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 NZ$60m share buyback</h2>
Property for Industry (PFI) has announced it will buy back up to 5% of its own shares which equates to NZ$60m or 25.2m shares. We view the buyback as a logical capital management move given the large discount to NTA (-21%, although not uncommon in the listed property sector at the moment) and view managements (1) comfortable balance sheet position and (2) confidence in portfolio valuations despite rising interest rates as positive signals for the stock. Assuming PFI purchased all shares at the last close price (NZ$2.39) and current incremental debt cost of 3.2% (reflects a floating base rate of 2.3% plus 90bps margin with PFI already paying line fees on its facility) we calculate the buyback could increase NTA by +4cps and lift AFFO per share by +2.0%.
Portfolio cap rate compression has been supported by falling interest rates, however the recent lift in rates has seen questions raised around the sustainability of current book values for the listed property sector. Short term, PFI do not expect any deterioration in valuations with the half year results. Longer term, debt costs remain high vs. industrial cap rates – new floating debt is now c.4.1% (2.3% 90 day bank bill rate plus 180bps line fee and margin) and five-year fixed is c.5.4% (3.6% five-year swap rate plus 180bps line fee and margin) this compares to PFI’s last reported cap rate of 4.4%. PFI’s -21% discount to its current NTA of NZ$3.03 implies c.90-110bp cap rate expansion (range reflecting flat to +4% market rent growth) or a portfolio cap rate of 5.3% to 5.5% is being priced by the market. Auckland industrial rent growth has recently been one of the strongest of the commercial property sectors. CBRE are forecasting Auckland prime and secondary rents to grow 4-5% per annum over the next 5 years which will provide some offset to rising cap rates. We estimate +6% rent growth is needed to offset a +25bp cap rate movement.
PFI’s FY21 gearing was 27.7%. Looking forward, PFI has NZ$150m of capital to spend at its brownfields redevelopments at Bowden Rd and Springs Rd and is progressing the divestment of Shed 22 (FY22 BV NZ$13.7m) and 39 Edmundson St, Napier (NZ$4.6m). We calculate that if fully executed the announced buyback will lift gearing to 30.5% on a pro-forma basis, the lower end its 30-40% target range.
Buy back pro-forma NTA and AFFOps
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/473/original/image_34524037131653440063698.png?1653440073" class="editor-image img-responsive" data-smartkarma-image-id="276473"></figure>
Source: Company data, Forsyth Barr analysis

Property for Industry NZ$60m share buyback
Property for Industry (PFI) has announced it will buy back up to 5% of its own shares which equates to NZ$60m or 25.2m shares. We view the buyback as a logical capital management move given the large discount to NTA (-21%, although not uncommon in the listed property sector at the moment) and view managements (1) comfortable balance sheet position and (2) confidence in portfolio valuations despite rising interest rates as positive signals for the stock. Assuming PFI purchased all shares at the last close price (NZ$2.39) and current incremental debt cost of 3.2% (reflects a floating base rate of 2.3% plus 90bps margin with PFI already paying line fees on its facility) we calculate the buyback could increase NTA by +4cps and lift AFFO per share by +2.0%.
Portfolio cap rate compression has been supported by falling interest rates, however the recent lift in rates has seen questions raised around the sustainability of current book values for the listed property sector. Short term, PFI do not expect any deterioration in valuations with the half year results. Longer term, debt costs remain high vs. industrial cap rates – new floating debt is now c.4.1% (2.3% 90 day bank bill rate plus 180bps line fee and margin) and five-year fixed is c.5.4% (3.6% five-year swap rate plus 180bps line fee and margin) this compares to PFI’s last reported cap rate of 4.4%. PFI’s -21% discount to its current NTA of NZ$3.03 implies c.90-110bp cap rate expansion (range reflecting flat to +4% market rent growth) or a portfolio cap rate of 5.3% to 5.5% is being priced by the market. Auckland industrial rent growth has recently been one of the strongest of the commercial property sectors. CBRE are forecasting Auckland prime and secondary rents to grow 4-5% per annum over the next 5 years which will provide some offset to rising cap rates. We estimate +6% rent growth is needed to offset a +25bp cap rate movement.
PFI’s FY21 gearing was 27.7%. Looking forward, PFI has NZ$150m of capital to spend at its brownfields redevelopments at Bowden Rd and Springs Rd and is progressing the divestment of Shed 22 (FY22 BV NZ$13.7m) and 39 Edmundson St, Napier (NZ$4.6m). We calculate that if fully executed the announced buyback will lift gearing to 30.5% on a pro-forma basis, the lower end its 30-40% target range.
Buy back pro-forma NTA and AFFOps

Source: Company data, Forsyth Barr analysis

Property for Industry (PFI): NZ$60 Buyback Announced

Property For Industry

Property for Industry (PFI): NZ$60 Buyback Announced