New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Argosy<br>1H22 Result&nbsp;— Plain Sailing</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Argosy&nbsp;(ARG) delivered a solid 1H22 result with AFFO of NZ$25.5m, ahead of expectations due to lower tenant incentives, whilst net rental income was up on the prior year due to lower COVID-19 rental&nbsp;abatements. ARG reconfirmed FY22 dividend guidance of 6.55cps, which we estimate will represent a 114% AFFO payout ratio due to ongoing façade repairs at 7 Waterloo Quay (7WQ). ARG is trading broadly in line with the mid-point of peers, a 6.2% gross yield, and a modest discount to book value. We retain NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22/23/24 AFFO +10.8%/+1.2%/+0.5%, with FY22 largely reflecting lower incentives paid. DPS unchanged.</li>
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<h3>Solid result</h3>
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<p>ARG's result came in ahead of our expectations with the AFFO beat largely driven by lower tenant incentives and the -18% drop on the pcp due to the well flagged façade repairs at 7WQ. Portfolio metrics remained healthy, with 98.7% occupancy, a 5.3 year weighted average lease term (WALT) and like-for-like rental growth of 2.8% (comprised of structured increases of +2.8% and releasing of +3.3%, partially offset by a slight increase in vacancy/downtime). The Wellington Office market is strong with c.9% under renting in ARG's portfolio and the leasing up of vacant space at 7WQ and Stats NZ house development. ARG also believes its Auckland Industrial portfolio is c.4% under rented.</p>
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<h3>Developments</h3>
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<p>With Stats NZ house due to be completed at the end of FY22,&nbsp;ARG's&nbsp;development activity switches to a number of smaller projects (i.e Bell Ave, Unity Drive, and Carlton Gore Rd).&nbsp;ARG said there has been strong tenant demand for its 105 Carlton Gore Rd redevelopment, and flagged that its 101 Carlton Gore Rd asset will essentially be a copy of 105 once done. Despite demand&nbsp;the redevelopments are not cheap, with an estimated cost of NZ$35m each vs. current book values of mid-to-high NZ$20m&nbsp;and yield on cost of 5.3%. As such, development profits and incremental yields are modest. Including the sale of 25&nbsp;Nugent&nbsp;Street, we estimate gearing remains comfortable&nbsp;and will lift towards the middle of&nbsp;ARG's&nbsp;target range.</p>
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<h3>Earnings adjustments</h3>
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<div id="m_2458403583255843384iqkj6">
<p>We have revised our FY22 AFFO +10.8% reflecting lower incentives, and we have also incorporated NZ$1.5m of COVID-19 related rental abatements which we did not previously have in our numbers. Our FY23/24 AFFO estimates both also increase slightly, and we incorporated the sale of 25 Nugent St into our FY22 numbers. We have lowered our tenant incentives (both amortisation and actual paid) with ARG now capitalising to developments where appropriate.</p>
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Argosy 1H22 Result&nbsp;— Plain Sailing

NEUTRAL
Argosy&nbsp;(ARG) delivered a solid 1H22 result with AFFO of NZ$25.5m, ahead of expectations due to lower tenant incentives, whilst net rental income was up on the prior year due to lower COVID-19 rental&nbsp;abatements. ARG reconfirmed FY22 dividend guidance of 6.55cps, which we estimate will represent a 114% AFFO payout ratio due to ongoing façade repairs at 7 Waterloo Quay (7WQ). ARG is trading broadly in line with the mid-point of peers, a 6.2% gross yield, and a modest discount to book value. We retain NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY22/23/24 AFFO +10.8%/+1.2%/+0.5%, with FY22 largely reflecting lower incentives paid. DPS unchanged.



Solid result


ARG's result came in ahead of our expectations with the AFFO beat largely driven by lower tenant incentives and the -18% drop on the pcp due to the well flagged façade repairs at 7WQ. Portfolio metrics remained healthy, with 98.7% occupancy, a 5.3 year weighted average lease term (WALT) and like-for-like rental growth of 2.8% (comprised of structured increases of +2.8% and releasing of +3.3%, partially offset by a slight increase in vacancy/downtime). The Wellington Office market is strong with c.9% under renting in ARG's portfolio and the leasing up of vacant space at 7WQ and Stats NZ house development. ARG also believes its Auckland Industrial portfolio is c.4% under rented.


Developments


With Stats NZ house due to be completed at the end of FY22,&nbsp;ARG's&nbsp;development activity switches to a number of smaller projects (i.e Bell Ave, Unity Drive, and Carlton Gore Rd).&nbsp;ARG said there has been strong tenant demand for its 105 Carlton Gore Rd redevelopment, and flagged that its 101 Carlton Gore Rd asset will essentially be a copy of 105 once done. Despite demand&nbsp;the redevelopments are not cheap, with an estimated cost of NZ$35m each vs. current book values of mid-to-high NZ$20m&nbsp;and yield on cost of 5.3%. As such, development profits and incremental yields are modest. Including the sale of 25&nbsp;Nugent&nbsp;Street, we estimate gearing remains comfortable&nbsp;and will lift towards the middle of&nbsp;ARG's&nbsp;target range.


Earnings adjustments


We have revised our FY22 AFFO +10.8% reflecting lower incentives, and we have also incorporated NZ$1.5m of COVID-19 related rental abatements which we did not previously have in our numbers. Our FY23/24 AFFO estimates both also increase slightly, and we incorporated the sale of 25 Nugent St into our FY22 numbers. We have lowered our tenant incentives (both amortisation and actual paid) with ARG now capitalising to developments where appropriate.


Argosy Property

Argosy: 1H22 Result — Plain Sailing