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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Precinct Properties New Zealand / Equity Bottom-Up

<h2>Precinct Properties NZ</h2>
<p><strong>In the Middle of Town</strong></p>
<p><strong>NEUTRAL</strong></p>
<p>We have reviewed our Precinct Properties NZ (PCT) forecasts and adjusted our earnings and DPS forecasts for lower post lockdown tenant support, delayed Commercial Bay completion, and a higher payout ratio. ​​​​​​​While the prime location of PCT's portfolio and quality of its tenants should see earnings hold up relatively well; we forecast a relatively flat track with cyclical vacancy and rent pressure offset by Commercial Bay contribution. We lift our target price +6cps to NZ$1.58 and retain our NEUTRAL rating on valuation grounds with PCT trading at a 14% premium to its NTA. PCT will deliver its FY20 result on 13 August.&nbsp;</p>
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<h3>Office down cycle approaching</h3>
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<div id="m_991430928871110391injog">
<p>Office is typically a cyclical market. We expect this cycle will be no different to the past with rising vacancy and lower market rents. We expect Auckland rents to be pressured by business failures, backfill created by development completions, as well as growing subleasing as occupiers resize their footprint. While PCT is in a better position than last cycle with a better quality portfolio, longer weighted average lease term (WALT), and high quality tenant mix, it wont be immune to cyclical pressures. As such rent growth will be hard to find muting PCT earnings outlook. Lower rents and higher vacancy will also impact office valuations but with some offset from low interest rates. PCTs NTA may hold up better due to its high quality assets. We note that PCT typically release draft valuations pre-result but have not yet provided an update suggesting a flat outcome for FY20.</p>
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<h3>Lifting our&nbsp;EPS&nbsp;and&nbsp;DPS&nbsp;forecasts</h3>
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<div id="m_991430928871110391iilmd">
<p>We have adjusted our earnings for lower than previously forecast&nbsp;COVID&nbsp;tenant support, the delayed opening of Commercial Bay, the deferral of 1 Queen St redevelopment, settlement of the Pastoral House divestment, development of&nbsp;Bowen Campus stage 2 building 1, and higher levels of capitalised interest. Our FY20-22&nbsp;EPS&nbsp;forecasts increase +8.3%/+2.4%/+4.1% to 6.7/6.7/6.8cps and our&nbsp;DPS&nbsp;forecasts increase +11.5%/+19.2%/+20.8% to 6.3/6.3/6.3cps aided by a higher medium term payout ratio (up from 90% to 100% of&nbsp;AFFO). Despite the significant tailwind from Commercial Bay&nbsp;finally contributing to earnings we forecast&nbsp;relatively modest earnings and&nbsp;DPS&nbsp;growth over the next 3 years (FY20-22E&nbsp;CAGR&nbsp;of 1.3% and 0.2% respectively) reflecting the softer economic backdrop impacting occupancy and rent growth. We forecast occupancy to decline from 99% at 1H20 to trough at c.95% in FY21.</p>
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<h3>Valuation keeps us NEUTRAL</h3>
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<div id="m_991430928871110391iw4xv">
<p>Despite the upward revisions to our EPS and DPS track we retain our NEUTRAL rating on valuation grounds. PCT is currently trading at a 14% premium to its NTA; slightly above NZ listed property vehicle (LPV) peers at a 10% premium at the median level. We also highlight that PCT's gross yield of 5.3% is in line with the sector median of 5.5%, with a similar dividend growth outlook.</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
In the Middle of Town
NEUTRAL
We have reviewed our Precinct Properties NZ (PCT) forecasts and adjusted our earnings and DPS forecasts for lower post lockdown tenant support, delayed Commercial Bay completion, and a higher payout ratio. ​​​​​​​While the prime location of PCT's portfolio and quality of its tenants should see earnings hold up relatively well; we forecast a relatively flat track with cyclical vacancy and rent pressure offset by Commercial Bay contribution. We lift our target price +6cps to NZ$1.58 and retain our NEUTRAL rating on valuation grounds with PCT trading at a 14% premium to its NTA. PCT will deliver its FY20 result on 13 August.&nbsp;


Office down cycle approaching


Office is typically a cyclical market. We expect this cycle will be no different to the past with rising vacancy and lower market rents. We expect Auckland rents to be pressured by business failures, backfill created by development completions, as well as growing subleasing as occupiers resize their footprint. While PCT is in a better position than last cycle with a better quality portfolio, longer weighted average lease term (WALT), and high quality tenant mix, it wont be immune to cyclical pressures. As such rent growth will be hard to find muting PCT earnings outlook. Lower rents and higher vacancy will also impact office valuations but with some offset from low interest rates. PCTs NTA may hold up better due to its high quality assets. We note that PCT typically release draft valuations pre-result but have not yet provided an update suggesting a flat outcome for FY20.


Lifting our&nbsp;EPS&nbsp;and&nbsp;DPS&nbsp;forecasts


We have adjusted our earnings for lower than previously forecast&nbsp;COVID&nbsp;tenant support, the delayed opening of Commercial Bay, the deferral of 1 Queen St redevelopment, settlement of the Pastoral House divestment, development of&nbsp;Bowen Campus stage 2 building 1, and higher levels of capitalised interest. Our FY20-22&nbsp;EPS&nbsp;forecasts increase +8.3%/+2.4%/+4.1% to 6.7/6.7/6.8cps and our&nbsp;DPS&nbsp;forecasts increase +11.5%/+19.2%/+20.8% to 6.3/6.3/6.3cps aided by a higher medium term payout ratio (up from 90% to 100% of&nbsp;AFFO). Despite the significant tailwind from Commercial Bay&nbsp;finally contributing to earnings we forecast&nbsp;relatively modest earnings and&nbsp;DPS&nbsp;growth over the next 3 years (FY20-22E&nbsp;CAGR&nbsp;of 1.3% and 0.2% respectively) reflecting the softer economic backdrop impacting occupancy and rent growth. We forecast occupancy to decline from 99% at 1H20 to trough at c.95% in FY21.


Valuation keeps us NEUTRAL


Despite the upward revisions to our EPS and DPS track we retain our NEUTRAL rating on valuation grounds. PCT is currently trading at a 14% premium to its NTA; slightly above NZ listed property vehicle (LPV) peers at a 10% premium at the median level. We also highlight that PCT's gross yield of 5.3% is in line with the sector median of 5.5%, with a similar dividend growth outlook.



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: In the Middle of Town