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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kiwi Property Group<br>Red Light&nbsp;Doesn't&nbsp;Stop Rent Relief</h2>
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<p><strong>NEUTRAL</strong></p>
<p>The effects of the pandemic continue to linger with the Omicron community outbreak and the move back to Red in the traffic light setting a headwind to the recovery in retail spending that was evident over Christmas. Shopping mall visitation is down and with the wave of infection yet to peak we expect shopper hesitancy to persist into FY23. Industry conversations suggest that CBD retail and food and beverage has been the hardest hit. Kiwi Property Group (KPG) has confirmed FY22 DPS will be 5.3cps, below our 5.5cps forecast with the key variance likely provisioning of some Omicron outbreak rent relief for its tenants. While KPG continues to trade at a large discount to NTA and offers an attractive 6.9% gross yield, it is in the early stages of executing on a capital hungry strategic transformation and its initial capital recycling is taking longer than expected. We retain NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22–24 AFFO -4.2%/-4.4%/-0.1% and DPS -2.8%/-2.7%/0.0%.</li>
<li><strong>Target price</strong>:&nbsp;-9cps to NZ$1.20 largely reflecting a higher cost of capital in our DCF, our NAV is unchanged.</li>
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<h3>Foot traffic isolating with Omicron</h3>
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<p>Our&nbsp;carpark&nbsp;tracker suggests that while&nbsp;KPG's&nbsp;flagship&nbsp;Sylvia Park is still seeing comparable traffic to the prior year its other malls are likely seeing visitation drop off. Since the start of the Omicron outbreak in late January&nbsp;LynnMall&nbsp;carpark&nbsp;occupancy has been tracking c.20% below the prior year. While restrictions under Red&nbsp;are broadly&nbsp;equivalent to Level 2 for retail, widespread community transmission is&nbsp;new in NZ&nbsp;and some shoppers are clearly hesitant to visit public areas for extended periods. Food and beverage is likely seeing the largest impacts and accounts for 10% of&nbsp;KPG's&nbsp;gross rental income. The peak of the Omicron outbreak is expected in three to six weeks and there will likely be a long period of high case volumes after.&nbsp;UK cases peaked early January and while lower are still at levels consistant with the peaks of previous waves;&nbsp;Australia peaked mid-January. Low foot traffic will likely remain into FY23. We have conservatively assumed&nbsp;a further&nbsp;gross rent is&nbsp;abatements&nbsp;NZ$4m&nbsp;in 4Q22 and 1Q23 reflecting a 50% reduction in rent for food and beverage operators and some smaller speciality&nbsp;retail&nbsp;tenants.</p>
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<h3>Undemanding valuation but in the early stages in its transformation</h3>
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<p>KPG has a clear plan to lower its retail exposure and fund its development pipeline within a relatively tight fiscal envelope. However, seismic issues, the Delta outbreak, and now Omicron have lowered cash income and delayed divestment of non-core retail assets. Near-term, investors continue to be rewarded with a solid dividend yield underpinned by a higher quality portfolio once retail assets held for sale are divested. Successful rezoning of&nbsp;Drury&nbsp;may also deliver a solid revaluation uplift. We retain our NEUTRAL rating.</p>
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Kiwi Property Group Red Light&nbsp;Doesn't&nbsp;Stop Rent Relief

NEUTRAL
The effects of the pandemic continue to linger with the Omicron community outbreak and the move back to Red in the traffic light setting a headwind to the recovery in retail spending that was evident over Christmas. Shopping mall visitation is down and with the wave of infection yet to peak we expect shopper hesitancy to persist into FY23. Industry conversations suggest that CBD retail and food and beverage has been the hardest hit. Kiwi Property Group (KPG) has confirmed FY22 DPS will be 5.3cps, below our 5.5cps forecast with the key variance likely provisioning of some Omicron outbreak rent relief for its tenants. While KPG continues to trade at a large discount to NTA and offers an attractive 6.9% gross yield, it is in the early stages of executing on a capital hungry strategic transformation and its initial capital recycling is taking longer than expected. We retain NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY22–24 AFFO -4.2%/-4.4%/-0.1% and DPS -2.8%/-2.7%/0.0%.
Target price:&nbsp;-9cps to NZ$1.20 largely reflecting a higher cost of capital in our DCF, our NAV is unchanged.



Foot traffic isolating with Omicron


Our&nbsp;carpark&nbsp;tracker suggests that while&nbsp;KPG's&nbsp;flagship&nbsp;Sylvia Park is still seeing comparable traffic to the prior year its other malls are likely seeing visitation drop off. Since the start of the Omicron outbreak in late January&nbsp;LynnMall&nbsp;carpark&nbsp;occupancy has been tracking c.20% below the prior year. While restrictions under Red&nbsp;are broadly&nbsp;equivalent to Level 2 for retail, widespread community transmission is&nbsp;new in NZ&nbsp;and some shoppers are clearly hesitant to visit public areas for extended periods. Food and beverage is likely seeing the largest impacts and accounts for 10% of&nbsp;KPG's&nbsp;gross rental income. The peak of the Omicron outbreak is expected in three to six weeks and there will likely be a long period of high case volumes after.&nbsp;UK cases peaked early January and while lower are still at levels consistant with the peaks of previous waves;&nbsp;Australia peaked mid-January. Low foot traffic will likely remain into FY23. We have conservatively assumed&nbsp;a further&nbsp;gross rent is&nbsp;abatements&nbsp;NZ$4m&nbsp;in 4Q22 and 1Q23 reflecting a 50% reduction in rent for food and beverage operators and some smaller speciality&nbsp;retail&nbsp;tenants.


Undemanding valuation but in the early stages in its transformation


KPG has a clear plan to lower its retail exposure and fund its development pipeline within a relatively tight fiscal envelope. However, seismic issues, the Delta outbreak, and now Omicron have lowered cash income and delayed divestment of non-core retail assets. Near-term, investors continue to be rewarded with a solid dividend yield underpinned by a higher quality portfolio once retail assets held for sale are divested. Successful rezoning of&nbsp;Drury&nbsp;may also deliver a solid revaluation uplift. We retain our NEUTRAL rating.


Kiwi Property Group: Red Light Doesn't Stop Rent Relief