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>Listed Property Vehicles</h2>
<p><strong>The Price of Performance</strong></p>
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<p>The level of both base and performance fees paid to external managers of NZ Listed Property Vehicles (LPVs) has been a contentious issue in the past. The current trend to internalise management better aligns management and investor interests in our view. That said, there is a cost to manage assets either internally or externally and it is the relative cost structures that impact on the attractiveness of LPVs. One of the surprises of the recent Goodman Property Trust (GMT) result was the scale of the performance fee earned. The potential for large performance fee payments is a key difference between internal and external management of LPVs. Five NZ LPVs remain externally managed and all have some sort of performance fee. These performance fees vary in payout mechanism (cash or units), return targets (relative or absolute performance), and benchmarks (shareholder returns or asset values). Our review of performance fees suggests that Investore (IPL) is likely to have incurred additional performance fees over 2H20, and Vital Healthcare Property Trust (VHP) incentives fees are likely to continue albeit at a lower level; we have adjusted our forecasts and target prices accordingly.</p>
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<p><strong>Performance fees likely to be a recurring feature for some LPVs</strong></p>
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<p><strong>GMT (UNDERPERFORM)</strong>: One of the surprises with GMT's FY20 result was the carried over performance fee balance of NZ$89.5m. This balance resulted from significant outperformance vs. peers over FY20, with GMT +30% vs. the sector -3%. The balance is carried forward in perpetuity but can be offset by underperformance. Given the size of the carry over balance continuation of performance fees is likely over the near-term, however, as performance fees are paid in units this will only have a modest impact on GMT's cash earnings per share.</p>
<p><strong>IPL&nbsp;(OUTPERFORM)</strong>: IPL's carried forward return for the December quarter was +16.7% which would have more than offset the -3.1% total shareholder return that quarter, resulting in a performance fee payable. However, no performance fee was likely payable for the 4Q20 given March quarterly total return of -8.3%. It has been a solid start to 1Q21 with total returns of +4.9% YTD. We have included a 3Q performance fee in our estimates, which lowers FY20 EPS by -1.7%, but our NZ$1.85 12-month target price is unchanged.</p>
<p><strong>Precinct Properties (PCT, NEUTRAL)</strong>: Due to recent underperformance PCT had a carried forward performance fee deficit of NZ$4.4m at 1H20. YTD the index is down -15% vs. PCT down -12%, therefore, some erosion of this deficit has occurred but no performance fee is payable in quarters when total shareholder return is negative. At this stage we have left our earnings forecasts unchanged but remain cognisant of future performance fee payments once PCT has covered its carried forward deficit.</p>
<p><strong>VHP&nbsp;(OUTPERFORM)</strong>:&nbsp;VHP&nbsp;is the only NZ&nbsp;LPV&nbsp;that does not link incentive fees directly to shareholder returns. Incentive fees are based on the increase in net tangible assets (NTA). Therefore,&nbsp;VHP's&nbsp;​​​​​​​total&nbsp;shareholder returns can&nbsp;underperform&nbsp;but incentive fees can still be paid if cap rate compression continues to lift asset values and&nbsp;NTA. Given the supportive backdrop for medical property&nbsp;we have included modest incentive fees (previously zero) in our FY21/22 forecasts&nbsp;which only has a minor impact on earnings per share (&lt;1%) due to dilution from payment in units but&nbsp;reduces&nbsp;our 12-month target price 2% to NZ$2.70.</p>
<p><strong>Asset Plus (APL, UNDERPERFORM)</strong>: Given its weight to retail and relatively high gearing APL has underperformed the sector by -22% YTD; as such we do not believe a performance fee is likely. Going forward, given its balance sheet constraints and capital hungry development pipeline, we view outperformance vs. the sector as challenging and therefore leave our forecast unchanged with no performance fees paid over FY20–22E.</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</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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Listed Property Vehicles
The Price of Performance

The level of both base and performance fees paid to external managers of NZ Listed Property Vehicles (LPVs) has been a contentious issue in the past. The current trend to internalise management better aligns management and investor interests in our view. That said, there is a cost to manage assets either internally or externally and it is the relative cost structures that impact on the attractiveness of LPVs. One of the surprises of the recent Goodman Property Trust (GMT) result was the scale of the performance fee earned. The potential for large performance fee payments is a key difference between internal and external management of LPVs. Five NZ LPVs remain externally managed and all have some sort of performance fee. These performance fees vary in payout mechanism (cash or units), return targets (relative or absolute performance), and benchmarks (shareholder returns or asset values). Our review of performance fees suggests that Investore (IPL) is likely to have incurred additional performance fees over 2H20, and Vital Healthcare Property Trust (VHP) incentives fees are likely to continue albeit at a lower level; we have adjusted our forecasts and target prices accordingly.

Performance fees likely to be a recurring feature for some LPVs

GMT (UNDERPERFORM): One of the surprises with GMT's FY20 result was the carried over performance fee balance of NZ$89.5m. This balance resulted from significant outperformance vs. peers over FY20, with GMT +30% vs. the sector -3%. The balance is carried forward in perpetuity but can be offset by underperformance. Given the size of the carry over balance continuation of performance fees is likely over the near-term, however, as performance fees are paid in units this will only have a modest impact on GMT's cash earnings per share.
IPL&nbsp;(OUTPERFORM): IPL's carried forward return for the December quarter was +16.7% which would have more than offset the -3.1% total shareholder return that quarter, resulting in a performance fee payable. However, no performance fee was likely payable for the 4Q20 given March quarterly total return of -8.3%. It has been a solid start to 1Q21 with total returns of +4.9% YTD. We have included a 3Q performance fee in our estimates, which lowers FY20 EPS by -1.7%, but our NZ$1.85 12-month target price is unchanged.
Precinct Properties (PCT, NEUTRAL): Due to recent underperformance PCT had a carried forward performance fee deficit of NZ$4.4m at 1H20. YTD the index is down -15% vs. PCT down -12%, therefore, some erosion of this deficit has occurred but no performance fee is payable in quarters when total shareholder return is negative. At this stage we have left our earnings forecasts unchanged but remain cognisant of future performance fee payments once PCT has covered its carried forward deficit.
VHP&nbsp;(OUTPERFORM):&nbsp;VHP&nbsp;is the only NZ&nbsp;LPV&nbsp;that does not link incentive fees directly to shareholder returns. Incentive fees are based on the increase in net tangible assets (NTA). Therefore,&nbsp;VHP's&nbsp;​​​​​​​total&nbsp;shareholder returns can&nbsp;underperform&nbsp;but incentive fees can still be paid if cap rate compression continues to lift asset values and&nbsp;NTA. Given the supportive backdrop for medical property&nbsp;we have included modest incentive fees (previously zero) in our FY21/22 forecasts&nbsp;which only has a minor impact on earnings per share (&lt;1%) due to dilution from payment in units but&nbsp;reduces&nbsp;our 12-month target price 2% to NZ$2.70.
Asset Plus (APL, UNDERPERFORM): Given its weight to retail and relatively high gearing APL has underperformed the sector by -22% YTD; as such we do not believe a performance fee is likely. Going forward, given its balance sheet constraints and capital hungry development pipeline, we view outperformance vs. the sector as challenging and therefore leave our forecast unchanged with no performance fees paid over FY20–22E.



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





Ashton Olds
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



 Listed Property Vehicles: The Price of Performance