New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

Real Estate Reflections Delivering the Goods


The listed property vehicle (LPV) sector delivered a solid end to a tough year with six LPVs delivering robust FY21 results. While full year results still featured the impact of lockdown, there had clearly been a pick-up in 2H activity with solid leasing outcomes as well as sustained occupancy and lease term. Industrial remains the strongest sub-sector, CBD office was solid. and a significant rebound in consumption has seen retail stabilise. While financial results and operational outcomes were generally better than we expected, dividend guidance was weaker with strategic initiatives and moves to better cash cover dividend payments weighed on distributions. Balance sheet capacity is being deployed but a move to higher sector gearing is a one-off boost to earnings. We continue to favour&nbsp;&nbsp;Argosy (ARG), Precinct Properties (PCT), and Asset Plus (APL) on relative valuation grounds, and Stride (SPG) for its transformation into a capital light asset manager.



Solid FY21 results...


Six&nbsp;LPVs&nbsp;reported FY21 results in May. While results were slightly above expectations our FY22 forecast revisions were more mixed.&nbsp;Despite the worst fears when the pandemic hit, portfolio metrics have held up well a year on from&nbsp;lockdown&nbsp;and&nbsp;most&nbsp;LPVs&nbsp;had&nbsp;solid 2H21 leasing success. Industrial remains robust, CBD office solid, and retail has rebounded, however, fringe CBD office is seeing some challenges. Development and acquisition activity is seeing balance sheet capacity fill up.


...but distribution guidance weaker


Dividend guidance generally undershot consensus expectations. This was largely due to strategic initiatives; 1) KPG announced it will divest its retail assets and recycle the proceeds into redevelopment of its mixed-use assets as well as the sooner than expected start of its greenfield development at Drury, 2) SPG expects to spin-off its office fund in FY22, and 3) IPL acquired a development site vs. market expectations of a stabilised asset.


LPVs&nbsp;flat but outperforming the broader market


The NZ LPV sector had another flat month in May but outperformed the broader market with the NZX50G down -3.2%. The best performing LPVs were ARG and SPG while Kiwi Property Group (KPG), and PCT were the laggards. KPG's underperformance likely reflected a rebasing of dividend expectations post its result. Year-to-date, SPG and KPG are the only two LPVs that have delivered positive returns, with valuation pressure from rising interest rates weighing on the sector.​​​​​​​



Rohan Koreman-Smit, CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds, CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Real Estate Reflections: Delivering the Goods

Real Estate Reflections Focus Shifts to Fundamentals


Bond yields have dictated LPV sector performance year-to-date, however, with six LPVs reporting FY21 results in May, we expect fundamentals to come back into focus. Results will still feature the impact of lockdown, as such 2H run rates and outlook commentary/guidance (which we expect the majority of the LPVs to provide given more stable operating conditions) will be our focal point. We expect portfolio outcomes to be mixed given the varied impacts on each sub-sector, but modest given the quality of listed portfolios. Longer-term, retail and office markets have the most open questions as to the structural impacts of the pandemic; has it accelerated the shift of retail online (likely in our view), has working from home reduced office demand (we believe modestly but not for quality buildings).&nbsp;



May reporting to bring&nbsp;fundamentals&nbsp;back into focus


Six&nbsp;LPVs&nbsp;will report FY21 results in May with outcomes still featuring&nbsp;the impact of&nbsp;lockdown. We expect portfolio fundamentals to be mixed with 1) retail rents and occupancy&nbsp;reset downwards but with the outlook more stable due to robust current trading conditions, 2) office rents pressured by&nbsp;impact of working from home induced sub-leasing particularly in A-grade assets, and 3) strong demand for logistics space continuing to&nbsp;underpin industrial rents.&nbsp;


Cap rates catch up


Asset plus (APL), Goodman (GMT),&nbsp;Investore&nbsp;(IPL), and Kiwi Property (KPG) have now all provided FY21 valuation updates. A consistant theme has been 1) strong industrial and large format retail valuations, with those assets being viewed as pandemic proof, 2) upward movement in office valuations despite working from home concerns, and 3) flat retail valuations despite solid retail sales.&nbsp;SPG and ARG do not typically release&nbsp;valuation updates prior to results but we expect solid results from each given their exposure of industrial (ARG 43% of the portfolio, and SPG 22%) and office (ARG 42% and SPG 42%).&nbsp;


LPVs&nbsp;flat but&nbsp;underperform&nbsp;the broader market


The NZ LPV sector was up +1.2% in April, slightly underperforming the broader market with the NZX50G up +1.4%. The best performing LPVs were NZ Rural Land Company (NZL) which announced a large acquisition and Argosy (ARG), while Asset Plus (APL) was the largest underperformer, with a flat FY21 portfolio valuation outcome likely weighing on the stock. Year-to-date KPG is the only LPV that has delivered positive returns, with valuation pressure from rising interest rates weighing on the rest of the sector.



Rohan Koreman-Smit, CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds, CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Real Estate Reflections: Focus Shifts to Fundamentals

Precinct Properties New Zealand / Equity Bottom-Up

Real Estate Reflections Internalisations — Have They Delivered?


The listed property vehicles (LPVs) were flat and underperformed the broader S&amp;P/NZX 50 in March, with higher bond yields continuing to weigh on investor sentiment. Precinct's (PCT) internalisation of its management contract was the most notable event in the sector this month and in this report we review the operating cost performance of other internalised LPVs. Our analysis suggests that shareholder value has been delivered, however, benefits vs. prior externally managed structures are slowly being eroded by cost creep. Also, the pricing of PCT's internalisation highlights the value of management contracts in the current market with Stride Property Group (the only LPV with an asset management platform of scale) being the key beneficiary in the sector.&nbsp;



LPVs&nbsp;flat but&nbsp;underperform&nbsp;the broader market


The NZ LPV sector was&nbsp;up +0.4% in March&nbsp;supported by distributions (the capital index was down -0.2%).&nbsp;The best performing&nbsp;LPVs&nbsp;were Kiwi Property Group (KPG) and Goodman Property Trust (GMT), both of which provided portfolio valuation&nbsp;updates ahead of their full year results.&nbsp;​​​​​​​LPVs&nbsp;underperformed the broader market with the NZX50G up +2.7% in March. We believe this&nbsp;underperformance&nbsp;partly reflects continued pressure from higher long bond yields.&nbsp;


Have recent internalisations delivered?


The most significant announcement from the sector this month was PCT's NZ$215m internalisation of its management contract, which is expected to result in an annual cash saving of NZ$14.6m. This continues a trend which has seen a number of LPVs buyout and cancel their external management agreements over the last decade, with half of the sector now internally managed. Our analysis of past internalisations suggest they have generated shareholder value above that of the initial payment but cost increases are slowly eroding the initial benefits over time. To date, lower debt costs have helped to offset this cost creep which has reduced operating leverage at the EBIT level.&nbsp;


Could we see more internalisations?


We do not believe the relatively high cost of PCT's internalisation will spur other LPVs to follow a similar path, with the managers of the remaining externally managed LPVs focussed on expanding their real estate asset management businesses. However, we do highlight that SPG is the owner of a number of management contracts which we estimate are potentially worth up to 27cps, based on the PCT transaction metrics, on top of its NZ$2.01 NTA.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Real Estate Reflections: Internalisations — Have They Delivered?

Real Estate Reflections The Long and the Short of it


The listed property vehicles (LPVs) and broader S&amp;P/NZX 50 were both down in February, with fears of inflation and rising bond yields weighing on investor sentiment. While rising bond yields make LPV dividend yields relatively less attractive, banks continue to offer suppressed deposit rates and upcoming marginal tax rate changes increase the attractiveness of the portfolio investment entity (PIE) structure. Additionally, LPVs are finally delivering some DPS growth with those that reported in the month on track to deliver +2–3%. That said, many LPVs continue to trade at significantly tighter earnings spreads vs. their history. Further lifts in bond yields remain a headwind for the sector, particularly if the short end of the yield curve begins to rise.



LPV sector down, but outperforms broader market


The NZ LPV sector was down -4.3% in February with higher bond yields likely causing some selling of the yield driven sector. This was +2.6% vs. the NZX50G and partly reflects idiosyncrasies that have seen large declines in some sectors (clean energy ETFs come to mind). The best performing LPV was APL with a solid share price reaction to the sale of its Eastgate shopping mall at a discount to book value. Industrial names PFI and GMT also held up well, while KPG saw the largest declines.&nbsp;


Long bond yields have greater bearing on LPV performance


10-year bond yields have almost doubled year-to-date and are now c.1.9%. Contraction in LPV sector yield spreads has cushioned the valuation downside which we believe is partly driven by a steep yield curve, giving investors few short term yield options with&nbsp;bank term deposits&nbsp;&lt;1% across the range. While low short term rates may be providing&nbsp;some support for now, history suggests that this is&nbsp; likely&nbsp;temporary. Historically, LPV sector performance is correlated to changes in long bond yields, however, there is little (if any) correlation with changes in bank deposit rates. In summary, long bond yields will continue to reign supreme over NZ LPV sector valuations in our view.


Solid results and guidance for growth


Valuation challenges aside, recent results from Property for Industry (PFI), Precinct Properties (PCT) and Vital Healthcare (VHP) were solid with continued strong portfolio metrics, incremental rent growth, low gearing, and development upside. Strong direct market demand for assets is providing an opportunity for LPVs to remix portfolios with all three names who reported recently selling assets at or above book value. Guidance was solid and was maintained or increased with DPS guided to grow 2–3% yoy.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Real Estate Reflections: The Long and the Short of It

Property For Industry FY20 Result&nbsp;— Sheds at Capacity

UNDERPERFORM
Property For Industry (PFI) reported a solid result slightly above our expectations. However, PFI is now one of the most expensive&nbsp;LPVs&nbsp;in the market. While we are attracted to the defensive nature of industrial property and consistent&nbsp;strategic&nbsp;execution by management, we believe this is more than priced in given its current 30% premium to NTA and one of the slimmest gross yields in the sector, reflecting its&nbsp;tightest&nbsp;spread to bonds on record. We believe this leaves little room for relative&nbsp;upside vs. the sector and downgrade our rating to UNDERPERFORM.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;AFFO&nbsp;+1.8%/-0.4%/-4.6% in&nbsp;FY21/FY22/FY23 reflecting the sale of&nbsp;Carlaw&nbsp;Park and increased interest costs&nbsp;
Target price:&nbsp;Down -3cps to NZ$2.70
Rating:&nbsp;Downgraded to UNDERPERFORM from NEUTRAL



Industrial consistency


PFI delivered another solid result, in line with our expectations. AFFO was slightly ahead of forecasts, boosted by lower than expected tax and interest expenses. Corporate costs increased by 14% in the period as PFI hired additional staff to manage increasing compliance requirements and ESG ambitions. Maintenance capex fell -34% in the period due to COVID-19 related stoppages, although this was offset by increased tenant incentives due to activity at Carlaw Park prior to its sale. Portfolio fundamentals remain strong with 99.4% occupancy, WALT of 5.3 years, and pro-forma gearing of 30% sits comfortably below its 35% target. PFI guided to FY21 DPS of 7.85–7.90cps based on 95–100% payout of AFFO.


Transition nearing completion


Following the divestment of&nbsp;Carlaw&nbsp;Park, with settlement expected in December 2021, PFI will be 98% weighted to industrial property and have pro-forma gearing of 26.5%. PFI is nearing completion on its strategic initiative to become a pure-play industrial LPV, with an increased weighting in Auckland. We expect near-term portfolio activity to be driven by acquisitions rather than redevelopments, given its fully leased portfolio has limited near-term opportunities for larger scale redevelopments. Deploying NZ$100m would lift gearing into the low 30%'s.


Valuation&nbsp;


We make changes to our risk free rate (from 1.3% to 2.3%) and market risk premium (from 6.0% to 5.5%), consistent with our strategy report, Still a One Way Bet? — Updated WACC Assumptions, published 12 February 2021. The net impact of this is a +47bp increase in our WACC which, along with our earnings changes, lowers our DCF by c.5%. This impact is broadly offset by a 5% lift in our NAV driven by higher property values.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Property For Industry: FY20 Result — Sheds at Capacity

New Zealand

Property for Industry Limited is a property company that invests in New Zealand industrial properties. The Company's property portfolio includes sites in Auckland, Hamilton, Tauranga, Wellington and Christchurch.

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Property For Industry (PFI NZ)

Real Estate Reflections: Delivering the Goods

Real Estate ReflectionsDelivering the Goods The listed property vehicle (LPV) sector delivered a solid end to a tough year with six LPVs...

Forsyth Barr

Real Estate Reflections: Focus Shifts to Fundamentals

Real Estate ReflectionsFocus Shifts to Fundamentals Bond yields have dictated LPV sector performance year-to-date, however, with six LPVs...

Forsyth Barr

Real Estate Reflections: Internalisations — Have They Delivered?

Real Estate ReflectionsInternalisations — Have They Delivered? The listed property vehicles (LPVs) were flat and underperformed the broader...

Forsyth Barr

Real Estate Reflections: The Long and the Short of It

Real Estate ReflectionsThe Long and the Short of it The listed property vehicles (LPVs) and broader S&P/NZX 50 were both down in February,...

Forsyth Barr

Property For Industry: FY20 Result — Sheds at Capacity

Property For IndustryFY20 Result — Sheds at Capacity UNDERPERFORM Property For Industry (PFI) reported a solid result slightly above our...

Forsyth Barr

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