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>Fickle Wind in its Sails, Downgrade to NEUTRAL</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Argosy's&nbsp;(ARG) recent strong performance has been largely driven by suggestions it will enter the FTSE EPRA NAREIT Global Real Estate Indexes. The index changes are announced 1 September 2021, enacted on the 17 September 2021, with index demand continuing to underpin ARG price for some time. While index inclusion will likely result in some cost of capital benefits&nbsp;we&nbsp;view ARG as fairly valued at current levels, trading on a 5.6% gross yield vs. the sector average of 5.3% and a +10% premium to its NTA vs. the sector average of +6%. We lower our rating from OUTPERFORM to NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Target price</strong>:&nbsp;+3cps to NZ$1.60 reflecting stronger industrial asset valuations</li>
<li><strong>Rating</strong>:&nbsp;Downgrade from OUTPERFORM to NEUTRAL</li>
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<h3>Valuation fair</h3>
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<p>Mark-to-market&nbsp;ARG's&nbsp;portfolio based on pure play listed comps PFI, PCT, and IPL suggests an NTA of NZ$1.73/share. We see this as optimistic given the lower quality of&nbsp;ARG's&nbsp;office portfolio vs. PCT, as well as upcoming office vacancy and redevelopment risk in Auckland. ARG&nbsp;is currently trading at a 390bp premium to the 10-year bond yield vs. its historical premium of 510bp and&nbsp;a&nbsp;+10% premium to its NTA vs. its historical premium of +1%.&nbsp;It is also&nbsp;trading in line with the sector average on yield and premium to NTA.</p>
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<h3>Solid portfolio underpinned by industrial</h3>
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<p>ARG's&nbsp;portfolio has retained strong operating metrics&nbsp;with 99% occupancy, WALT of 5.5 years and like-for-like rent growth of 6.3% in FY21. Over the last five&nbsp;years ARG has pivoted its portfolio towards industrial and away from retail. ARG is now c.50% industrial, a sub-sector which continues to see strong tenant demand, low vacancy, and lower yields driven by investor demand.&nbsp;PFI's&nbsp;recent valuation update&nbsp;saw a -85bp cap rate compression over the 6-months to June, suggesting there is further NTA upside for ARG.</p>
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<h3>More development coming</h3>
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<p>ARG expects value-add opportunities within the portfolio will aid in reaching its NZ$3b of assets by 2031 target and has identified NZ$337m of assets that have potential, including NZ$276m of green projects. This includes Auckland office projects on Carlton Gore Rd. Construction costs are rising and have impacted the current 8–14 Willis St development. ARG has recognised that development will become a greater part of the business going forward and has established a development team.&nbsp;</p>
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<div><strong>Rohan Koreman-Smit, CFA</strong></div>
<div><a href="mailto:rohan.koreman-smit@forsythbarr.co.nz" target="_blank" rel="noopener">rohan.koreman-smit@<wbr>forsythbarr.co.nz</a></div>
<div>+64 9 368 0085</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Argosy Fickle Wind in its Sails, Downgrade to NEUTRAL

NEUTRAL
Argosy's&nbsp;(ARG) recent strong performance has been largely driven by suggestions it will enter the FTSE EPRA NAREIT Global Real Estate Indexes. The index changes are announced 1 September 2021, enacted on the 17 September 2021, with index demand continuing to underpin ARG price for some time. While index inclusion will likely result in some cost of capital benefits&nbsp;we&nbsp;view ARG as fairly valued at current levels, trading on a 5.6% gross yield vs. the sector average of 5.3% and a +10% premium to its NTA vs. the sector average of +6%. We lower our rating from OUTPERFORM to NEUTRAL.


What's changed?&nbsp;



Target price:&nbsp;+3cps to NZ$1.60 reflecting stronger industrial asset valuations
Rating:&nbsp;Downgrade from OUTPERFORM to NEUTRAL



Valuation fair


Mark-to-market&nbsp;ARG's&nbsp;portfolio based on pure play listed comps PFI, PCT, and IPL suggests an NTA of NZ$1.73/share. We see this as optimistic given the lower quality of&nbsp;ARG's&nbsp;office portfolio vs. PCT, as well as upcoming office vacancy and redevelopment risk in Auckland. ARG&nbsp;is currently trading at a 390bp premium to the 10-year bond yield vs. its historical premium of 510bp and&nbsp;a&nbsp;+10% premium to its NTA vs. its historical premium of +1%.&nbsp;It is also&nbsp;trading in line with the sector average on yield and premium to NTA.


Solid portfolio underpinned by industrial


ARG's&nbsp;portfolio has retained strong operating metrics&nbsp;with 99% occupancy, WALT of 5.5 years and like-for-like rent growth of 6.3% in FY21. Over the last five&nbsp;years ARG has pivoted its portfolio towards industrial and away from retail. ARG is now c.50% industrial, a sub-sector which continues to see strong tenant demand, low vacancy, and lower yields driven by investor demand.&nbsp;PFI's&nbsp;recent valuation update&nbsp;saw a -85bp cap rate compression over the 6-months to June, suggesting there is further NTA upside for ARG.


More development coming


ARG expects value-add opportunities within the portfolio will aid in reaching its NZ$3b of assets by 2031 target and has identified NZ$337m of assets that have potential, including NZ$276m of green projects. This includes Auckland office projects on Carlton Gore Rd. Construction costs are rising and have impacted the current 8–14 Willis St development. ARG has recognised that development will become a greater part of the business going forward and has established a development team.&nbsp;



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





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



Argosy: Fickle Wind in Its Sails, Downgrade to NEUTRAL

Argosy Property

Argosy: Fickle Wind in Its Sails, Downgrade to NEUTRAL