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</h2>
<p><strong>Shock Absorber —&nbsp;Downgrade to NEUTRAL</strong></p>
<p><strong>NEUTRAL</strong></p>
<p>Property for Industry (PFI) has performed strongly through the pandemic driven market volitility, with the share price having now largely recovered from the initial sell off as the defensive qualities of industrial property gained favour. The industrial property sub-sector has seen 1) strong rent collection vs. other types of properties, 2) increased demand particularly in logistics, and 3) limited downward revaluations to date. As a result PFI is now trading on a gross yield of 4.2%, a forward Adjusted Funds From Operations (AFFO) multiple of 28.2x, and a 16% premium to its net tangible assets (NTA) backing vs. peers on a 5.5% average gross yield, a forward AFFO multiple of 25.6x, and a 2% premium to NTA. As a result, we see limited scope for further outperformance vs. the sector and downgrade our rating to NEUTRAL.</p>
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<h3>Trading updates have been solid</h3>
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<p>PFI has provided a few market updates since the pandemic began unfolding in March. PFI secured NZ$50m of additional funding to ensure liquidity, cut costs, and provided assistance to tenants where required. To date, PFI has signed 45 tenant support deals totalling 1.2% of annual rent, split 50/50 between deferrals and abatements. Rent and operating expense collection was ~90% in April and May and in line with listed industrial peers and sector anecdotes. We have not made any changes to our earnings and distribution estimates.</p>
<p>Additionally, recent revaluations have seen industrial property assets hold up better than their retail and office counterparts. Stride's (SPG) industrial assets increased in value by +14% over the 12 months to 31 March 2020, while Argosy's (ARG) lifted by +7%. Although further NTA upside is limited given PFI's +9% revaluation over the 12 months to 31 December 2019, it is comforting to see industrial asset values have remained solid during times of stress.&nbsp;</p>
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<h3>Safe haven buying</h3>
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<p>The strong rent collection rates relative to the office/retail sub-sectors and positive valuation outcomes for industrial assets has seen PFI and Goodman Property (GMT) hold up well relative to other LPVs. PFI was initially been sold off but has recovered strongly, leading the listed property vehicle (LPV) sector in performance in May, up +13%. Since we upgraded PFI to OUTPERFORM on 27 March 2020, it has returned +15.9% and +250bp vs. the S&amp;P/NZX Property Gross Index.</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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Property For Industry
Shock Absorber —&nbsp;Downgrade to NEUTRAL
NEUTRAL
Property for Industry (PFI) has performed strongly through the pandemic driven market volitility, with the share price having now largely recovered from the initial sell off as the defensive qualities of industrial property gained favour. The industrial property sub-sector has seen 1) strong rent collection vs. other types of properties, 2) increased demand particularly in logistics, and 3) limited downward revaluations to date. As a result PFI is now trading on a gross yield of 4.2%, a forward Adjusted Funds From Operations (AFFO) multiple of 28.2x, and a 16% premium to its net tangible assets (NTA) backing vs. peers on a 5.5% average gross yield, a forward AFFO multiple of 25.6x, and a 2% premium to NTA. As a result, we see limited scope for further outperformance vs. the sector and downgrade our rating to NEUTRAL.


Trading updates have been solid


PFI has provided a few market updates since the pandemic began unfolding in March. PFI secured NZ$50m of additional funding to ensure liquidity, cut costs, and provided assistance to tenants where required. To date, PFI has signed 45 tenant support deals totalling 1.2% of annual rent, split 50/50 between deferrals and abatements. Rent and operating expense collection was ~90% in April and May and in line with listed industrial peers and sector anecdotes. We have not made any changes to our earnings and distribution estimates.
Additionally, recent revaluations have seen industrial property assets hold up better than their retail and office counterparts. Stride's (SPG) industrial assets increased in value by +14% over the 12 months to 31 March 2020, while Argosy's (ARG) lifted by +7%. Although further NTA upside is limited given PFI's +9% revaluation over the 12 months to 31 December 2019, it is comforting to see industrial asset values have remained solid during times of stress.&nbsp;


Safe haven buying


The strong rent collection rates relative to the office/retail sub-sectors and positive valuation outcomes for industrial assets has seen PFI and Goodman Property (GMT) hold up well relative to other LPVs. PFI was initially been sold off but has recovered strongly, leading the listed property vehicle (LPV) sector in performance in May, up +13%. Since we upgraded PFI to OUTPERFORM on 27 March 2020, it has returned +15.9% and +250bp vs. the S&amp;P/NZX Property Gross Index.



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: Shock Absorber — Downgrade to NEUTRAL