APN Industria grow earnings 3.3%

19 August 2021

The APN Industria REIT achieved a record Statutory net profit of $119.2 million, thanks to $85.2 million of revaluation gains and increased rents, driving a substantially higher result than the prior corresponding period (pcp).

Alex Abell, Fund Manager of APN Industria REIT said: “This year’s strong result is largely the outcome of our continued focus on asset management and capital deployment in the most attractive markets, underpinning 12% FFO growth and a 13.5% increase in Net Tangible Asset backing per security. Industrial market conditions continued to strengthen and we anticipate continued valuation growth in FY22 – with transactions in the 3 – 4% cap rate range becoming more common, a meaningful differential to ADI’s weighted average cap rate of 5.8%.”

The APN Industria REIT portfolio includes 39 assets – comprising 67% industrial warehouses and 33% business park office properties (by value). The composition of industrial properties in the portfolio has increased from 24% to 67% in 5 years as APN proactively invested $452 million of capital into this sub- sector. This asset allocation decision has been a key driver of growth that has contributed to a total securityholder return over this 5 year period of 94%, with distributions accounting for more than 40% of the return.

Funds From Operations (FFO) increased 12% ($4.4 million) to $41.2 million, or 3.1% per security to 19.9 cents. This outcome is above the 2 – 3% guidance range, which was upgraded during the period from broadly the same as FY21. The distribution declared was $36.4 million, up 9%, or 17.3 cents per security, reflecting an payout ratio of 86.9% of FFO.

A key driver of the increase in FFO was Net Property Income rising 10.9% to $49.9 million, which represents 2.1% like for like growth, and was boosted by 8.7% growth at Brisbane Technology Park (BTP). The resilience of the occupier base was again reflected in our rent collection performance, with 99.9% of contracted gross rent being collected.

Gearing is 31.6%, the lower end of the target range of 30 – 40%. To fund $182 million of accretive acquisitions during the year, $55.4 million of equity was raised, and approximately $300 million of debt facilities were established or refinanced with an average maturity of 3.9 years. The weighted average cost of debt was 2.65% at balance date and interest cover is 7.2x, one of the highest ratios in the A-REIT sector.

Net Tangible Assets (NTA) increased 38 cents per security to $3.20. This was driven by $81.7 million of fair value adjustments, largely the result of 55% of the portfolio being independently revalued during the period and material increases being reported.

The weighted average cap rate for the $1.1 billion portfolio is now 5.78%, tightening 0.60% over the past 12 months, and the weighted average lease expiry (WALE) is 5.4 years. Occupancy during the year increased from 94% to 98%.

On 13 August 2021, the Dexus acquisition of APN Property Group (APN), the manager of APN Industria REIT, was implemented. As a result, Dexus is now the manager of APN Industria REIT. Dexus maintains a 15.3% stake in ADI, demonstrating continued alignment, with the APN management team being retained. As a result of the acquisition, the Fund will rebrand to Dexus Industria REIT and the ticker code will be DXI. These changes are planned to take effect in October 2021. The rebranding simplifies the Fund’s market positioning for existing and potential tenants and investors.

FY22 guidance has been set at FFO 19.3 cents per security and DPS 17.3 cents per security, subject to a continuation of current market condition and no unforeseen circumstances.

The APN in REIT is on our Top Picks List.

The REIT commenced the year with a security price of $2.36 against a NAV of $2.82 (-16% discount to NAV) and closed the year at $3.32 against a NAV of $3.20 (4% premium to NAV). The REIT provided a 17.3c distribution for FY21, equating to a 7.33% yield, which together with a 40% lift in unit price would provide investors with a total return of 48%.

Key financial and operational highlights for the period are:

Financial highlights:

Funds From Operations (FFO) up $4.4 million (12.0%) to $41.2 million, the strongest performance since IPO, and an increase of 3.1% to 19.9 cents per security
Strong cash flow with 99.9% gross rent invoiced converted to collected cash
Net Tangible Assets up 13.5% to $3.20, including $85.2 million of valuation gains – the portfolio is now $1.1 billion with a weighted average capitalisation rate 5.78%

Operating highlights:

One of the first A-REIT’s to be certified carbon neutral by Climate Active across the property portfolio and associated corporate operations
42,100 square metres of leasing delivered with occupancy increasing 4% over the year to 98%
Transition to Dexus with continuation of existing APN team, preserves strong governance, and increases depth of expertise and growth prospects

Portfolio update

Leasing across the portfolio totaled 42,100 square metres, with success in both the industrial and business park components of the portfolio. Industrial leasing was 37,500 square metres, and included the lease up of 80 – 96 South Park Drive, Dandenong South, and renewals at both 32 Garden St and 147- 153 Canterbury Road, Kilsyth, as well as Australia Post at 5B Butler Boulevard, Adelaide Airport, which was a key business plan initiative for this FY21 acquisition.

Leasing across ADI’s business park investments was driven by small to medium sized occupiers, particularly at Brisbane Technology Park, where 47 deals were completed over 3,300 square metres, demonstrating the active approach to management and the increasing appeal the park has to occupiers, particularly tenants from technology and life science industries. At Rhodes Corporate Park, 1,300 square metres was leased, and the re-leasing campaign for Building A is tracking well with approximately 5,000 square metres of space under negotiation, whilst the existing tenant is still in occupation until September 2021.

Acquisitions:

Since July 2020, the REIT announced $181m of new property acquisitions, $37m of which was post 30th June 2021.

According to RESourceData, these transactions comprised;

16 Quarry Rd Stapylton QLD – $65.2m
Butler Boulevard Adelaide Airport SA – $29.6m
65 O’Briens Rd Corio Vic – $36m
137 Fitzgerald Road Laverton North VIC – $24.1m
57 Mark Anthony Drive Dandenong South VIC – 13.485m

Valuations:

June 2021 valuation growth driven by a combination of cap rate compression ($49m of uplift) and active asset management outcomes ($15m of uplift).

Strengthening the REIT’s capital position

FY22 Guidance

The Fund remains well positioned, with a carbon neutral portfolio carried at an average cap rate of 5.78%, and approximately 3% fixed average annual rent increases and a weighted average lease expiry of 5.4 years. The rent roll is underpinned by government, listed, national and multi-national companies, which make up 87% of income, providing strong ongoing income resilience with 99.9% of rent collected in FY21.

Dexus’s integrated real estate management platform, coupled with the continuation of the existing management team provides greater asset management and future growth opportunities for ADI.

Whilst there is leasing momentum at Rhodes Corporate Park, with approximately 5,000 square metres under offer, this has not been included in FY22 earnings guidance and provides potential for upside.