Review praises new look DNZ

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Newly-listed DNZ Property Fund drew attention in Forsyth Barr's monthly review of NZX-listed real estate businesses.

Jeremy Simpson and Fraser Hunter said they were now studying DNZ, which started trading in August, and they rated it as a stock to accumulate.

They issued a report this week on the nine listed property businesses, including the renamed ING trusts called Argosy and Vital.

DNZ, trading yesterday at $1.11 and drew praise but not without a few riders.

DNZ has the potential to close its share price discount and add value to shareholders as it builds a track record on the listed market and the benefits of an internal structure become apparent, Simpson and Hunter said.

Financial projections are for a $102.1 million loss for the 2011 financial year to turn into a $19.2 million profit by 2012.

"We initiated research coverage of DNZ with a positive investment view. DNZ listed on the NZX on August 16 after a $45 million capital raising and went into the NZX Property Index on September 20 with a weighting of 7.8 per cent, making it the fifth largest listed property vehicle in terms of index weighting," they said.

DNZ, established in 1996, is New Zealand's only internally managed listed property entity and owns 55 properties worth an average $12 million each.

"Internalised structure is its key feature. Over time, theoretically DNZ should trade at a premium to the other listed property vehicles simply because of its superior management structure. However, a number of other factors will impact on where DNZ trades and management will need to build a track record in the listed market," they said.

Prospects might get brighter because the stock is not held by any one big shareholder.

"DNZ has an open register and, with its internal management, could be subject to takeover or consolidation activity at some stage, something that is very difficult to achieve for most of its peers," they said.

However, the business has a number of drawbacks. DNZ is trading at one of the largest discounts to asset-backing on the NZX: $681 million of assets trading at a market capitalisation of just $272 million, flagging warning signs.

The analysts listed risk factors as including the relatively short-term expiry profile of its tenancies and an extremely high gearing, still at about 40 per cent.

The best-performing real estate businesses in the last month were Argosy Property Trust (up 7.2 per cent), Kermadec Property Fund (up 6.5 per cent) and Kiwi Income Property Trust (up 5.2 per cent). The worst were National Property Trust and Property for Industry.