New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kiwi Property Group<br>FY21 Result&nbsp;— Soft Year, Solid Signals</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Kiwi Property Group's (KPG) FY21 was a year marred by COVID-19 but has positively provided it an opportunity to reset priorities and change the direction of the vehicle. AFFO of 5.69cps (vs. expectations of 5.56cps) was down -17% yoy, but reflects a new base level of earnings with pandemic impacts being a similar quantum to the upcoming divestments of The Plaza and Northlands. Although rebasing earnings and dividends has been painful for shareholders, we believe KPG's strategic reset was necessary to improve the long-term outlook of the vehicle. Our focus now turns to divestment outcomes, development updates, and strategic execution. NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;DPS adjusted -4.4%/-2.6%/-5.4% in FY21/FY22/FY23 reflecting the assumed sale of&nbsp;Northlands&nbsp;in 1H22 (alongside The Plaza which was already in our forecasts)</li>
<li><strong>Target price</strong>:&nbsp;Lowered by -4cps to NZ$1.29</li>
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<h3>Through the trough</h3>
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<p>KPG's FY21 result was slightly ahead of expectations due to better top-line rental outcomes and lower corporate costs than forecast. COVID-19 rental abatements totalling NZ$19.5m weighed on underlying performance, however, a strong recovery in retail trading should isolate this disruption to FY21, assuming no further lockdowns. Operations also improved, with 2H21 Mixed-use MAT up +2.1% on a like-for-like basis, re-leasing spreads recovering to +2.7%, the Galleria backfill attracting high quality tenants, and its office portfolio remaining solid. Categorising several retail assets as held for sale has reduced visibility of trends for retail malls.</p>
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<h3>Now time to execute</h3>
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<p>The sale of Northlands and The Plaza, which we estimate contribute a cumulative c.NZ$22m of AFFO per annum, cements the rebasing of KPG's earnings at the COVID-19 impacted level. More importantly, it also funds future non-retail developments, with committed gearing (including the new NZ$63m Sylvia Park office building) falling to 25.3% post the sale of these assets. We estimate that KPG has capacity for the NZ$70m Centre Place North office tower, NZ$50m of Drury earthworks, a third NZ$100m Sylvia Park office tower, as well as another c.NZ$280m of developments before it reaches the top end of its target gearing range (25%–35%).</p>
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<h3>Retain NEUTRAL</h3>
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<p>While it is positive to see a clear plan from KPG to lower its retail exposure and fund its mixed-use pipeline, this transition will not be fast or straightforward and carries a high level of execution risk. Near-term investors are to be rewarded with a solid dividend yield underpinned by a higher quality portfolio once retail assets are divested. We retain our NEUTRAL rating.</p>
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<div><strong>Rohan Koreman-Smit, CFA</strong></div>
<div><a href="mailto:rohan.koreman-smit@forsythbarr.co.nz" target="_blank" rel="noopener">rohan.koreman-smit@<wbr>forsythbarr.co.nz</a></div>
<div>+64 9 368 0085</div>
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<div><strong>Ashton Olds, CFA</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
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Kiwi Property Group FY21 Result&nbsp;— Soft Year, Solid Signals

NEUTRAL
Kiwi Property Group's (KPG) FY21 was a year marred by COVID-19 but has positively provided it an opportunity to reset priorities and change the direction of the vehicle. AFFO of 5.69cps (vs. expectations of 5.56cps) was down -17% yoy, but reflects a new base level of earnings with pandemic impacts being a similar quantum to the upcoming divestments of The Plaza and Northlands. Although rebasing earnings and dividends has been painful for shareholders, we believe KPG's strategic reset was necessary to improve the long-term outlook of the vehicle. Our focus now turns to divestment outcomes, development updates, and strategic execution. NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;DPS adjusted -4.4%/-2.6%/-5.4% in FY21/FY22/FY23 reflecting the assumed sale of&nbsp;Northlands&nbsp;in 1H22 (alongside The Plaza which was already in our forecasts)
Target price:&nbsp;Lowered by -4cps to NZ$1.29



Through the trough


KPG's FY21 result was slightly ahead of expectations due to better top-line rental outcomes and lower corporate costs than forecast. COVID-19 rental abatements totalling NZ$19.5m weighed on underlying performance, however, a strong recovery in retail trading should isolate this disruption to FY21, assuming no further lockdowns. Operations also improved, with 2H21 Mixed-use MAT up +2.1% on a like-for-like basis, re-leasing spreads recovering to +2.7%, the Galleria backfill attracting high quality tenants, and its office portfolio remaining solid. Categorising several retail assets as held for sale has reduced visibility of trends for retail malls.


Now time to execute


The sale of Northlands and The Plaza, which we estimate contribute a cumulative c.NZ$22m of AFFO per annum, cements the rebasing of KPG's earnings at the COVID-19 impacted level. More importantly, it also funds future non-retail developments, with committed gearing (including the new NZ$63m Sylvia Park office building) falling to 25.3% post the sale of these assets. We estimate that KPG has capacity for the NZ$70m Centre Place North office tower, NZ$50m of Drury earthworks, a third NZ$100m Sylvia Park office tower, as well as another c.NZ$280m of developments before it reaches the top end of its target gearing range (25%–35%).


Retain NEUTRAL


While it is positive to see a clear plan from KPG to lower its retail exposure and fund its mixed-use pipeline, this transition will not be fast or straightforward and carries a high level of execution risk. Near-term investors are to be rewarded with a solid dividend yield underpinned by a higher quality portfolio once retail assets are divested. We retain our NEUTRAL rating.



Rohan Koreman-Smit, CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds, CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Kiwi Property Group: FY21 Result — Soft Year, Solid Signals