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>
Retail&nbsp;Revalued
UNDERPERFORM
Kiwi Property Group's (KPG) March 2020 valuations have resulted in an -NZ$290m (or -8.5%) decline in asset values driven by retail/mixed use assets. Retail assets were impacted by changes in rental assumptions with cap rate expansion only accounting for 20–25% of change in value. KPG's NTA reduces -13% to NZ$1.24 and gearing increases to 32% (towards top of its 25–35% range). Questions remain with regard to how KPG's retail assets track post-lockdown and we expect the news flow to remain challenging. We have not changed our earnings forecasts at this stage but continue to expect a sharply lower dividend than FY19, though an improvement on the 50% FY20 payout. UNDERPERFORM.
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Portfolio valuations down -8.5%
KPG's March 2020 valuations have resulted in an -NZ$290m (or -8.5%) decline in asset values. This decline is largely driven by KPG's retail (-21%) and mixed use (-11%) assets with office (+2%) values up slightly. Figure 1 sets out the changes in asset values by sub-sector along with the change in cap rate and implied change in rent. Retail assets were impacted by changes in valuers rental assumptions with cap rate expansion only accounting for 20–25% of change in value. Office cap rates were unchanged and KPG saw strong upward revisions for Wellington assets underpinned by long-term Government leases.
Balance sheet tightens — a full 1H21 dividend not likely
KPG's NTA reduces -13% to NZ$1.24 (versus our NAV of NZ$1.14) and gearing increases to 32% (towards the top of its 25–35% target range vs. 45% covenant). KPG has some committed spend remaining to complete its Galleria development Sylvia Park. Prior to COVID-19 KPG had a pipeline of developments including further office/hotels at Sylvia Park, increased retail space at Northlands, upgraded food and beverage at The Base. Higher gearing constrains KPG's capacity to execute on this pipeline. We also don't expect KPG to pay a full dividend in 1H21 to ensure it has headroom to support rent relief and not increase gearing.
Read-throughs&nbsp;for other&nbsp;LPVs: Office (and maybe Industrial) seeing better outcomes
While KPG's portfolio has the highest weighting to retail of the NZ LPV sector it does include high quality office. On each sub-sector 1) Retail valuations (both KPG's retail and mixed-use assets) were slightly more negative than expected largely due to underlying rental assumptions which were down 8–15%; Stride (SPG) shopping centre values are likely to decline 10–20% given outcomes reported so far, 2) Office held up better than expected particularly assets with long term leases and strong tenant covenants, which we believe provides a solid read-through for Precinct (PCT) and parts of the Argosy (ARG) portfolio, 3) Other assets, which includes industrial property adjacent to Sylvia Park (as well as Drury land), were broadly unchanged suggesting Goodman (GMT) and Property for Industry (PFI) and a smaller extent ARG, valuations will hold up near-term.
 Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Kiwi Property Group
Retail&nbsp;Revalued
UNDERPERFORM
Kiwi Property Group's (KPG) March 2020 valuations have resulted in an -NZ$290m (or -8.5%) decline in asset values driven by retail/mixed use assets. Retail assets were impacted by changes in rental assumptions with cap rate expansion only accounting for 20–25% of change in value. KPG's NTA reduces -13% to NZ$1.24 and gearing increases to 32% (towards top of its 25–35% range). Questions remain with regard to how KPG's retail assets track post-lockdown and we expect the news flow to remain challenging. We have not changed our earnings forecasts at this stage but continue to expect a sharply lower dividend than FY19, though an improvement on the 50% FY20 payout. UNDERPERFORM.

Portfolio valuations down -8.5%
KPG's March 2020 valuations have resulted in an -NZ$290m (or -8.5%) decline in asset values. This decline is largely driven by KPG's retail (-21%) and mixed use (-11%) assets with office (+2%) values up slightly. Figure 1 sets out the changes in asset values by sub-sector along with the change in cap rate and implied change in rent. Retail assets were impacted by changes in valuers rental assumptions with cap rate expansion only accounting for 20–25% of change in value. Office cap rates were unchanged and KPG saw strong upward revisions for Wellington assets underpinned by long-term Government leases.
Balance sheet tightens — a full 1H21 dividend not likely
KPG's NTA reduces -13% to NZ$1.24 (versus our NAV of NZ$1.14) and gearing increases to 32% (towards the top of its 25–35% target range vs. 45% covenant). KPG has some committed spend remaining to complete its Galleria development Sylvia Park. Prior to COVID-19 KPG had a pipeline of developments including further office/hotels at Sylvia Park, increased retail space at Northlands, upgraded food and beverage at The Base. Higher gearing constrains KPG's capacity to execute on this pipeline. We also don't expect KPG to pay a full dividend in 1H21 to ensure it has headroom to support rent relief and not increase gearing.
Read-throughs&nbsp;for other&nbsp;LPVs: Office (and maybe Industrial) seeing better outcomes
While KPG's portfolio has the highest weighting to retail of the NZ LPV sector it does include high quality office. On each sub-sector 1) Retail valuations (both KPG's retail and mixed-use assets) were slightly more negative than expected largely due to underlying rental assumptions which were down 8–15%; Stride (SPG) shopping centre values are likely to decline 10–20% given outcomes reported so far, 2) Office held up better than expected particularly assets with long term leases and strong tenant covenants, which we believe provides a solid read-through for Precinct (PCT) and parts of the Argosy (ARG) portfolio, 3) Other assets, which includes industrial property adjacent to Sylvia Park (as well as Drury land), were broadly unchanged suggesting Goodman (GMT) and Property for Industry (PFI) and a smaller extent ARG, valuations will hold up near-term.
 Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Kiwi Property

Kiwi Property Group: Retail Revalued