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</h2>
Large mixed-use&nbsp;portfolio
We view Kiwi Property Group (KPG) as the best priced of the large cap stocks in the listed property sector and have upgraded our rating from NEUTRAL to OUTPERFORM. KPG looks relatively cheap in an expensive sector.
What’s changed?
<ul>
<li>Earnings: No change</li>
<li>Target Price: Lifted +12.5% to NZ$1.62 as a result of our WACC changes</li>
<li>Rating:&nbsp;Upgraded to OUTPERFORM</li>
</ul>
Upgraded target price
As detailed in our property sector report&nbsp;‘Real Estate reflections’&nbsp;dated 5 September, we have made changes to our weighted average cost of capital (WACC) assumptions and have adopted our new firm wide, risk free rate and market risk premium across all of the 10 listed property vehicles that we cover. The new risk free rate is 2%, down from 2.75% and the market risk premium is now 7.5%, down from 7.75%. The net result is a lift in the KPG target price of +12.5% to NZ$1.62.
Given the relatively low asset betas in the listed property sector, this has had a material positive impact on our DCF valuations. The level of impact on our target prices is less significant, given our target price is a 50% blend of our DCF valuations and our unchanged NAV valuations. While the lower WACC has lifted our target prices by +7% to +17% it has had little impact on our investment ratings. This is because our investment ratings are relative to the listed property sector, not the wider equity market.
Upgraded investment rating to OUTPERFORM
KPG had a relatively large lift in its target price and has for some time been our preferred large cap exposure, given the premium pricing attached to GMT and PCT. Concern regarding KPG’s retail exposure is the key reason for the discount which we think provides an opportunity for investors given the quality of KPG’s assets. KPG trades at multiples well below the sector average and significantly below its large cap peers as detailed in Figure 4.
Large mixed-use portfolio has appeal
KPG owns a portfolio of large prime mixed-use, retail and office assets, with rental income diversified across a substantial tenant base. Recent sales of non-core assets have improved portfolio quality and made KPG more defensive to softening property market fundamentals. KPG is not immune to the structural headwinds for retail property with e-commerce growth impacting; however, we expect KPG’s catchment-dominant malls to outperform.&nbsp;
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Investment View
KPG has an attractive and large diversified portfolio of prime mixed-use and standalone retail and office assets. While retail headwinds remain, catchment-dominant shopping centres are relatively well positioned. Around 30% of its asset base is a defensive office portfolio with a mix of well-located Auckland assets and government leased property in Wellington. KPG has a cost efficient internalised management structure. Our rating is OUTPERFORM.
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&nbsp;Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Kiwi Property Group
Large mixed-use&nbsp;portfolio
We view Kiwi Property Group (KPG) as the best priced of the large cap stocks in the listed property sector and have upgraded our rating from NEUTRAL to OUTPERFORM. KPG looks relatively cheap in an expensive sector.
What’s changed?

Earnings: No change
Target Price: Lifted +12.5% to NZ$1.62 as a result of our WACC changes
Rating:&nbsp;Upgraded to OUTPERFORM

Upgraded target price
As detailed in our property sector report&nbsp;‘Real Estate reflections’&nbsp;dated 5 September, we have made changes to our weighted average cost of capital (WACC) assumptions and have adopted our new firm wide, risk free rate and market risk premium across all of the 10 listed property vehicles that we cover. The new risk free rate is 2%, down from 2.75% and the market risk premium is now 7.5%, down from 7.75%. The net result is a lift in the KPG target price of +12.5% to NZ$1.62.
Given the relatively low asset betas in the listed property sector, this has had a material positive impact on our DCF valuations. The level of impact on our target prices is less significant, given our target price is a 50% blend of our DCF valuations and our unchanged NAV valuations. While the lower WACC has lifted our target prices by +7% to +17% it has had little impact on our investment ratings. This is because our investment ratings are relative to the listed property sector, not the wider equity market.
Upgraded investment rating to OUTPERFORM
KPG had a relatively large lift in its target price and has for some time been our preferred large cap exposure, given the premium pricing attached to GMT and PCT. Concern regarding KPG’s retail exposure is the key reason for the discount which we think provides an opportunity for investors given the quality of KPG’s assets. KPG trades at multiples well below the sector average and significantly below its large cap peers as detailed in Figure 4.
Large mixed-use portfolio has appeal
KPG owns a portfolio of large prime mixed-use, retail and office assets, with rental income diversified across a substantial tenant base. Recent sales of non-core assets have improved portfolio quality and made KPG more defensive to softening property market fundamentals. KPG is not immune to the structural headwinds for retail property with e-commerce growth impacting; however, we expect KPG’s catchment-dominant malls to outperform.&nbsp;

Investment View
KPG has an attractive and large diversified portfolio of prime mixed-use and standalone retail and office assets. While retail headwinds remain, catchment-dominant shopping centres are relatively well positioned. Around 30% of its asset base is a defensive office portfolio with a mix of well-located Auckland assets and government leased property in Wellington. KPG has a cost efficient internalised management structure. Our rating is OUTPERFORM.

&nbsp;Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Kiwi Property Group: Large Mixed-Use Portfolio