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>Real Estate Reflections</h2>
Flattening the Earnings Curve
The once predictable earnings path of Listed Property Vehicles (LPVs) has abruptly become less clear with COVID-19 challenging the historically defensive asset class in an unprecedented way. In this note we attempt to quantify the level of near-term tenant support LPVs may have to provide. We also adjust our earnings forecasts for lower market rents and higher vacancy, although the immediate impact is moderated by under renting, fixed annual rent increases, and solid lease terms, particularly for LPVs with strong tenant covenants. Furthermore, the overall earnings impact is partially offset by reintroduction of depreciation on building structure and lower floating interest costs. We retain our preference for Investore (IPL), Property for Industry (PFI), and Vital Healthcare Property (VHP). Our least preferred LPVs remain Kiwi Property (KPG) and Asset Plus (APL). With this note we transfer coverage of the NZ LPV sector to Rohan Koreman-Smit.
Lowering our earnings&nbsp;estimates
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Company announcements and industry anecdotes suggest that LPVs are being good corporate citizens and providing relief to tenants impacted by the Government enforced lockdown. We estimate this near-term support will cost LPVs 1–14% of annual gross rental income, significantly reducing June quarter cash flows, with retail landlords seeing a higher than average impact. We have also 1) lowered our rent growth to zero for the next two years, with structured rent increases being broadly offset by negative market reviews and lease expiries, and 2) increased vacancy. The impact of these adjustments is partially offset by tax benefits from the reintroduction of depreciation on building structures and lower floating interest costs as hedging rolls off. The net outcome is a reduction of -2% to -23% in our FY21 LPV earnings estimates but a more modest -1% to -6% for FY22.
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Uncertainty weighed on LPVs over April
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The&nbsp;LPV&nbsp;sector rebounded +3.7% in April, lagging the S&amp;P/NZX&nbsp;50G index which was up +7.5% in one of its three best months in twenty years. Since the sell off began in late February&nbsp;the property sector has underperformed utilities by -6%&nbsp;and the market by -8% over concerns about revaluation losses and rent relief. Revaluation outcomes&nbsp;have been mixed&nbsp;with&nbsp;valuers&nbsp;turning away from valuation approaches based on market evidence, instead focusing on cash-flows and sentiment. Industrial properties have fared the best and have provided steady gains, while some retail assets have been dealt severe write-downs. The pandemics impact remains fluid, and with a wide range of possible outcomes we continue to prefer&nbsp;LPVs&nbsp;with&nbsp;defensive&nbsp;asset bases and lower near-term uncertainty.
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Rohan Koreman-Smit rohan.koreman-smit@forsythbarr.co.nz +64 9 368 0085
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127

Real Estate Reflections
Flattening the Earnings Curve
The once predictable earnings path of Listed Property Vehicles (LPVs) has abruptly become less clear with COVID-19 challenging the historically defensive asset class in an unprecedented way. In this note we attempt to quantify the level of near-term tenant support LPVs may have to provide. We also adjust our earnings forecasts for lower market rents and higher vacancy, although the immediate impact is moderated by under renting, fixed annual rent increases, and solid lease terms, particularly for LPVs with strong tenant covenants. Furthermore, the overall earnings impact is partially offset by reintroduction of depreciation on building structure and lower floating interest costs. We retain our preference for Investore (IPL), Property for Industry (PFI), and Vital Healthcare Property (VHP). Our least preferred LPVs remain Kiwi Property (KPG) and Asset Plus (APL). With this note we transfer coverage of the NZ LPV sector to Rohan Koreman-Smit.
Lowering our earnings&nbsp;estimates

Company announcements and industry anecdotes suggest that LPVs are being good corporate citizens and providing relief to tenants impacted by the Government enforced lockdown. We estimate this near-term support will cost LPVs 1–14% of annual gross rental income, significantly reducing June quarter cash flows, with retail landlords seeing a higher than average impact. We have also 1) lowered our rent growth to zero for the next two years, with structured rent increases being broadly offset by negative market reviews and lease expiries, and 2) increased vacancy. The impact of these adjustments is partially offset by tax benefits from the reintroduction of depreciation on building structures and lower floating interest costs as hedging rolls off. The net outcome is a reduction of -2% to -23% in our FY21 LPV earnings estimates but a more modest -1% to -6% for FY22.

Uncertainty weighed on LPVs over April

The&nbsp;LPV&nbsp;sector rebounded +3.7% in April, lagging the S&amp;P/NZX&nbsp;50G index which was up +7.5% in one of its three best months in twenty years. Since the sell off began in late February&nbsp;the property sector has underperformed utilities by -6%&nbsp;and the market by -8% over concerns about revaluation losses and rent relief. Revaluation outcomes&nbsp;have been mixed&nbsp;with&nbsp;valuers&nbsp;turning away from valuation approaches based on market evidence, instead focusing on cash-flows and sentiment. Industrial properties have fared the best and have provided steady gains, while some retail assets have been dealt severe write-downs. The pandemics impact remains fluid, and with a wide range of possible outcomes we continue to prefer&nbsp;LPVs&nbsp;with&nbsp;defensive&nbsp;asset bases and lower near-term uncertainty.


Rohan Koreman-Smit rohan.koreman-smit@forsythbarr.co.nz +64 9 368 0085
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127

Real Estate Reflections: Flattening the Earnings Curve