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>
<p><strong>Shoppers Return, Dividends to Follow</strong></p>
<p><strong>UNDERPERFORM</strong></p>
<p>Kiwi Property Group (KPG) has provided an update on shopping centre visitation and dividends. Pedestrian counts across its portfolio are +1% yoy and KPG stated that it intends to pay a 1H21 dividend from underlying cash earnings given increased clarity around the post lockdown trading environment. We have adjusted our forecasts accordingly. Looking forward, KPG has logical plans to dilute its retail concentration via development of its existing assets; however, tight funding headroom and some challenged assets on the balance sheet increase execution risks in the current economic environment. Despite trading at a discount to its net tangible asset (NTA) value, we believe risks are skewed to the downside given KPG's leverage to the uncertain backdrop. We retain our UNDERPERFORM rating and NZ$1.10 target price.</p>
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<h3>Customers are back, but will spending follow?&nbsp;</h3>
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<p>KPG&nbsp;has reported that pedestrian counts for its portfolio are&nbsp;+1% vs. the&nbsp;pcp,&nbsp;since normal trading resumed on the 14 May. This is a solid improvement from -8% over the first 2 weeks of post-lockdown&nbsp;trading. Visitation hasn't&nbsp;been uniform, with Sylvia Park and&nbsp;Palmerston&nbsp;North seeing the best foot traffic. Our car park tracker suggests Sylvia Park (Figure 1) has seen increasing visitation over the last 5 weeks while Lynn Mall (Figure 2) has been flatter. No comment was provided on sales levels, however, credit card data&nbsp;from&nbsp;Paymark&nbsp;suggests that non-grocery spending is marginally down&nbsp;yoy. While&nbsp;KPG's&nbsp;visitation is encouraging, we believe an element of pent up demand remains and longer term retail sales trends are yet to be fully delineated.</p>
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<h3>Dividend returns in 1H21</h3>
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<p>KPG has stated the company intends to pay a 1H21 dividend based on 90–100% of adjusted funds from operations (AFFO). First half underlying earnings are impacted by rent abatements, partially offset by cost savings and tax benefits. While KPG is still in discussions with some tenants, KPG are confident rent abatements won't exceed prior guidance of NZ$20m. We have lowered our rent relief and vacancy assumption from NZ$35m to NZ$25m and lifted our 1H21 dividend from 1.7cps to 2.1cps, which equates to a 90% payout of AFFO. Our medium term forecasts still include higher vacancy and lower top line growth due to softer underlying economic conditions.&nbsp;</p>
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<h3>Balance sheet remains a concern</h3>
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<p>KPG's ambitions to transform its portfolio will require patience As the retail sub-sector has lost favour with investors, KPG has spent recent years transitioning into a diversified mixed-use portfolio. It has now signalled that the ongoing transition may see it acquire industrial assets and/or establish a funds management business alongside existing residential build-to-rent ambitions at Sylvia Park and development of the Drury town centre. With gearing of 32% nearing the top end of its targeted 25-35% range and retail assets likely under further revaluation pressure (and not easy to divest in the current environment), the funding pathway for this transition will not be straightforward.</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</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
Shoppers Return, Dividends to Follow
UNDERPERFORM
Kiwi Property Group (KPG) has provided an update on shopping centre visitation and dividends. Pedestrian counts across its portfolio are +1% yoy and KPG stated that it intends to pay a 1H21 dividend from underlying cash earnings given increased clarity around the post lockdown trading environment. We have adjusted our forecasts accordingly. Looking forward, KPG has logical plans to dilute its retail concentration via development of its existing assets; however, tight funding headroom and some challenged assets on the balance sheet increase execution risks in the current economic environment. Despite trading at a discount to its net tangible asset (NTA) value, we believe risks are skewed to the downside given KPG's leverage to the uncertain backdrop. We retain our UNDERPERFORM rating and NZ$1.10 target price.


Customers are back, but will spending follow?&nbsp;


KPG&nbsp;has reported that pedestrian counts for its portfolio are&nbsp;+1% vs. the&nbsp;pcp,&nbsp;since normal trading resumed on the 14 May. This is a solid improvement from -8% over the first 2 weeks of post-lockdown&nbsp;trading. Visitation hasn't&nbsp;been uniform, with Sylvia Park and&nbsp;Palmerston&nbsp;North seeing the best foot traffic. Our car park tracker suggests Sylvia Park (Figure 1) has seen increasing visitation over the last 5 weeks while Lynn Mall (Figure 2) has been flatter. No comment was provided on sales levels, however, credit card data&nbsp;from&nbsp;Paymark&nbsp;suggests that non-grocery spending is marginally down&nbsp;yoy. While&nbsp;KPG's&nbsp;visitation is encouraging, we believe an element of pent up demand remains and longer term retail sales trends are yet to be fully delineated.


Dividend returns in 1H21


KPG has stated the company intends to pay a 1H21 dividend based on 90–100% of adjusted funds from operations (AFFO). First half underlying earnings are impacted by rent abatements, partially offset by cost savings and tax benefits. While KPG is still in discussions with some tenants, KPG are confident rent abatements won't exceed prior guidance of NZ$20m. We have lowered our rent relief and vacancy assumption from NZ$35m to NZ$25m and lifted our 1H21 dividend from 1.7cps to 2.1cps, which equates to a 90% payout of AFFO. Our medium term forecasts still include higher vacancy and lower top line growth due to softer underlying economic conditions.&nbsp;


Balance sheet remains a concern


KPG's ambitions to transform its portfolio will require patience As the retail sub-sector has lost favour with investors, KPG has spent recent years transitioning into a diversified mixed-use portfolio. It has now signalled that the ongoing transition may see it acquire industrial assets and/or establish a funds management business alongside existing residential build-to-rent ambitions at Sylvia Park and development of the Drury town centre. With gearing of 32% nearing the top end of its targeted 25-35% range and retail assets likely under further revaluation pressure (and not easy to divest in the current environment), the funding pathway for this transition will not be straightforward.



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





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



Kiwi Property Group: Shoppers Return, Dividends to Follow