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

Precinct Properties New Zealand / Equity Bottom-Up

<h2>Precinct Properties NZ<br>FY20 Result&nbsp;— In Fighting Shape</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Precinct Properties (PCT) delivered a solid FY20 result, with AFFO of NZ$82.7m ahead of our forecast NZ$79.2m, primarily due to lower than expected tax expense and maintenance capex and incentives. The market reacted positively to PCT's relative earnings resilience to the first lockdown and solid DPS guidance of 6.5cps (+3% yoy). While PCT's portfolio metrics remain robust for now, there are signs of deterioration in the broader office market. PCT's long lease terms and high quality tenant base have it in fighting shape for the coming downcycle but it will not avoid every punch from broader market weakness, in our view. We lift our earnings estimates c.4% and target price to NZ$1.72. With PCT trading at a 17% premium to NTA and broadly in line with our target price we retain our NEUTRAL rating.</p>
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<h3>PCT&nbsp;has strong foundations but office market is on shifting sands</h3>
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<p>PCT's portfolio has been strong with 1) occupancy remaining high at 98%, 2) just NZ$1.7m of lockdown abatements provided, 3) early trading at Commercial Bay's retail precinct tracked ahead of expectations, and 4) additional leasing up of developments. However, while the pandemic's impact on PCT has been modest to date, the office market is inherently cyclical and PCT will not be immune in our view. We have seen some early signs with 6,100sqm of sublease space becoming available across PCT's portfolio, and prime Auckland office net effective rents slip backwards (-0.1% yoy in June). Prior cycles have taken 2–3 years for vacancy and rents to bottom.</p>
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<h3>Newer portfolio means more distributions</h3>
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<p>PCT has provided FY21 AFFO and DPS guidance of 6.5cps, slightly ahead of our previous expectations. The key drivers of higher than expected guidance was lower tenant incentives and maintenance capex. This is a derivative of the portfolio transformation that PCT has undertaken since 2014, whereby it disposed of older assets which required substantial maintenance and replaced them with new builds. In the process, PCT has lowered its average building age from 26 to 12, its maintenance capex requirements from 60–80bps to c.20bps, lifted its WALT to 8 years from 5, and significantly reduced near-term lease expiry. While we expect maintenance capex and leasing requirements to lift as PCT's assets age, for now this supports higher distributions.&nbsp;</p>
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<h3>Lifting our&nbsp;AFFO&nbsp;forecasts and target price</h3>
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<p>We lift our FY21–23E AFFO forecasts +5.6%/+4.0%/+4.1% reflecting, 1) the assumed sale of ANZ Tower in mid FY21 offset by, 2) higher capitalised interest with 1 Queen St being classified as development despite the scope and timing remaining uncertain, and 3) lower maintenance capex and lease incentives paid. However, in our view this is somewhat of a lower quality upgrade as on both distributable profit and FFO our forecasts decline 4–7%. We have lifted our DPS forecasts in line with our AFFO upgrades. We lift our target price 9% to NZ$1.72 reflecting a large lift in our DCF valuation to NZ$1.83, largely driven by our revised WACC assumptions, which more than offsets a slight decline in our NAV.</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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Precinct Properties NZ FY20 Result&nbsp;— In Fighting Shape

NEUTRAL
Precinct Properties (PCT) delivered a solid FY20 result, with AFFO of NZ$82.7m ahead of our forecast NZ$79.2m, primarily due to lower than expected tax expense and maintenance capex and incentives. The market reacted positively to PCT's relative earnings resilience to the first lockdown and solid DPS guidance of 6.5cps (+3% yoy). While PCT's portfolio metrics remain robust for now, there are signs of deterioration in the broader office market. PCT's long lease terms and high quality tenant base have it in fighting shape for the coming downcycle but it will not avoid every punch from broader market weakness, in our view. We lift our earnings estimates c.4% and target price to NZ$1.72. With PCT trading at a 17% premium to NTA and broadly in line with our target price we retain our NEUTRAL rating.


PCT&nbsp;has strong foundations but office market is on shifting sands


PCT's portfolio has been strong with 1) occupancy remaining high at 98%, 2) just NZ$1.7m of lockdown abatements provided, 3) early trading at Commercial Bay's retail precinct tracked ahead of expectations, and 4) additional leasing up of developments. However, while the pandemic's impact on PCT has been modest to date, the office market is inherently cyclical and PCT will not be immune in our view. We have seen some early signs with 6,100sqm of sublease space becoming available across PCT's portfolio, and prime Auckland office net effective rents slip backwards (-0.1% yoy in June). Prior cycles have taken 2–3 years for vacancy and rents to bottom.


Newer portfolio means more distributions


PCT has provided FY21 AFFO and DPS guidance of 6.5cps, slightly ahead of our previous expectations. The key drivers of higher than expected guidance was lower tenant incentives and maintenance capex. This is a derivative of the portfolio transformation that PCT has undertaken since 2014, whereby it disposed of older assets which required substantial maintenance and replaced them with new builds. In the process, PCT has lowered its average building age from 26 to 12, its maintenance capex requirements from 60–80bps to c.20bps, lifted its WALT to 8 years from 5, and significantly reduced near-term lease expiry. While we expect maintenance capex and leasing requirements to lift as PCT's assets age, for now this supports higher distributions.&nbsp;


Lifting our&nbsp;AFFO&nbsp;forecasts and target price


We lift our FY21–23E AFFO forecasts +5.6%/+4.0%/+4.1% reflecting, 1) the assumed sale of ANZ Tower in mid FY21 offset by, 2) higher capitalised interest with 1 Queen St being classified as development despite the scope and timing remaining uncertain, and 3) lower maintenance capex and lease incentives paid. However, in our view this is somewhat of a lower quality upgrade as on both distributable profit and FFO our forecasts decline 4–7%. We have lifted our DPS forecasts in line with our AFFO upgrades. We lift our target price 9% to NZ$1.72 reflecting a large lift in our DCF valuation to NZ$1.83, largely driven by our revised WACC assumptions, which more than offsets a slight decline in our NAV.



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



Precinct Properties NZ: FY20 Result — In Fighting Shape