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>Investore<br>Too Much of a Good Thing</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>Investore&nbsp;(IPL) has been the beneficiary of increased demand for&nbsp;large format retail (LFR) property, stemming from the low interest rate environment and a lower risk premium attributed to the LFR sub-sector given its resilience against COVID-19&nbsp;lockdowns. This has resulted in strong capitalisation rate compression for&nbsp;IPL's&nbsp;portfolio, lifting asset values substantially in FY21 and providing sizable share price gains for shareholders. Unfortunately, strong demand for the asset class has inhibited&nbsp;IPL's&nbsp;ability to deploy capital it raised in April 2020. With valuation upside tempered by the impact of higher interest rates on our DCF, and earnings growth contingent on acquisitions in a competitive market, we downgrade our rating to NEUTRAL.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/201/424/original/image_97107719821618796350293.png?1618796353" class="editor-image img-responsive" data-smartkarma-image-id="201424"></figure>
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<h3>What's changed?&nbsp;</h3>
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<div id="m_-5768840996529099872iwrmo3-2-2-2">
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<li><strong>Earnings:</strong>&nbsp;FY21–23 AFFO -0.5%/-2.8%/-0.7% and DPS 0.0%/-1.4%/-0.7%</li>
<li><strong>Target price</strong>:&nbsp;-15cps to NZ$2.20</li>
<li><strong>Rating</strong>:&nbsp;Downgrade from OUTPERFORM to NEUTRAL</li>
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<h3>Strong demand for LFR has driven cap rate compression</h3>
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<div id="m_-5768840996529099872ik10uf-2-2">
<p>Low interest rates have driven demand for yield assets and properties, with 'essential' tenants viewed as lower risk post the pandemic lockdown. Given their relatively small size, strong tenant covenants and long WALT, stand alone LFR/supermarket assets have found particular favour with syndicates and high net worth individuals. IPL has been a beneficiary of this demand, announcing a 2H21 revaluation gain of +5.9% or NZ$57.5m, largely attributable to a -30bp decline in its portfolio average cap rate to 5.23%. We estimate that 2H21 valuation gains add +16cps to NTA which is now NZ$2.09/share.&nbsp;</p>
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<h3>This makes it difficult to deploy capital</h3>
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<div id="m_-5768840996529099872ib5c3l-2-2">
<p>IPL's&nbsp;April 2020 capital raise reduced gearing from 42% to 31% and provided headroom for acquisitions. Based on its current debt facilities, IPL currently has NZ$168m of acquisition capacity. By way of example, we expect an NZ$50m acquisition would equate&nbsp;to a c.5% lift in earnings, all else equal. While this prospective earnings accretion is attractive, the ability to deploy capital is increasingly difficult given the competitive environment. With no transactions announced to date, IPL has&nbsp;been disciplined with regards to its acquisition metrics&nbsp;but its above peers, earnings growth, track record&nbsp;is coming into question.</p>
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<h3>Earnings and valuation revised, d/g to NEUTRAL</h3>
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<div id="m_-5768840996529099872ihtr8o-2-2">
<p>We have adjusted our FY21–23 AFFO downwards marginally, reflecting 1) adjustments to our modelled NZ$100m of acquisitions with all now occurring in FY22 (was split between 2H21 and FY22), 2) slightly higher asset values and management fees, and 3) updated interest rate forecasts.&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>
<div></div>
</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>
</div>
</div>

Investore Too Much of a Good Thing

NEUTRAL
Investore&nbsp;(IPL) has been the beneficiary of increased demand for&nbsp;large format retail (LFR) property, stemming from the low interest rate environment and a lower risk premium attributed to the LFR sub-sector given its resilience against COVID-19&nbsp;lockdowns. This has resulted in strong capitalisation rate compression for&nbsp;IPL's&nbsp;portfolio, lifting asset values substantially in FY21 and providing sizable share price gains for shareholders. Unfortunately, strong demand for the asset class has inhibited&nbsp;IPL's&nbsp;ability to deploy capital it raised in April 2020. With valuation upside tempered by the impact of higher interest rates on our DCF, and earnings growth contingent on acquisitions in a competitive market, we downgrade our rating to NEUTRAL.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY21–23 AFFO -0.5%/-2.8%/-0.7% and DPS 0.0%/-1.4%/-0.7%
Target price:&nbsp;-15cps to NZ$2.20
Rating:&nbsp;Downgrade from OUTPERFORM to NEUTRAL



Strong demand for LFR has driven cap rate compression


Low interest rates have driven demand for yield assets and properties, with 'essential' tenants viewed as lower risk post the pandemic lockdown. Given their relatively small size, strong tenant covenants and long WALT, stand alone LFR/supermarket assets have found particular favour with syndicates and high net worth individuals. IPL has been a beneficiary of this demand, announcing a 2H21 revaluation gain of +5.9% or NZ$57.5m, largely attributable to a -30bp decline in its portfolio average cap rate to 5.23%. We estimate that 2H21 valuation gains add +16cps to NTA which is now NZ$2.09/share.&nbsp;


This makes it difficult to deploy capital


IPL's&nbsp;April 2020 capital raise reduced gearing from 42% to 31% and provided headroom for acquisitions. Based on its current debt facilities, IPL currently has NZ$168m of acquisition capacity. By way of example, we expect an NZ$50m acquisition would equate&nbsp;to a c.5% lift in earnings, all else equal. While this prospective earnings accretion is attractive, the ability to deploy capital is increasingly difficult given the competitive environment. With no transactions announced to date, IPL has&nbsp;been disciplined with regards to its acquisition metrics&nbsp;but its above peers, earnings growth, track record&nbsp;is coming into question.


Earnings and valuation revised, d/g to NEUTRAL


We have adjusted our FY21–23 AFFO downwards marginally, reflecting 1) adjustments to our modelled NZ$100m of acquisitions with all now occurring in FY22 (was split between 2H21 and FY22), 2) slightly higher asset values and management fees, and 3) updated interest rate forecasts.&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



Investore Property

Investore: Too Much of a Good Thing