, so thanks very much for making the time. With me today, I've got NZL director, Chris Swasbrook, and Rob Campbell and Sarah Kennedy, both joining us online from the NZL board. The results we'll be talking about today are for the six-month period, ending the 30 June, 2024 , which is our half year. Just a reminder that NZL's balance date is the end of December 2024 . I'll walk through without laboring some of the slides in our presentation and then move to questions, and if people could just raise their hand if they've got a question.
So the portfolio's increased its yield by, and further diversified following our recent acquisitions of some apple orchard land and forests. Our free cash flow or operating cash flow, FO per share, has grown from 1.53 cents per share to 1.94 cents per share, which is growth of just under 27% compared to the same period the year before. Gearing's lowered to 30.5%. The dividend has been resumed with a 75% payout ratio of FO. We previously announced to the market that Roc Partners have purchased 25% of the NZL portfolio, and we've and we're touching on in this result, our partnership with New Zealand Forest Leasing, one of our tenants, which is a large project centered around native regeneration on some of our forestry properties.
In terms of the half-year 2024 result, we've seen net profit after tax and FO grow. NAV per share has grown since listing. It's back slightly from 31 December. We're reaffirming our FO forecast to be in the range of NZD 0.05-NZD 0.0536 per share in 2024. We expect to see the second half of the year free cash flow per share grow, versus the first half of the year, and that's largely a result of the CPI rent increases we saw take place in the middle of the year, and some higher-yielding acquisitions that we've made with some of the proceeds of the sale of 25% of the dairy portfolio to Roc.
We've seen our CPI-linked rental increases come through at just under 19% on just under 40% of our total portfolio, and this took effect in the middle of this year, and so we'll see the half year impact of this in the second half of the year, and obviously a full year of it the following year. A further 26.5% of our portfolio, which is on annual CPI rental review, saw a 4% increase in the twelve-month period leading up to it. And there's been a small on-market share buyback with some opportunistic buying over the last half-year period, bringing total shares bought back to just under 630,000 shares. In terms of financial highlights and metrics, total assets of NZD 423.5 million.
Net asset value of NZD 216.9 million. NAV per share is NZD 1.55, and gearing's at 30%. We've resumed the dividend, and we're paying out 75% of half year's FO, which is 1.46 cents per share, and we expect that to be higher in the second half, as previously mentioned. This slide is a summary of the acquisitions that we've made and the portfolio changes over the first half of the year. Really, this is just the deployment of the proceeds received from the 25% portfolio sale. So what we've seen is diversity of the portfolio increased to, lower exposure to dairy and increased exposure to forestry and apples.
We've seen our gearing come down from 36% to roughly 30%, and we've seen our weighted average lease term increase by nearly 10%, so from 11.6 years to 12.7. We've purchased some apple orchard land only, so not the improvements, although the improvements do revert to our ownership at the end of the lease. We've purchased in Twyford, Hawke's Bay, which is arguably the best apple-growing area in the country. We've added to our forestry estates and added a tenant, a different tenant into the mix as well, in Whanganui and Taranaki. And we've contracted to buy an apple orchard, some apple orchard land in Otago, part of it is settled with NZL shares issued at NAV, and the collection of these acquired properties yield between 7.5% and 9%.
They also have annual rental adjustments as opposed to three yearly, which you'd be used to with our dairy portfolio. So the frequency of rental adjustments has increased as well across the portfolio. In terms of our adjusted funds from operations or FO for this half year period, we've seen 2.19 cents per share of funds from operations, and then in terms of adjusted funds from operations, 1.94 cents per share. We expect that to be considerably higher in the second half of the year. Profit and loss, NZD 12.38 million net profit after tax, and 9.18 cents per share of earnings per share.
In terms of net asset value per share, you'll see that it was close to NZD 1.60 at the thirty-first of December, and it's NZD 1.55 as of today. In terms of our debt summary, there's 30.5% gearing. Our average interest cost is 6.6%, and we've got a 1.2 years weighted average term to expiry. I would touch on that. What we're going through at the moment is bringing in a banking partner. We're well progressed on that front. And so we expect that we would extend further out our debt facility exposure and profile with the introduction of a new banking partner alongside Rabo.
We're 64% hedged at the moment, which tails off to 50% next year and 35% the following year. So the slide on total returns, which I'm sure you'll be familiar with, our steadily increasing net asset value and FO per share and dividends per share. In terms of our sustainability program, most on the call will be familiar with our Enduring Life for Land program. In terms of specific initiatives, this throughout this period and ongoing, we've put a spotlight on our native forest regeneration. And so with our tenant partner, what we're engaged in is very active fire management and large-scale intensive pest animal control, pest plant control.
And what that allows for is for pine trees to act as a nurse crop to native plants, and regeneration of native birds, to allow both native plants and native birds to regenerate. Pest control is effective, you know, is expensive, and it's your number one priority in terms of keeping out competing species, both flora and fauna and animals. And so that's something that we'll continue to update and report on, and is an active project for us. We've had other initiatives around solar pumps and green loans that we touched on on this slide. And then in terms of the dividend and outlook, we reaffirmed our dividend policy of 60%-90% payout of FO. For this half year, we're paying out 75% of that.
In terms of a share buyback program, and I just think it's important to make this clear. We always want to have the ability to buy back stock if there's a very compelling opportunity to do so. That's not to say that we'll be romping out in the market to buy back shares on an unaffected basis. We do have a dividend reinvestment policy and process people can participate in with this dividend. So obviously we're not going to be introducing a DRP, and then taking that money, buying shares back at the same price, in the same period of time. It's just the share buyback program is important to have it in place, should there be a very compelling and accretive opportunity in the future. In terms of the outlook and our FY 2024 forecast, so we're reaffirming guidance.
We've seen the impact of inflation in 2024 with forestry and dairy asset lease increases. We've got hedging in place at 64% of our total borrowings, and that drops off to around 50% and 30%. As it currently stands, plan at the moment will be to keep that hedging at similar levels, and continue to roll as it comes off. I think with that, what I'll do is open up to questions. I've got two hands up here. Arie, you were the first to put your hand up, so I'll take questions from you first.
Oh, good morning. Thanks, Richard. Yeah, just a
Oh, hang on a second, let me just turn up the volume. It's a little bit hard to hear. Excuse me. It looks like it's at full.
Yeah. Is this better?
It's slightly better, yes.
Okay, I'll make sure I speak up. Yeah, just firstly, in terms of the Roc cash, that's now largely accounted for. You've got gearing in the low thirties. You know, will we see some further small acquisitions beyond what you've announced in FY 2024, or into the start of FY 2025, that utilizes a bit of that gearing capacity? Or is that not the intention?
No, I think I don't anticipate there being any further small acquisitions. I think what we've announced and what we've got planned with the southern orchard, that sort of ticks over between this year and next year, that'll be it.
Okay, and then just I guess following on from that, but thinking further out, in terms of future acquisitions, I mean, you've started... well, you're well underway, I guess, into first buying the portfolio away from dairy. Now, sort of, you know, more concentrated in dairy and forestry. Do you have targets in terms of weighting to the various end use classes? Or will it be more opportunity specific?
It'll be opportunity driven. I mean, the further concentrated we are in certain areas, the more appealing something would need to be to really, you know, really influence us to continue to chase it, but no, we don't have targets. We're opportunistic in our purchases, and there'll be a cycle, and there'll be a time for a variety of different assets. We just want to buy quality at a good price, and so need to remain optimistic about that.
Arie, sorry, Arie, we've always said that from the outset. It's Chris here that we would be opportunistic. And I think if you go back in time to when we first started the New Zealand Rural Land Company, and people were highly skeptical as to whether we could buy any land at the yields we were indicating. We went out and bought that large scale dairy portfolio, and we've since added on incrementally, starting in forestry and now horticulture. And if we had told you at the beginning that we would get 8.5% on horticultural land, you would have told us we were on drugs.
It's just always opportunistic, and there's, you know, various asset classes, or some sectors within that particular asset class, you know, become more attractive at certain points in the cycle, and that will continue to be the case for the foreseeable future. We do not have a pretty pie chart saying that we want 33% in dairy, 33% in horticulture, 33% in trees.
Yep. No, that's good. And then, just on the refinancing of the debt, which you mentioned as well progressed. In terms of finalizing that and extending out that current debt, do you have sort of a timeframe in mind in terms of when that'll be sewn up?
Yeah, yeah. Arie, are you able to just speak up a little bit?
We really couldn't hear you, Arie. I don't know why.
Okay, yeah, that's unfortunate. Yes, sorry, just in terms of the refinancing of current debt, which you mentioned, yeah, that could. Have you got a timeframe in terms of when you expect that to be concluded?
In the next couple of months.
Yeah. Right, and then final one, just in terms of the dividend policy, so let's say that you've gone in the middle of the range, what are the factors that will likely sort of influence where you end up in that range, sort of, going forward? Is it 75% now for the sort of foreseeable future? Or, you know, what will sort of determine where you sit in that range, in future periods?
There's a number of things that we're balancing when we look at our target payout ratio. We'll certainly, I would expect, sit in the mid to lower end of the range so that we retain some flexibility with free cash flow. It does depend on what opportunities are presented to us, what our gearing looks like, trying to remain attractive to the marginal buyer, which is likely to be a yield-focused retail investor, and so yeah, it's a balance, but if you thought somewhere in the mid to lower half of that range, you wouldn't be too far off.
Great.
Thank you, Arie. We've. You know what markets are like as well as anyone here. I mean, you know, they do strange things from time to time, and you want to have that flexibility to buy back shares. So I don't think that we're doing this DRP, and we're going to take that money and buy back shares. I understand people would be scratching their heads saying, "Well, that's very inefficient use of capital." You view buybacks as very much like we are when we're purchasing land, we want to be opportunistic. If we think the discount is too big and the market is not pricing the shares properly, we will initiate the buyback.
Thank you.
Is that all from you, Arie?
Yes, it is. Thank you.
Thanks. The next floor is with you.
Oh, there we go. Sorry. Good morning. Just checking in that you can hear me.
Yes, we can.
Yes, we can.
Great. Looking at your FY 2024 FO guidance of $7 million-$7.5 million, which is unchanged, CPI-based rent reviews have come in in line with basically expectations. However, since then, the forward interest curve has shifted downwards quite a bit, and I guess all else equal, the combination of the two would lead to higher FO expectations. Would it be possible to provide a bit more of a breakdown in terms of how your FO expectations have accounted for this drop in interest rate? Is it a case of the FY 2024 weighted average cost of debt not changing, and this being more of a story for FO beyond FY 2024?
Yes, so there is. So a couple of things. We were delayed by three months on a couple of our more material purchases. So some of orchards and forestry didn't settle towards the till the end of May, and we thought we'd be doing those earlier in the year. So there's a little bit of you know delay on settlement, therefore delay on rental income. On the on the flip side of the coin of the you know we hedge the 64% of the debt, so the other thirty-six percent that we're unhedged for, we should see some improvement on what we forecast for the end of the you know the unhedged portion of our interest toward towards the end of the year. And then also you know there's.
Slightly, not very material, but slightly more professional fees associated with, you know, selling and buying properties, and so you see a little bit of that versus, say, you know, a more steady state. And so just the unders and overs of those various elements leaves us within the existing guidance range we have for half on, so we've just retained guidance.
Okay, thanks. That's helpful. And then just on the rent reviews, 18.6% is quite a chunky increase. Would it be possible to provide some more commentary as to how you're monitoring your tenants' financial health and ability to manage these increases?
Yeah. So a good back-of-the-envelope metric to think about from a dairy tenant's point of view is, in the past, our rental. So first and foremost, if a tenant's leasing a property from us, they don't then have gearing on the land. So I think about the lease as a, you know, financing or interest-like cost from the tenant's point of view. In the past, the lease is made up between NZD 1.10 and NZD 1.30 of milk check income. With a 20% increase in round numbers, that then becomes NZD 1.50 in round, you know, in round terms, out of a tenant's milk check.
If you then add on five to six dollars worth of just pure operating costs, you end up with a six and a half to sort of seven dollar on structure all in with milk at the moment, NZD 8.80 is about 20-something% net profit margin, which is reasonably healthy for tenants. We are also looking at partnering with Rabobank to offer tenants some access to hedging as well, because at these levels, they are very profitable. And so if we're able to facilitate some sort of program in conjunction with our banking partner to tenants for some to effectively lock in very healthy margins and profits, we'd like to do so.
On top of that, what we get from tenants is quite detailed quarterly management accounting as well as budgets and reforecasts when they're doing them, so we get quite a good line of sight into tenant profitability, as well as monitoring their balance sheets. And so at a minimum, a tenant with a 10-year lease needs to maintain at least 6 times rental cover in terms of equity. And then, the longer the lease, the higher that needs to be. So for an apple orchard, for example, that increases to 12 times. And so those, it's market monitoring and a basic understanding of the sector's profitability and what granular information and contractual obligations on our tenants that we monitor as well. Is that helpful?
Yeah, thanks. That's really helpful. Just to clarify, the hedging offered to tenants with Rabobank, is that for interest rate or commodity risk?
If it was done, and we're still working through it with Rabobank, et cetera, if it does get done, it would be for milk price, not interest rates, and we would have no economic exposure .
Great, thanks. Regarding the recently announced apple orchard acquisition, would I be correct in saying that this will be 75% funded by NZL, with the remaining 25% funded by Roc Partners?
Right.
Great. And so will the second tranche or the second payment also be done with NZL shares issued at NAV?
So the payment and the shares are in two tranches. The shares are in the first tranche, with the balance being in cash, and then the second payment's all cash.
Okay, thanks. And just a last question from me. Your commentary on native forest regeneration, just thinking aloud, radiata pine forest you see in New Zealand, or, you know, I've seen in New Zealand, don't really have the best soil compared to say, you know, using gorse to help a native nurse crop. In terms of going from a plantation radiata to native regeneration, how has this been done elsewhere in New Zealand? And I guess, how does it impact for the pine trees, the pine trees' impact on the soil? I guess the reason why one of the reasons why I ask this is, I was under the impression that when the forestry acquisition was initially announced, it had a relatively low maintenance spend outlook from the tenant's point of view, given its material profile.
But going from pine trees to nurse crop sounds like a lot more work required, which means a lot more costs, right?
So the costs are incurred by the tenant, and so what it really boils down to, in simple terms, is very active pest control management. And so what you see around other parts of New Zealand, especially with pine crop, is people either don't want to spend the money on pest management, or they like to be able to hunt deer, goats, and pigs in their forests. If you want to spend the money on having really high-quality fencing and then very active pest control, being goats, pigs, deer, et cetera, and stoats and weasels, so that you then allow for goats not to eat the native ferns that are growing underneath, and for stoats, and weasels, and rats not to eat birds' eggs so that the birds can thrive, and then also distribute native seed.
That's how you regenerate native underneath a pine crop, and then pine, when it starts to run its course in a hundred and fifty years, you've got a very healthy, self-sustaining, native growth coming through to effectively take over. But yes, it's expensive and intensive, but that's why you have a large tenant that's got the staff and got the infrastructure to do that.
Yeah. Nick, it's Chris here. We, the board of NZL actually went down recently to look at one of our forests in Taranaki with our tenant, New Zealand Forest Leasing. And Richard is 100% right, and you actually had to see it to believe it, that pest control is the major driver of native bush regeneration. Soil quality is a distant also ran in that sense. It is just amazing and how New Zealand Forest Leasing and their teams manage that, and everything from you know the number of hedgehogs that are controlled and everything like that. I had no idea that a hedgehog is actually very dangerous to native bird species and things like that.
I cannot stress enough, it's about pest control, and the tenant is just has a world-class one, well, just an incredible operation doing this. It really is.
Out of their 70 employees across the business, approximately 50 are in pest control.
Yeah, I mean, that, because it's just so vital for their operation as well. So, you know, maybe we've got a field trip down there next year and/or later this year, and take some of the analysts around and show you. It really is quite eye-opening. So it comes down to pest control. It's not soil, and it's not this negativity around pine needles, and acidity in the soil, and these various stories that you hear. Nothing to do with it.
Thanks. So I guess with the 50 people dedicated to the pest control, this expensive, or like, you know, this high cost ongoing cost going forward is not sort of a new development from the tenant's point of view. They always sort of expected this or had planned on this?
Correct. Because it goes to growth, it goes to the carbon profile and the growth. You get the trees off, particularly when they're younger, to a good start. The carbon profile is very, very robust, and so they have modeled all of this. They are in the business of farming for carbon, and they know that pests do real damage to their growth profiles and even mature trees as well.
Okay, thanks. That's great. That's all from me.
Yeah. I'll go through the Q&A questions that we've got here. So we've got seven questions. One question, Rabobank Facility B, expired this Sunday, the first of September. Has this been re-negotiated yet, and if so, when will it? Yes, it's been extended by Rabobank for another three months while we go through our refinance, and they've said they'll continue to extend until... They're a very happy bank and will continue to extend while we're working through refinance. We've had strong offers come back, and we think that bringing on the significant partner will be imminent. In terms of our debt covenant levels, so our baseline debt covenant in terms of interest coverage ratio is 1.75.
We've got a temporary covenant of 1.65 times, and it then reverts to 1.75. In the past, it has been as high as 2, but 1.75 times ICR cover is the current debt covenant, with a temporary 1.65 times. At the moment, we're trading. Our ICR is about 2.3 to 2.4. There's a question on the DRP program, which we believe we've answered. In terms of the types of buyback, all of our buybacks are done on market. We say that at a minimum, we'd like to see a 90% discount, but obviously, when we're buying back, especially at NZD 0.88 and lower, the discount we're buying for is a lot greater than that.
There's a question. REINZ appears to show dairy prices per hectare dropping throughout the year. Would you expect a valuation at the end of the year to show a drop in asset value for dairy assets? Well, I wouldn't expect so, but I can't predict the market. By the end of the year, we're seeing prices hold reasonably firm, and confidence increasing in the sector, so yeah, I'm unsure at the moment.
There's a question here on NZL stated they were not paying dividends because they wanted cash for buybacks of the severely undervalued stock, but the cash hasn't been used for buybacks. What has changed? Yes, we only repurchased a small amount of shares in the period, but we were out of the market for quite a period of time with various transactions, and you have the windows, and we just didn't have large enough windows to really execute on a buyback. So that's the reason why we didn't repurchase many shares there. You go back to previous periods, we obviously did. I can't-
And the dividend was suspended. Well, the dividend was suspended for the last year... And that's when we bought the majority of the shares. This first half year, we've been out of the market, and we're paying a dividend out.
And also, we've had these transactions where we haven't been able to. So I think we followed through on what we said we would do with regard to that question in the relevant time periods.
Another question here: Can you please provide more color on the new tenant, MM Forests Limited? So MM Forests Limited is a medium-sized forester in the North and South Islands. They found a particularly attractive off-market purchase they wanted to make. With the purchase came some carbon credits, which we obviously didn't want, and so they approached us knowing the sort of arrangement we had with New Zealand Forest Leasing, and we managed to construct what I think was quite an attractive deal for NZL, and bring on another New Zealand domestic owner/operator, medium-sized tenant with a strong balance sheet. They've got the same covenants required as anyone else. Right. Are there any more questions? There don't appear to be, and I can't see any hands raised.
So if there aren't any further questions or hands raised, I'd like to thank everyone very much for joining us today and making time, and as always, please send us an email or give us a phone call if you'd like to speak to anyone or have any further questions. But thank you very much, and we really appreciate the support.
Thank you.