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>Getting Back on Track&nbsp;</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Kiwi Property Group (KPG) has lifted its FY21 adjusted funds from operations (AFFO) guidance by +10.5% at the mid-point, following strong leasing outcomes and turnover rents in its retail portfolio. The revised guidance largely reverses the downgrades we made at KPG's 1H21 result and sees us lift our 2H21 DPS forecasts +0.45cps to 3.05cps, implying a 4.9% cash yield on an annualised basis. While it is encouraging that the buoyant retail backdrop has prevented a deterioration in operations, we remain cautious of the funding and earnings pathway for its transition away from retail. UNDERPERFORM.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21–23E AFFO +9.0%/+4.7%/+4.5%</li>
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<h3>Upgrade to FY21 guidance</h3>
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<p>KPG increased its FY21 AFFO&nbsp;guidance +8.7–12.2% to 5.50–5.60cps (previously 4.90–5.15cps). Stronger than anticipated trading in its shopping malls has seen leasing outcomes and turnover rents ahead of&nbsp;KPG's&nbsp;expectations and rental&nbsp;abatements, and doubtful debts lower than anticipated despite further COVID-19 disruptions. Implied 2H21 AFFO is 3.18–3.28cps (1H21: 2.32cps) which suggests a potential final distribution of 3.05cps based on a 95% payout. Annualising 2H21 DPS,&nbsp;KPG's&nbsp;last close of NZ$1.24/share suggests a cash yield of 4.9%,&nbsp;in-line with its&nbsp;12-month moving average cash yield of 4.9%.​​​​​​​</p>
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<h3>Retail upside</h3>
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<p>Trading conditions in the retail sector have remained buoyant, with consumers reallocating travel spend towards discretionary purchases. Listed retailers have reported strong same store sales growth with improved margins. While it is encouraging that the improved retail backdrop is filtering through to landlords,&nbsp;lockdown&nbsp;forced many retailers to invest&nbsp;heavily in their online presence and&nbsp;anecdotes highlight&nbsp;online sales are higher margin than equivalent physical sales.&nbsp;Given this dynamic,&nbsp;questions still remain about the longer-term future of retail footprint and rents. Given&nbsp;KPG's&nbsp;malls are generally best-in-class, we expect it will fare better than the broader sector but expect some transitory pains.</p>
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<h3>Rating remains UNDERPERFORM, awaiting FY21 result on 24 May</h3>
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<p>We lift our FY21E to the mid point of guidance, translating to increased dividend forecasts in-line with KPG's payout ratio (95% of AFFO). A key focus at the FY21 result will be the outcome of the CBRE led sale process of The Plaza and updated portfolio valuations. We expect valuers will be more optimistic given downside scenarios haven't materialised, however, market evidence remains limited outside of the recent sale of Eastgate Mall in Christchurch below book value. Furthermore, Scentre Groups December 2020 valuations were broadly unchanged, suggesting retail revaluations won't be as strong as the industrial and office sub-sectors.&nbsp;</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 Getting Back on Track&nbsp;

UNDERPERFORM
Kiwi Property Group (KPG) has lifted its FY21 adjusted funds from operations (AFFO) guidance by +10.5% at the mid-point, following strong leasing outcomes and turnover rents in its retail portfolio. The revised guidance largely reverses the downgrades we made at KPG's 1H21 result and sees us lift our 2H21 DPS forecasts +0.45cps to 3.05cps, implying a 4.9% cash yield on an annualised basis. While it is encouraging that the buoyant retail backdrop has prevented a deterioration in operations, we remain cautious of the funding and earnings pathway for its transition away from retail. UNDERPERFORM.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY21–23E AFFO +9.0%/+4.7%/+4.5%



Upgrade to FY21 guidance


KPG increased its FY21 AFFO&nbsp;guidance +8.7–12.2% to 5.50–5.60cps (previously 4.90–5.15cps). Stronger than anticipated trading in its shopping malls has seen leasing outcomes and turnover rents ahead of&nbsp;KPG's&nbsp;expectations and rental&nbsp;abatements, and doubtful debts lower than anticipated despite further COVID-19 disruptions. Implied 2H21 AFFO is 3.18–3.28cps (1H21: 2.32cps) which suggests a potential final distribution of 3.05cps based on a 95% payout. Annualising 2H21 DPS,&nbsp;KPG's&nbsp;last close of NZ$1.24/share suggests a cash yield of 4.9%,&nbsp;in-line with its&nbsp;12-month moving average cash yield of 4.9%.​​​​​​​


Retail upside


Trading conditions in the retail sector have remained buoyant, with consumers reallocating travel spend towards discretionary purchases. Listed retailers have reported strong same store sales growth with improved margins. While it is encouraging that the improved retail backdrop is filtering through to landlords,&nbsp;lockdown&nbsp;forced many retailers to invest&nbsp;heavily in their online presence and&nbsp;anecdotes highlight&nbsp;online sales are higher margin than equivalent physical sales.&nbsp;Given this dynamic,&nbsp;questions still remain about the longer-term future of retail footprint and rents. Given&nbsp;KPG's&nbsp;malls are generally best-in-class, we expect it will fare better than the broader sector but expect some transitory pains.


Rating remains UNDERPERFORM, awaiting FY21 result on 24 May


We lift our FY21E to the mid point of guidance, translating to increased dividend forecasts in-line with KPG's payout ratio (95% of AFFO). A key focus at the FY21 result will be the outcome of the CBRE led sale process of The Plaza and updated portfolio valuations. We expect valuers will be more optimistic given downside scenarios haven't materialised, however, market evidence remains limited outside of the recent sale of Eastgate Mall in Christchurch below book value. Furthermore, Scentre Groups December 2020 valuations were broadly unchanged, suggesting retail revaluations won't be as strong as the industrial and office sub-sectors.&nbsp;



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: Getting Back on Track