Favourable Yield Sparks Interest In Propertylink

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Propertylink, a manager of industrial assets, has piqued the interest of several brokers since listing, given the opportunities offered and a favourable distribution yield.

-Aims to leverage asset management capability and take advantage of potential in B-grade commercial assets
-Execution risks around leasing and funds under management considered priced in
-Current price provides attractive entry point in Goldman Sachs' view

By Eva Brocklehurst

Propertylink ((PLG)) has piqued the interest of several brokers since its recent listing on ASX, given the stock offers an attractive prospective distribution yield and appears to be fully pricing known risks.

The Australian real estate investment trust (A-REIT) is internally managed and has an independently valued $685m portfolio of 33 assets, predominantly B-grade industrial space in Sydney and Melbourne. Portfolio occupancy is 95%, excluding assets held for sale or undergoing redevelopment. There is also a funds management (FUM) platform at around $1bn which is backed by eight global institutional investors.

The company's aim is to leverage its asset management capability and take advantage of secondary grade commercial assets that have the potential to add value. Propertylink manages assets and funds on behalf of A-REITs, pension funds, insurance companies, as well as investment advisors. These investment partners are located across the globe and the group has been successful at introducing new capital partners and growing funds and assets under management (AUM).

Credit Suisse has initiated coverage with an Outperform rating and 92c target, noting the stock offers a prospective distribution yield of 9.1%. The comparison with a sub-set of A-REITs based on similar portfolios is favourable. The broker's selected peer group trades at a free funds from operations (FFO) average yield of 8.0% which compares with Propertylink's prospective FFO of 9.6%.

At current levels the stock is implying a 7% discount to current book values versus the 6% average premium implied for A-REITs so Credit Suisse believes execution risks around leasing and FUM are more than priced in. The broker acknowledges that estimating an implied multiple for the FUM of any A-REIT entails a high degree of subjectivity.

Charter Hall ((CHC)) and Goodman Group ((GMG)) offer the clearest comparables to Propertylink's fund and asset management business. It could be argued, Credit Suisse contends, that the size and established nature of these two means Propertylink warrants either a discount – being less established – or a premium – given greater growth potential.

In sum, the broker considers the stock a unique opportunity given the experienced management team and a fully integrated platform along with a sound balance sheet. This means the business is well positioned to cope with the relatively high level of risk when it comes to income expiry in the medium term. The weighted average lease expiry was 3.6 years as of June 30 2016.

Goldman Sachs agrees the stock is a source of opportunity and has a Buy rating. The broker's $1.00 price target implies a forward distribution yield of 8.7%, the highest in its A-REIT coverage. The stock is down around 16% since its listing on August 5, providing an attractive entry point in the broker's view.

Goldman also believes concerns about current and future leasing risk within the portfolio are priced in. The outlook contains the potential to close the valuation gap via additional third-party capital and enhance earnings growth. Successful leasing outcomes on existing vacancies should also support earnings.

Ord Minnett initiates coverage with an Accumulate recommendation and 95c target price, noting Propertylink's pro forma distribution yield is nearly double the sector average of 4.7%. Income is sustained from its portfolio of assets, and growth is expected to be driven by FUM. The broker likes the team's approach to taking advantage of re-positioning opportunities and managing its lease expiry profile.

The FUM business represents around 12% of earnings and Ord Minnett expects revenue growth in this segment at around 10% per annum over FY17–21, excluding potential performance fees. The broker believes the focus is on two fronts, managing the expiry profile, as 47% of the portfolio expires in the next three years, and raising and investing capital to grow the funds business.

In FY17, Propertylink intends to lift occupancy to 96% and grow external AUM by $750 million to $1.5 billion. Ord Minnett notes it has already acquired $310 million of this target and has a further $290 million in advanced discussions. Within leasing, Propertylink has agreed terms on 11 of its 27 expiries in FY17, with the broker observing good progress made on a number of the remainder.
 

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