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

Property For Industry 1H20 Result: Rock Solid Despite Virus

NEUTRAL
Property for Industry (PFI) reported an in-line interim result, with lower than expected abatements, tax, and interest offsetting higher than expected maintenance capex and leasing incentives. PFI reinstated FY20 dividend guidance (originally provided in February) of 7.65–7.70cps. While we expect industrial property to remain relatively robust vs. other sub-sectors, we believe this is largely priced into PFI's current share price with the stock trading at a 31% premium to its net tangible asset (NTA) backing, an FY21 Adjusted Funds From Operations (AFFO) multiple of 34.5x, and a gross yield of 4.0%. We retain our NEUTRAL rating.


Property for Investment


PFI delivered a solid result, ahead of our expectations at the top line due to lower than expected COVID-19 rental abatements, but a touch lower at the AFFO line due to higher than expected maintenance capex and leasing incentives (from the timing of new leases). Of the ~140 tenants in PFI's portfolio, there has only been a couple of failures and cash collection of rent has been high, &gt;95% in recent months. Portfolio fundamentals remain strong with 99.0% occupancy, WALT of 5.3 years, and gearing at 29%, comfortably below its 35% target.&nbsp;


The focus turns to leasing and recycling


Leasing progress in 1H20 was solid, with 4.6% of the rent roll leased on an average term of 6.4 years. While 1H20 leasing saw incentives remain low at about 2 weeks rent-free,&nbsp;incentives are expected to tick up across the market in the short/medium term as landlords look to secure tenants in a softer market.&nbsp;PFI&nbsp;has 19.1% of rent expiring or vacant over the next three years.
PFI has NZ$128m of debt headroom and NZ$69m of capital commitments. PFI is working to divest its remaining non-core properties which account for 9% of portfolio value including the c.NZ$100m Carlaw Park office complex. Low interest rates and earnings certainty in a post COVID-19 world has seen direct industrial assets well bid, and as such it may be challenging to manage earnings dilution from any capital recycling.&nbsp;


Earnings&nbsp;forecasts and target price up, valuation still full


We have lifted our FY20/21/22 AFFO by 3.9%/3.5%/0.9% which largely reflects lower COVID-19 rent abatements partially offset by higher tenant incentives. Our revised earnings profile and lifted payout ratio (now 100% of AFFO) lifts our distribution forecasts c.10%. We lift our target price to NZ$2.64 due to 1) revised WACC assumptions lifting our DCF to NZ$2.78, and 2) 12bp of cap rate compression and PFI's sector low management expense ratio (MER) lifting our NAV to NZ$2.42. We remain NEUTRAL rated on PFI on valuation grounds with the stock trading at a 31% premium to its NTA which implies +21% increase in asset values, which equates to 102bp of cap rate compression.



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



Property For Industry: 1H20 Result: Rock Solid Despite Virus