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>FY22 Result — The Show Can't Go On</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Goodman Property Trust (GMT) reported FY22 cash earnings +4.5% on the prior year and in line with our expectations. GMT's guidance for FY23 cash earnings of 6.9cps and DPS of 5.9cps was ahead of our expectations and we have adjusted our forecasts accordingly. Under-renting within GMT's portfolio underpins near-term growth. While the topline growth outlook is solid, asset valuations are more uncertain. Higher interest rates are pressuring GMT's sector low capitalisation rates, which makes development (a key plank of GMT's growth strategy) more challenging. GMT is trading materially ahead of the sector with a 29x one year forward P/E and on the lowest gross yield of 4.0%. UNDERPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY23–25 DPS +4%/+4%/+8% reflecting the capture of under-renting, this represents a CAGR of +4% over the period.</li>
<li><strong>Target price</strong>:&nbsp;+5cps to NZ$2.02</li>
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<h3>Industrial rent growth remains healthy</h3>
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<p>GMT reported +5.1% like-for-like underlying rent growth and +11.4% rent growth on leasing deals, highlighting strong occupier demand for industrial space. GMT believes its portfolio is now 10% under-rented (or annual rent of NZ$17.9m). GMT has pre agreed +11% FY23 rent increases on&nbsp;11% of its leases and a further 26% are subject&nbsp;to either CPI or market escalations.&nbsp;</p>
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<h3>Hard to make development and acquisitions stack up</h3>
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<p>After pausing the office and&nbsp;carpark&nbsp;project at&nbsp;Highbrook, GMT currently has NZ$426m of developments in progress that are 98% pre-leased and expected to deliver a 5.0% yield on cost. The economics of development are shifting rapidly, with (1) build costs rising 20–25% over the last six months and (2) uncertainty around the valuation of the completed asset.&nbsp;GMT's&nbsp;share price currently implies a portfolio cap rate of&nbsp;+90bp to 5.1%, which suggests potential for negative revaluations on its current developments. This environment makes it&nbsp;challenging for GMT to progress acquisitions&nbsp;and new developments. Industrial land values are likely softening.</p>
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<h3>Great industrial but still expensive</h3>
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<p>Rising interest rates continue to pressure valuation metrics. Long bond yields are back to 2015 levels. On an earnings yield basis&nbsp;GMT's&nbsp;spread to 10 year bond yields is +40bp compared to its 10 year average of +300bps. With industrial cap rates at record lows uncertainty around the book value of assets is high. Applying the terminal cap rates and discount rates used in&nbsp;GMT's&nbsp;FY15 valuations to FY22&nbsp;market rent and growth assumptions implies cap rate expansion of +140–250bps. While, this likely overstates the potential movement in asset yields, given risk premiums that investors are prepared to pay for industrial property has clearly tightened, it highlights the wide range of potential outcomes that sustained higher interest rates could deliver.</p>
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Goodman Property Trust FY22 Result — The Show Can't Go On

UNDERPERFORM
Goodman Property Trust (GMT) reported FY22 cash earnings +4.5% on the prior year and in line with our expectations. GMT's guidance for FY23 cash earnings of 6.9cps and DPS of 5.9cps was ahead of our expectations and we have adjusted our forecasts accordingly. Under-renting within GMT's portfolio underpins near-term growth. While the topline growth outlook is solid, asset valuations are more uncertain. Higher interest rates are pressuring GMT's sector low capitalisation rates, which makes development (a key plank of GMT's growth strategy) more challenging. GMT is trading materially ahead of the sector with a 29x one year forward P/E and on the lowest gross yield of 4.0%. UNDERPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;FY23–25 DPS +4%/+4%/+8% reflecting the capture of under-renting, this represents a CAGR of +4% over the period.
Target price:&nbsp;+5cps to NZ$2.02



Industrial rent growth remains healthy


GMT reported +5.1% like-for-like underlying rent growth and +11.4% rent growth on leasing deals, highlighting strong occupier demand for industrial space. GMT believes its portfolio is now 10% under-rented (or annual rent of NZ$17.9m). GMT has pre agreed +11% FY23 rent increases on&nbsp;11% of its leases and a further 26% are subject&nbsp;to either CPI or market escalations.&nbsp;


Hard to make development and acquisitions stack up


After pausing the office and&nbsp;carpark&nbsp;project at&nbsp;Highbrook, GMT currently has NZ$426m of developments in progress that are 98% pre-leased and expected to deliver a 5.0% yield on cost. The economics of development are shifting rapidly, with (1) build costs rising 20–25% over the last six months and (2) uncertainty around the valuation of the completed asset.&nbsp;GMT's&nbsp;share price currently implies a portfolio cap rate of&nbsp;+90bp to 5.1%, which suggests potential for negative revaluations on its current developments. This environment makes it&nbsp;challenging for GMT to progress acquisitions&nbsp;and new developments. Industrial land values are likely softening.


Great industrial but still expensive


Rising interest rates continue to pressure valuation metrics. Long bond yields are back to 2015 levels. On an earnings yield basis&nbsp;GMT's&nbsp;spread to 10 year bond yields is +40bp compared to its 10 year average of +300bps. With industrial cap rates at record lows uncertainty around the book value of assets is high. Applying the terminal cap rates and discount rates used in&nbsp;GMT's&nbsp;FY15 valuations to FY22&nbsp;market rent and growth assumptions implies cap rate expansion of +140–250bps. While, this likely overstates the potential movement in asset yields, given risk premiums that investors are prepared to pay for industrial property has clearly tightened, it highlights the wide range of potential outcomes that sustained higher interest rates could deliver.


Goodman Property Trust: FY22 Result — The Show Can't Go On