Analysts upgrade Stride recommendations as REIM strategy develops

Stride's NorthWest Mall, empty during lockdown. Photo / Sylvie Whinray

Analysts reacted to Stride Property Group's annual results, post-balance date developments and flagging share price by upgrading their recommendations to various euphemisms of "buy."

On the day the results were released last week, Stride's stapled securities were trading at $1.68, a 12 per cent discount on net tangible assets, and they have since recovered to $1.77.

Pre-Covid, the shares had typically traded at a premium to NTA, notwithstanding that its directly held properties are now heavily skewed towards shopping centres at 62 per cent of the portfolio, assets that have been battling the shift to online shopping, a trend that the coronavirus crisis has only hastened.

The company's board has certainly sent a strong signal to the market by announcing it would maintain this year's dividend at the same 9.91 cents per share it has paid in each of the previous two years.

That's despite adjusted funds from operations being only 8.71 cents per share in the 12 months ended March and 8.88 cents the previous year.

Craigs Investment Partners analyst Adam Lilley said current year dividends are unlikely to be covered by affo either.

Other listed property vehicles have used the crisis to rebase their payouts, he noted. For example, Goodman Property Trust has said it will now pay out between 80 per cent and 90 per cent of annual cash earnings, down from the 95 per cent it paid in the year ended March.

Stride is in the throes of transforming from a property owner, developer and landlord, known in investment jargon as a real estate investment trust or REIT, to a REIM, or real estate investment manager.

Its third spin-off, Industre Property Joint Venture, becomes officially established today. As the name suggests, it will hold Stride's existing 12 industrial properties in a joint venture with international institutional investors represented by JP Morgan Asset Management.

It joins the listed Investore Property, which owns large-format retail properties, and the unlisted Diversified NZ Property Trust.

Market recognition

Stride now holds $488 million worth of property directly but its assets under management are now $1.82 billion and its look-through ownership is $960m – it owns 68.3 per cent of Industre, 18.8 per cent of Investore and 2 per cent of Diversified.

Jarden analysts Arie Dekker and Grant Lowe note that Stride has received little market recognition for its funds management strategy to date.

"We suspect this highlights one of the issues associated with Stride's dilution away from more defensive asset classes with the 100 per cent directly owned portfolio now concentrated in shopping centres and office," the Jarden analysts said in their note on the results.

"Putting that issue aside, the repositioning of Stride's business is going well with Investore well established and positioned for further growth and Industre about to settle with capacity for growth also," they said.

Attractive entry point

Lilley headlined his note: Dare to dREIM big? and said that the majority of future growth will come from such externally managed funds.

"Having reached this point, we consider this now makes for an attractive entry point as Stride starts to focus and deliver on the growth phase of its strategy," he said.

Forsyth Barr analyst Rohan Koreman-Smit said he thinks the market is attributing no value to Stride's asset management businesses, so "the risk reward is favourable at current levels."

"Additionally, Stride trades on the highest cash yield in the sector at 5.9 per cent. While this is a lower quality yield, as it's not covered by underlying cash earnings, Stride's board appears committed to paying it in the near term."

Stride certainly has plenty of firepower to take advantage of any opportunities that emerge in the wake of the crisis.

The company said last week that it had more than $218m of banking facility headroom, that Investore had another $148m in available banking facilities and Industre had access to additional committed capital of $154m.