Ord Minnett has analysed the Investa Office Fund portfolio while the market was focused on other issues, leading us to believe the outlook for Investa’s Sydney portfolio has improved due to the pace at which market rents continue to rise (10–15% pa), and recent sales, which suggest asset values have increased a further 15% in the past three months.
Consequently, we have increased our stabilised earnings forecast by 10% to reflect higher rents on re-leasing, which will be applicable in two to three years after the completion of Investa’s repositioning projects. We have also lifted our NTA estimate to $5.30–5.50 to reflect recent transactions, but we expect this will take another 12–18 months to be fully reflected in book value.
Our revised earnings estimates show EPS growth up from 0% to 3% for FY18, from minus-6% to minus-5% for FY19–20, and from 4% to around 15% for FY21–22.
We estimate Investa has 70,000sqm of space expiring in the next three years where it will achieve 25% re-leasing spreads, or 95,000sqm including 347 Kent Street where the spreads are minus 10%.
Across the portfolio, this equates to an 8% reversion taking into account the negative spreads we anticipate in Brisbane, Perth and Melbourne. The main negative is Perth, where Investa is 25% over-rented and has 5,000sqm expiring (66 St Georges Terrace). Also, 151 Clarence Street is non-income-producing and has reversionary income of $22 million, but requires a further $120 million in development expenditure and incentives.