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>
<p><strong>Management Potential</strong></p>
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<p>With funds management platforms en vogue (Augusta (AUG) and Stride (SPG) being the top performers over the month), we profile the characteristics of these vehicles in this month's report. We also highlight that (1) the dividend outlook has become more clear post-reporting season, and (2) lower interest rates have expanded yield spreads in both the listed and direct property markets. We believe greater income certainty and higher spreads will prove attractive to investors and result in demand for LPV yield. While medium term rents and vacancy remain unknown, we believe low interest rates potentially limits further downside to direct property valuations, particularly for well located assets with low vacancy risk and strong lease covenants. We remain selective given the volatile operating backdrop and continue to prefer Investore (IPL), and Vital Healthcare Property (VHP) for their defensive attributes in this time of uncertainty, and SPG for the leverage in its asset management platform.</p>
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<h3>Funds management 101</h3>
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<p>The NZ LPV rent based earnings has been relatively vanilla vs. other income derived by Australian REITs. There has been some changes in the NZ LPV sector with (1) SPG transitioning to an asset management model, and (2) AUG building a portfolio of open ended unlisted property funds. The key revenue driver for real estate asset managers is growth in assets under management. Additional fees leverage a relatively high fixed cost base, driving strong incremental margins and high earnings growth. The NZ market appears reluctant to ascribe much value to SPG's management platform at this stage.</p>
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<h3>Flat as a pancake</h3>
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<p>The S&amp;P/NZX All Real Estate Gross index returned -0.2% in June, underperforming the broader S&amp;P/NZX 50G market which was up +5.2% over the month. While the prima facie performance gap is large, the broader market was largely driven by strong performances in its two largest exposures: FPH and ATM. Within the LPVs return dispersion was particularly wide with smaller LPVs outperforming; Augusta +23% on the back of a takeover offer, SPG +13% following a solid result and broker upgrades, and Investore +8% being offset by large cap GMT -7%.</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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Real Estate Reflections
Management Potential

With funds management platforms en vogue (Augusta (AUG) and Stride (SPG) being the top performers over the month), we profile the characteristics of these vehicles in this month's report. We also highlight that (1) the dividend outlook has become more clear post-reporting season, and (2) lower interest rates have expanded yield spreads in both the listed and direct property markets. We believe greater income certainty and higher spreads will prove attractive to investors and result in demand for LPV yield. While medium term rents and vacancy remain unknown, we believe low interest rates potentially limits further downside to direct property valuations, particularly for well located assets with low vacancy risk and strong lease covenants. We remain selective given the volatile operating backdrop and continue to prefer Investore (IPL), and Vital Healthcare Property (VHP) for their defensive attributes in this time of uncertainty, and SPG for the leverage in its asset management platform.



Funds management 101


The NZ LPV rent based earnings has been relatively vanilla vs. other income derived by Australian REITs. There has been some changes in the NZ LPV sector with (1) SPG transitioning to an asset management model, and (2) AUG building a portfolio of open ended unlisted property funds. The key revenue driver for real estate asset managers is growth in assets under management. Additional fees leverage a relatively high fixed cost base, driving strong incremental margins and high earnings growth. The NZ market appears reluctant to ascribe much value to SPG's management platform at this stage.


Flat as a pancake


The S&amp;P/NZX All Real Estate Gross index returned -0.2% in June, underperforming the broader S&amp;P/NZX 50G market which was up +5.2% over the month. While the prima facie performance gap is large, the broader market was largely driven by strong performances in its two largest exposures: FPH and ATM. Within the LPVs return dispersion was particularly wide with smaller LPVs outperforming; Augusta +23% on the back of a takeover offer, SPG +13% following a solid result and broker upgrades, and Investore +8% being offset by large cap GMT -7%.



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



Real Estate Reflections: Management Potential

Augusta Capital

Real Estate Reflections: Management Potential