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>Property for Industry 1H20 result – Initial thoughts</h2>
Property for Industry (PFI) reported funds from operations +6.5% to NZ$23.8m (ForBarr NZ$22.7m) largely driven by lower tax and interest expense. Adjusted funds from operations was -7.8% to NZ$18.9m (ForBarr NZ$19.4m) with higher maintenance capex and lease incentives paid (both of which can be lumpy). PFI reinstated its FY21 DPS guidance at 7.65-7.70cps based on a 80-90% FFO and a 95-100% AFFO payout; we had forecast 7.0cps due to COVID impacts on cash flow which appear higher what PFI has reported with this result.
Overall, and despite DPS guidance higher than our expectations, we see little to change our NEUTRAL view on PFI; while industrial property is better positioned than other real estate subsectors to weather the coming economic downturn we believe this is largely priced in. PFI is currently trading at a 30% premium to its NTA vs. the sector at a 16% premium and a FY21 cash yield of 2.9% based on PFIs reinstated guidance vs. the sector on 3.9%.
Key takeouts
<ul>
<li>COVID-19 abatements: Rent abatements and deferrals were NZ$0.7m and NZ$0.7m respectively (or 1.6% of annual rent) and reduced net rental income -NZ$1.1m in 1H20 in the period. Rent collection was &gt;95% in July and August.</li>
<li>Portfolio metrics remain strong: PFI maintains 99% occupancy, WALT of 5.3 years, and has a diversified income stream from 140 tenants across its 93 properties. Only 1.9% of contract rent is due to expire in 2H20.</li>
<li>Asset recycling: The disposal of PFI’s remaining non-industrial properties (~10% of total portfolio) remains a focus in 2020. Proceeds are expected to fund new industrial acquistions.</li>
<li>Softer rents expected: CBRE’s market outlook suggests that effective rents will tick down as landlords offer more generous incentives. Market rental assessments suggest that PFI’s portfolio is ~3.5% under rented, which should provide some buffer if market rents tick down.</li>
<li>Marginal fall in property values: All 93 of PFIs assets were revalued (14 full valuations the balance desktop) resulting in NZ$7.8m reduction in values. Despite this devaluation PFI’s passing yield tightened 10bp This was the principal driver of NTA reducing 1cps to NZ$2.05. Recent sales activity suggests yields are as low as pre-pandemic levels.</li>
</ul>
Result call details
Conference call: Preregister at&nbsp;<a href="http://apac.directeventreg.com/registration/event/2466573" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://apac.directeventreg.com/registration/event/2466573&amp;source=gmail&amp;ust=1599265674359000&amp;usg=AFQjCNFP1j78MKW4gQi79BuJZ_wPhln5jA" rel="noopener">http://apac.directeventreg.com/registration/event/2466573</a>
Webcast:&nbsp;<a href="https://edge.media-server.com/mmc/p/pjszu67e" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://edge.media-server.com/mmc/p/pjszu67e&amp;source=gmail&amp;ust=1599265674359000&amp;usg=AFQjCNFj-o836Pk8eG-9e8NHmFW9kq0PJA" rel="noopener">https://edge.media-server.com/mmc/p/pjszu67e</a>
PFI 1H20 result analysis
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1676850753139306605&amp;th=17455ee02a36f06d&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ8B2G7eGB3O5dzPIpQH9epis9okQJE0doCdg6DA2vFrNrbNqMn917ySe9U63vhm1V8yobMiYfY_7dCCarQ0ws34MDrFxgnS_fLMpo0DFwL7Uep0u_lpAXN6TCU&amp;disp=emb" width="484" height="528" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: Forsyth Barr analysis
Rohan Koreman-Smit&nbsp; Senior Analyst, Equities
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1676850753139306605&amp;th=17455ee02a36f06d&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ9T0wrpWnSy9HSCJxS5rVKDFufF2E8RA6MOftdE4IWqUGxwHY8wWuBEqPU7xNVa9g9J_vstbovsZvXaPQTHgPCyJQl0-v_B67y0zgsDbu9YYFvPffDaFNzmrKg&amp;disp=emb" class="editor-image img-responsive"></figure>
P: +64 9 368 0085 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Property for Industry 1H20 result – Initial thoughts
Property for Industry (PFI) reported funds from operations +6.5% to NZ$23.8m (ForBarr NZ$22.7m) largely driven by lower tax and interest expense. Adjusted funds from operations was -7.8% to NZ$18.9m (ForBarr NZ$19.4m) with higher maintenance capex and lease incentives paid (both of which can be lumpy). PFI reinstated its FY21 DPS guidance at 7.65-7.70cps based on a 80-90% FFO and a 95-100% AFFO payout; we had forecast 7.0cps due to COVID impacts on cash flow which appear higher what PFI has reported with this result.
Overall, and despite DPS guidance higher than our expectations, we see little to change our NEUTRAL view on PFI; while industrial property is better positioned than other real estate subsectors to weather the coming economic downturn we believe this is largely priced in. PFI is currently trading at a 30% premium to its NTA vs. the sector at a 16% premium and a FY21 cash yield of 2.9% based on PFIs reinstated guidance vs. the sector on 3.9%.
Key takeouts

COVID-19 abatements: Rent abatements and deferrals were NZ$0.7m and NZ$0.7m respectively (or 1.6% of annual rent) and reduced net rental income -NZ$1.1m in 1H20 in the period. Rent collection was &gt;95% in July and August.
Portfolio metrics remain strong: PFI maintains 99% occupancy, WALT of 5.3 years, and has a diversified income stream from 140 tenants across its 93 properties. Only 1.9% of contract rent is due to expire in 2H20.
Asset recycling: The disposal of PFI’s remaining non-industrial properties (~10% of total portfolio) remains a focus in 2020. Proceeds are expected to fund new industrial acquistions.
Softer rents expected: CBRE’s market outlook suggests that effective rents will tick down as landlords offer more generous incentives. Market rental assessments suggest that PFI’s portfolio is ~3.5% under rented, which should provide some buffer if market rents tick down.
Marginal fall in property values: All 93 of PFIs assets were revalued (14 full valuations the balance desktop) resulting in NZ$7.8m reduction in values. Despite this devaluation PFI’s passing yield tightened 10bp This was the principal driver of NTA reducing 1cps to NZ$2.05. Recent sales activity suggests yields are as low as pre-pandemic levels.

Result call details
Conference call: Preregister at&nbsp;http://apac.directeventreg.com/registration/event/2466573
Webcast:&nbsp;https://edge.media-server.com/mmc/p/pjszu67e
PFI 1H20 result analysis

Source: Forsyth Barr analysis
Rohan Koreman-Smit&nbsp; Senior Analyst, Equities

P: +64 9 368 0085 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Property for Industry: 1H20 Result – Initial Thoughts

Property For Industry

Property for Industry: 1H20 Result – Initial Thoughts