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

Goodman Property Trust / Equity Bottom-Up

<h2>Goodman Property Trust<br>Cap Rate Catch Up</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Goodman Property Trust (GMT) has announced strong 31 March 2021 valuations, with capitalisation rate compression of -50bps over the past six months (-70bp over FY21) lifting asset values by approximately NZ$415m (+12.5%) to NZ$3.8bn. The revaluations lift GMT’s NTA per share by +30cps (c.+16%) to 2.12cps and sees NTA largely catch-up to levels implied by its share price. While the revaluations are clearly a positive outcome, it does lift GMT's external management fees, dampening already slow earnings growth. We retain our UNDERPERFORM, with GMT trading on the sector-low dividend yield and delivering modest growth.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21–23E AFFO -0.1%/-1.7%/-1.6%</li>
<li><strong>Target price</strong>:&nbsp;-10cps to NZ$2.20 reflecting a higher cost of capital in our DCF, and slightly lower earnings</li>
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<h3>Strong revaluations, ahead of peers</h3>
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<p>The strong revaluations are ahead of expectations, especially when compared to Property for Industry (PFI) which recorded 25bps of capitalisation rate compression in the second half of CY20. This suggests strong market evidence in the first three months of 2021 and that valuers are looking through recent movements in bond yields. Anecdotes suggest that the direct market for industrial property remains strong, and is particularly competitive when assets are in lower price tiers, have long leases, and strong tenant covenants. Additionally, the leasing market is equally buoyant with agents yet to see any meaningful escalation in tenant incentives.</p>
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<h3>Management fees dilute revaluation celebrations</h3>
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<p>We estimate that&nbsp;GMT's&nbsp;NZ$415m portfolio revaluation&nbsp;has&nbsp;lifted&nbsp;base management fees by NZ$1.7m. This equates to 1.8%&nbsp;of our prior estimates for FY22E AFFO. As the capitalisation rate of the portfolio falls a higher portion of the portfolio's net operating income (NOI) is consumed by management fees. Given the portfolio's capitalisation rate of 4.7% (1H21: 5.2%), and the effective base management fee of 0.41% of portfolio assets, c.8.8% of NOI is required to pay management fees&nbsp;(vs. 1H21: c.7.8%).</p>
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<h3>Earnings tinkered, UNDERPERFORM remains the call</h3>
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<p>We have made small changes to our earnings forecasts in FY22/FY23, reflecting higher base management fees, as discussed above. We have also made changes to our cost of capital inputs, consistent with our strategy report, Still a One Way Bet? — Updated WACC Assumptions, published 12 February 2021, which has resulted in a +48bp uplift in our WACC. While we are attracted to GMT's high quality portfolio, management capability, and exposure to structural tailwinds in the industrial sector, we see better relative value across the sector given GMT's sector-low dividend yield and limited earnings growth.&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>Ashton Olds CFA</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
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Goodman Property Trust Cap Rate Catch Up

UNDERPERFORM
Goodman Property Trust (GMT) has announced strong 31 March 2021 valuations, with capitalisation rate compression of -50bps over the past six months (-70bp over FY21) lifting asset values by approximately NZ$415m (+12.5%) to NZ$3.8bn. The revaluations lift GMT’s NTA per share by +30cps (c.+16%) to 2.12cps and sees NTA largely catch-up to levels implied by its share price. While the revaluations are clearly a positive outcome, it does lift GMT's external management fees, dampening already slow earnings growth. We retain our UNDERPERFORM, with GMT trading on the sector-low dividend yield and delivering modest growth.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY21–23E AFFO -0.1%/-1.7%/-1.6%
Target price:&nbsp;-10cps to NZ$2.20 reflecting a higher cost of capital in our DCF, and slightly lower earnings



Strong revaluations, ahead of peers


The strong revaluations are ahead of expectations, especially when compared to Property for Industry (PFI) which recorded 25bps of capitalisation rate compression in the second half of CY20. This suggests strong market evidence in the first three months of 2021 and that valuers are looking through recent movements in bond yields. Anecdotes suggest that the direct market for industrial property remains strong, and is particularly competitive when assets are in lower price tiers, have long leases, and strong tenant covenants. Additionally, the leasing market is equally buoyant with agents yet to see any meaningful escalation in tenant incentives.


Management fees dilute revaluation celebrations


We estimate that&nbsp;GMT's&nbsp;NZ$415m portfolio revaluation&nbsp;has&nbsp;lifted&nbsp;base management fees by NZ$1.7m. This equates to 1.8%&nbsp;of our prior estimates for FY22E AFFO. As the capitalisation rate of the portfolio falls a higher portion of the portfolio's net operating income (NOI) is consumed by management fees. Given the portfolio's capitalisation rate of 4.7% (1H21: 5.2%), and the effective base management fee of 0.41% of portfolio assets, c.8.8% of NOI is required to pay management fees&nbsp;(vs. 1H21: c.7.8%).


Earnings tinkered, UNDERPERFORM remains the call


We have made small changes to our earnings forecasts in FY22/FY23, reflecting higher base management fees, as discussed above. We have also made changes to our cost of capital inputs, consistent with our strategy report, Still a One Way Bet? — Updated WACC Assumptions, published 12 February 2021, which has resulted in a +48bp uplift in our WACC. While we are attracted to GMT's high quality portfolio, management capability, and exposure to structural tailwinds in the industrial sector, we see better relative value across the sector given GMT's sector-low dividend yield and limited earnings growth.&nbsp;



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



Goodman Property Trust: Cap Rate Catch Up