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

Auckland International Airport Limited – Annual report – 30 June 2021

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. 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 Financial Statements.

The following measures remained in place throughout the 2021 financial year:

  • Suspension of dividends (see note 9);
  • Reduced operating expenditure;
  • Suspension of some capital expenditure projects; and
  • Financial covenant waivers until 31 December 2021 (see note 18(a)).

During the financial year ended 30 June 2021, New Zealand and Australia remained predominantly COVID-19 free, allowing a substantial recovery in domestic passenger numbers. As a result, in April 2021 the New Zealand and Australian Governments introduced the trans-Tasman travel bubble allowing two-way quarantine-free border crossings for passengers travelling between New Zealand and Australia. This delivered a partial recovery of international passenger numbers through Auckland Airport during the final quarter of the 2021 financial year.

Since then, however, Australia has experienced widespread outbreaks of the highly infectious delta variant, sending several states into lockdown. On 23 July, the New Zealand Government announced the suspension of quarantine-free trans-Tasman travel until 17 September, and this initial eight-week suspension might be extended. As a result, Auckland Airport brought forward its planned bank discussions regarding:

  • extending nearly $700.0 million of bank facilities due to mature over January-April 2022 ($128.0 million drawn at 30 June 2021) to support short term liquidity; and
  • modifying the interest coverage covenant after the current waiver expires on 1 January 2022.

The company is very pleased with the support provided by all eight banks which has resulted in $688 million of facilities being extended by between 7-19 months from the original maturity dates and the interest coverage covenant being converted from the previous 1.5x EBIT-based measure (excluding revaluations) to a new EBITDAbased measure (also excluding revaluations) that steps up progressively broadly in line with the anticipated recovery in international passengers. The EBITDA-based interest coverage covenant will start at 2.0x for calendar 2022, rising to 2.5x for calendar 2023 and settling at 3.0x for calendar 2024 onwards. As previously, there will be two measurement dates each year, these being 30 June and 31 December. The company forecasts that it will exceed the new covenant at the first measurement date on 30 June 2022.

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 2021 include capitalised interest of $2.4 million (2020: $5.0 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

As a result of the impact of COVID-19, the independent valuations of the group’s investment property portfolio at 30 June 2020 were reported on the basis of ‘material valuation uncertainty’, meaning less certainty and a higher degree of caution should be applied. As at 30 June 2021, the ‘material valuation uncertainty’ clause has been removed on all of the investment property valuations due to the strength of the property market and recent sales evidence, except for those relating to the two hotels in the group’s retail and service investment property portfolio. The valuers have advised that the longer term impact of COVID-19 on the hotel sector is yet to be fully known so the valuations are subject to ‘material valuation uncertainty’ and that less certainty should be attached to their valuations than would normally be the case. The total carrying value of the two hotels is $67.5 million.

All valuations have been reviewed by the group’s property management team, which has determined the valuations to be appropriate as at 30 June 2021.

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.

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 $301.5 million (30 June 2020: $279.3 million);
  • Industrial carried at $1,709.4 million (30 June 2020: $1,250.9 million); and
  • Other investment property carried at $216.2 million (30 June 2020: $193.8 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 $31.5 million at 30 June 2021 (2020: $91.9 million).

(b) Investment property

The group had contractual obligations to either purchase, develop, repair or maintain investment property for $43.5 million at 30 June 2021 (2020: $64.6 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 30 years (2020: one month and 31 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

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 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)