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

Auckland International Airport Limited – Annual report – 30 June 2022

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)).

Lease incentives are initially recognised at value of the incentive and amortised over the term of the lease. Other lease receivables may arise when fixed future retail or rental revenue increases are recognised on a straight-line basis over the term of the lease (refer to note 2(l)). The group assesses lease incentives and receivables for impairment at each reporting date and recognises impairment losses as prescribed by NZ IFRS 9.

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. This had a significant impact on Auckland Airport. Passenger numbers fell, both domestically and internationally, significantly impacting both the aeronautical and non-aeronautical business activities of the company. In response, Auckland Airport initiated a number of actions as reported in the 2020 and 2021 Financial Statements.

The following measures remained in place throughout the 2022 financial year:

  • Suspension of dividends (see note 9);
  • Reduced operating expenditure; and
  • Suspension of some capital expenditure projects.

During February 2022, Auckland Airport renegotiated its banking facility interest coverage covenants for the measurement periods between June 2022 and June 2024. The following table sets out the new EBITDA-based interest coverage covenants, with the covenant for the 12 months to 31 December 2024 onwards remaining unchanged.

Border closures and travel restrictions to keep New Zealand free of COVID-19 have severely impacted Auckland Airport since late in the 2020 financial year. In the second half of the 2022 financial year, the Omicron variant became widely established throughout New Zealand, and the New Zealand Government has as a result progressively removed border and travel restrictions. Now that COVID-19 is widespread, and the population widely vaccinated, the likelihood of the reimposition of border and travel restrictions has greatly reduced.

Auckland Airport’s actual interest coverage for the 12 months ended 30 June 2022 was 2.58x. Given the New Zealand Government’s progressive removal of border and travel restrictions over the second half of the 2022 financial year, and the strong rebound in international arrivals that this has enabled, Auckland Airport’s 12-month interest coverage metrics are likely to progressively strengthen going forward.

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

  • Recognition of rent abatements as negative variable rent (see note 2(l) and note 5);
  • Impairment and write-off of capital works in progress (see note 11 and note 12);
  • 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 2022 include capitalised interest of $0.8 million (2021: $2.4 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. The independent valuers considered the impact of COVID-19 in all revaluations. Further details of the valuation methodologies and sensitivities are included in note 11(c). The valuation methodologies are consistent with prior years.

All valuations have been reviewed by the group’s property management team, which has determined the valuations to be appropriate as at 30 June 2022.

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 2022. All valuers are registered valuers and industry specialists in valuing the above types of investment properties.

The table below summarises income and expenses related to investment properties:

The following categories of investment property are leased to tenants:

  • Retail and service carried at $328.8 million (30 June 2021: $301.5 million);
  • Industrial carried at $1,879.8 million (30 June 2021: $1,709.4 million); and
  • Other investment property carried at $221.9 million (30 June 2021: $216.2 million).

The above values include the land associated with these properties.

19. Commitments

(a) Property, plant and equipment

The group had contractual obligations to purchase or develop property, plant and equipment for $198.8 million at 30 June 2022 (2021: $31.5 million). These include the development of a new Transport Hub opposite the international terminal, aeronautical works, and enabling works associated with the integration of the domestic and international terminals.

(b) Investment property

The group had contractual obligations to either purchase, develop, repair or maintain investment property for $34.3 million at 30 June 2022 (2021: $43.5 million).

(c) Joint ventures

During the year ended 30 June 2022, the Tainui Auckland Airport Hotel 2 Limited Partnership (joint venture) tendered a contract for the second and final phase of development of a new Pullman Hotel. At 30 June 2022, the joint venture’s contractual obligations for the hotel development were $82.0 million (30 June 2021: $5.7 million). The group’s share of those commitments was $41.0 million at 30 June 2022 (30 June 2021: $2.9 million).

(d) 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 29 years (2021: one month and 30 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 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 an obligation to adjust fixed rent in response to significant reductions in passenger numbers or similar material adverse change. Fixed retail and rental income increases are 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)