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Morningstar | Investa's Earnings to Dip as Assets Emptied for Redevelopment. FVE Unchanged at AUD 5.15

Narrow-moat-rated Investa Office Fund reported fiscal 2018 funds from operations, or FFO, of AUD 30.6 cents per security, or cps, up 3% on the prior year. The result was in line with expectations, but guidance is soft. The emptying of two Sydney offices for major redevelopment works plus the sale of a Perth office are the main reason for guided fiscal 2019 FFO to decline 4.4% to AUD 29.2 cps. Forecast revisions have no impact on our fair value estimate, which is temporarily anchored to AUD 5.15 per share, being the takeover offer price from Blackstone Singapore. Investa shares have been trading very close to the takeover offer for the past three weeks indicating the market expects the takeover offer to be approved as proposed. At current levels, Investa screens as fairly valued, with the guided fiscal 2019 distribution of AUD 20.3 cps representing a yield of 3.9%.

Fiscal 2018 was a mixed year for rents, with like-for-like net property income, or NPI, growing 2.1% as compared with 4.7% in fiscal 2017. The softer result was mostly due to a deterioration in rents for properties in the weaker office markets of Brisbane and Perth. That said, like-for-like NPI growth in Sydney and North Sydney was solid but not outstanding, up 3.0% and 4.1% respectively.

We are expecting modest rental growth for fiscal 2019, with uplift in the 6% of leases being negotiated in Sydney to be largely offset by weaker rental outcomes for the 4% of leases being reset in weaker markets.

The entire portfolio was independently valued in May and resulted in a AUD 399 million or 10.5% uplift to the carrying value of the assets. We ascribe little value to this noncash accounting change, of which about 28% was due to the use of a lower discount rate by the external property valuers, which declined to 6.79% at June 2018 from 7.05% in June 2017. The balance of the revaluation was due to the higher rental growth assumptions by the valuers. These are inherently volatile, long-term in nature and hence highly subjective. Net tangible assets per security increased 14% over the year to AUD 5.47.