Conversion To 6-Star Green Standards Will Boost Leasing Activity

Key Takeaways

• Sustainability-focused upgrades yield higher rental rates and improved margins, with strong demand for green buildings enhancing revenue stability and tenant retention.
  
• Strategic property disposals and acquisitions, along with increased leasing activities, suggest potential long-term revenue growth and asset value enhancement.
  
• Ongoing economic sluggishness, valuing challenges, vacancy risks, and adverse tax policies are pressuring Argosy Property’s revenue growth, net margins, and potential dividend sustainability.

Catalysts

Argosy Property Limited in properties in New Zealand.

• The conversion of buildings to 6-star Green standards, as seen with 105 and 101 Carlton Gore Road, has led to higher rental rates per square meter, demonstrating potential for increased rental income and improved net margins due to sustainability-focused property upgrades.
  
• Continued strong demand for green buildings, coupled with better tenant retention and lower vacancies, positions Argosy Property to improve revenue stability and potentially enhance net margins over time.
  
• The notable increase in lease inquiries and the completion of several post-balance-date transactions indicate a positive trend in leasing activity, which could lead to future revenue growth.
  
• The 224 Neilson Street development has attained a 6-star design rating and is attracting significant interest, suggesting that successful leasing could enhance future earnings and return on investment.
  
• Plans to dispose of non-core properties and reinvest in strategic acquisitions such as 291 East Tamaki Road, along with a strong development pipeline, point to potential asset value increase and long-term revenue growth.

Argosy Property Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Argosy Property's revenue will decrease by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.9% today to 83.6% in 3 years time.
• Analysts expect earnings to reach NZ$110.5 million (and earnings per share of NZ$0.14) by about May 2028, up from NZ$-3.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NZ$129.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, up from -308.4x today. This future PE is lower than the current PE for the NZ REITs industry at 44.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Argosy Property Future Earnings Per Share Growth

Risks

• The sluggish economy observed over the past six months could continue to impact revenue growth and net margins as economic conditions directly affect leasing activity and property valuations.
  
• Although property valuations have slightly increased, the gains were deemed inconsequential. A significant factor was a small lift post-balance date, which highlights the vulnerability to weak market conditions that could affect future earnings.
  
• Despite a focus on green buildings, the assets still carry a vacancy rate, representing a potential risk to rental income stability and net margins if not managed effectively.
  
• Net property income was reported as flat, while AFFO and distributable income per share showed a slight decrease. This suggests that revenue growth and earnings are under pressure, and might not support sustained dividend payments at current levels.
  
• Changes in government tax policy, such as the removal of depreciation deductions, have already affected current tax expenses and could further impact net earnings if there are additional unfavorable policy shifts.

Valuation

• The analysts have a consensus price target of NZ$1.122 for Argosy Property based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$132.2 million, earnings will come to NZ$110.5 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of NZ$1.06, the analyst price target of NZ$1.12 is 5.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.