Investment property, certain disclosures, valuation, income, expenses, commitments, leases, rent abatements, COVID-19

Auckland International Airport Limited – Annual report – 30 June 2020

Industry: transport

2. Summary of significant accounting policies (extract)

(g) Investment properties

Investment properties are properties held by the group to earn rental income, for capital appreciation or both (including property being constructed or developed for future use as investment property). Land held for a currently undetermined future use is classified as investment property.

Investment properties are measured initially at cost and then subsequent to that initial measurement are stated at fair value. To determine fair value, Auckland Airport commissions investment property valuations at least annually by independent valuers. Gains or losses arising from changes in the fair values of investment properties are recognised in the income statement.

If the fair value of investment property under construction cannot be reliably determined but it is expected that the fair value of the property can be reliably determined when construction is complete, then investment property under construction will be measured at cost until either its fair value can be reliably determined or construction is complete.

Transfers are made to investment property when there is a change in use. This may be evidenced by ending of owner occupation, commencement of an operating lease to another party or commencement of construction or development for future use as investment property.

A property transfer from investment property to property, plant and equipment or inventory has a deemed cost for subsequent accounting at its fair value at the date of change in use. If an item of property, plant and equipment becomes an investment property, the group accounts for such property as an investment property only subsequent to the date of change in use.

Investment properties where the group acts as a lessor are leased to tenants under operating leases with rentals payable monthly. Lease payments for some contracts include CPI increases, sales-based concession fees and other adjustments to rentals, with any credit risk being managed in the same way as described for property, plant and equipment leased assets (refer to note 2(f)).

3. Significant accounting judgements, estimates and assumptions (extract)

(a) Fair value of investment property

Changes to market conditions or to assumptions made in the estimation of fair value may result in changes to the fair value of investment property. The carrying value of investment property and the valuation methodology are disclosed in note 12.

(d) COVID-19

During March 2020 the World Health Organization declared a global pandemic in relation to COVID-19. The New Zealand Government responded to COVID-19 by closing the international border for non-residents and introducing an alert level system with restrictions on business activity and societal interaction.

The effects of these measures on Auckland Airport has been significant. Passenger numbers, both domestically and internationally, have fallen as a result of the travel restrictions, significantly impacting both the aeronautical and non-aeronautical business activities of the company. As a result, Auckland Airport has taken a number of actions, including:

  • Suspension of dividends (see note 9);
  • Reduced operating expenditure;
  • Reduced the company’s workforce;
  • Rationalised operations to reflect the new environment;
  • Terminated or suspended capital expenditure projects;
  • Obtained extensions on all bank facilities maturing before 31 December 2021 (see note 18(a));
  • Obtained bank and USPP financial covenant waivers from 30 June 2020 to 31 December 2021, inclusive (see note 18(a)); and
  • Raised $1.2 billion in equity (see note 15).

The pandemic has resulted in impacts to key estimates and judgements used in these financial statements, including:

  • Recognition of rent abatements as negative variable rent (see note 2(c), note 2(l) and note 5);
  • Impairment and write-off of works in progress (see note 11 and note 12);
  • Provision for contract termination costs (see note 21);
  • Provision for expected credit losses (see note 14); and
  • Revaluations of property, plant and equipment and investment properties (see note 11 and note 12).

12. Investment properties

The table below summarises the movements in fair value of investment properties.

Additions for the year ended 30 June 2020 include capitalised interest of $5.0 million (2019: $1.8 million).

The group’s investment properties are all categorised as Level 3 in the fair value hierarchy, as described in note 18(c).

During the year, there were no transfers of investment property between levels of the fair value hierarchy.

The basis of valuation is market value, based on each property’s highest and best use. The valuation methodologies used were a direct sales comparison or a direct capitalisation of rental income, using market comparisons of capitalisation rates, supported by a discounted cash flow approach. Further details of the valuation methodologies and sensitivities are included in note 11(c). The valuation methodologies are consistent with prior years.

Impact of COVID-19

The group’s overall investment property portfolio value has remained stable despite COVID-19. The retail and service properties have been the most affected because of the dramatic fall-off in foot traffic to these stores during lockdown and the slow recovery since moving to Alert Level 1. Industrial properties have been supported by high quality tenants with long leases, including government agencies and essential services. Auckland Airport offered its tenants directly impacted by COVID-19 a mixture of rental abatements and deferrals. Rent abatements were generally limited to retail and aeronautical tenants whose businesses have been severely impacted, while deferrals were given to tenants who faced disruption, largely as a result of the Level 4 lockdown.

Valuers have carried out the valuations by applying assumptions regarding the reasonably possible impacts of COVID-19 based on information available as at 30 June 2020. Given the circumstances, the property valuations as at 30 June 2020 have been prepared on the basis of ‘material valuation uncertainty’, and therefore the valuers have advised that less certainty should be attached to the property valuations than would normally be the case.

All valuations have been reviewed by the group’s property management team, who, notwithstanding the uncertainty due to COVID-19, have determined the valuations to be appropriate as at 30 June 2020.

The principal assumptions used in establishing the valuations were as follows:

The fair value of investment properties valued by each independent registered valuer is outlined below.

The investment properties assigned to valuers are rotated across the portfolio every three years, with the most recent rotation occurring in June 2019. All valuers are registered valuers and industry specialists in valuing the above types of investment properties.

Income and expenses related to investment property

The following categories of investment property are leased to tenants:

  • Retail and service carried at $279.1 million (30 June 2019: $271.3 million);
  • Industrial carried at $1,240.9 million (30 June 2019: $927.8 million); and
  • Other investment property carried at $192.5 million (30 June 2019: $169.1 million).

19. Commitments

(a) Property, plant and equipment

The group had contractual obligations to purchase or develop property, plant and equipment for $91.9 million at 30 June 2020 (2019: $72.0 million).

(b) Investment property

The group had contractual obligations to either purchase, develop, repair or maintain investment property for $64.6 million at 30 June 2020 (2019: $183.4 million).

(c) Operating lease receivable – group as lessor

The group has commercial properties owned by the company that produce rental income and retail concession agreements that produce retail income.

These non-cancellable leases have remaining terms of between one month and 31 years (2019: one month and 36 years). Most leases with an initial period over three years include a clause to enable upward revision of the rental charge on contractual rent review dates according to prevailing market conditions. A very small minority can be revised downwards under normal trading conditions. However, some of the retail concession arrangements contain provisions for rental to be adjusted downwards in the event of a fall in passenger numbers.

The future minimum lease receivables have been reduced in 2020 where the group has contractual or constructive obligations to adjust fixed rent in response to COVID-19 and the associated reductions in passenger numbers.

Future minimum rental and retail income receivable under non-cancellable operating leases as at 30 June are as follows:

2. Summary of significant accounting policies (extract)

(l) Revenue recognition (extract)

Retail and rental income

Retail concession fees are recognised as revenue on an accrual basis based on the turnover of the concessionaires and in accordance with the related agreements. Rent abatements are recognised as an offset to revenue as negative variable lease payments when the group has a contractual or constructive obligation to adjust fixed rent in response to significant reductions in passenger numbers or similar material adverse change. Fixed retail and rental income is recognised as revenue on a straight-line basis over the term of the leases, which may result in lease receivable balances. The group assesses lease receivable balances for impairment at each reporting period (refer note 2(j)).

5. Profit for the year (extract)