KPG - Kiwi Property Group

[Shareguy]

Broker speak translated into English.
Strong Buy = BUY
Buy = Accumulate
Overweight = Hold or accumulate if you don't have enough
Hold = Reduce
Underweight = SELL

Agree............... SELL

[Basil]

Exciting times ahead for two of most discussed and loved stocks

Resido on one hand and The Helier on the other

Lose 30% on a $3.3m apartment ($1m) and opex is $550 per week. What a deal !
Makes renting a penthouse apartment at the Resido look very cheap lol

[Shareguy]

FB not keen either

While KPG maintained FY24 DPS guidance, we forecast this to be cut in FY25 and remain at these levels medium term, largely due to: (1) higher tax, (2) continued interest cost pressure, and (3) low initial returns from developments

[KW]

Craig's dont like the result

KIWI PROPERTY GROUP (DOWNGRADE TO UNDERWEIGHT) – 1H24 AFFO dropped -25.4% to NZ$48.6m although this was primarily driven by asset disposals over the past year or so. While KPG reaffirmed dividend guidance for FY24e at 5.7cps, Hill remains more cautious on the medium-term outlook, with KPG's Build to Rent project at Slyvia Park targeting a relatively skinny yield on cost (4.5-5.0%) - on ambitious although not impossible rental price points. On a yield plus growth (to FY27e) analysis KPG now screens at the bottom of the pack in terms of sector returns at 0.3% (sector +5.3%) and in conjunction with a small lift in his equity beta this drives a 5cps reduction in his TP to 78cps. Downgrade to Underweight accordingly. 

Has nobody told them that Term Deposits are paying 6%?  All these property companies chasing 4% returns in a world where the cost of finance exceeds 8% are not doing their shareholders any favours.

[Basil]

Has nobody told them that Term Deposits are paying 6%?  All these property companies chasing 4% returns in a world where the cost of finance exceeds 8% are not doing their shareholders any favours.

They'll never admit this but they've got themselves caught out in a yield trap.  When they were planning and consenting this a few years ago 5% looked like a half decent return assuming, (I don't), you believe all the ESG nonsense and claimed synergies and value add having these apartments next to Silvia Park brings in terms of extra customers shopping there.   According to KPG they are following the best international trends with these BTR right next to a mall that allegedly have been very successful overseas.  (No doubt fueled by some of the United Nation's agenda around carbon emissions). I guess once they pressed the button on approving the build contract there was no going back.

I think more important than this mistake is that nothing they have ever done before has been value or earnings accretive over the last 30 years.  Really, you have to question what's driving the board and management.  There seems a very heavy woke agenda driving ESG stuff but at what price to shareholders. Selling assets yielding as much as 12% and investing in build to rent that will be lucky after real costs to net 4% is ESG madness run amuck in my book.  I did a comparison of how this has compared to the property index a while back, (not inflation index).  Residential property index is up a whopping 600%+ in the last 30 years and this has gone nowhere. Really that's a shocking inditement on their business model. The only strong growth over time with this has been in management's fat salaries.

Investing in KPG is analogous to being on a road to nowhere.   Holders seem to believe it's all going to be different going forward and KPG's decades long history of declining NTA and dividends in real terms was somehow an aberration. 

[BlackPeter]

folks, I realize that it must be property fund bashing time, and whoever wants can have a go. No investment experience required.

I assume everybody else understands that its not the role of property investment funds to duplicate Berkshire Hathaway and accumulate heaps of wealth without ever paying  dividends. They are (at least in NZ) organised to act as tax efficient pseudo bonds.

Has nobody told them that Term Deposits are paying 6%?  All these property companies chasing 4% returns in a world where the cost of finance exceeds 8% are not doing their shareholders any favours.

Do you realise that you need to deduct your personal taxes from the 6% bond yeild youmentioned, leaving, if you are lucky 4%for yourself. KPG's dividend however comes out of a PIE - taxes are already paid. I prefer to receive the 7% tax free KPG currently pays compared to the 6% from your star bond which needs to be taxed, but each to their own.

...

Investing in KPG is analogous to being on a road to nowhere.   Holders seem to believe it's all going to be different going forward and KPG's decades long history of declining NTA and dividends in real terms was somehow an aberration. 

OK, lets see ...

I assume you realize that property is over the long run appreciating with something like 6% to 8% p.a?

If you look at KPG, they paid over the last decades something like that amount basically taxfree to their investors year after year. So - why would we expect that their value appreciates on top of the dividend? Would a bond paying interest appreciate (other than thee usual link into interest rates)?

In a diversified portfolio there are a lot of good reasons to add Property funds like e.g. KPG to the mix. If you do your numbers, then you will find that over the long term the return from them is better (and - depending on your personal tax situation - often more tax efficient) than the return from bonds ... and the risks are lower than with most other shares. Sure - they are cyclical as well, and whoever wants to further improve their return will buy them when low (like now) and sell them when high.

Remember - they are cyclical, i.e.you can rinse and repeat.

However - as we have seen, they are not just nice little money spinners, but some people who don't understand them really love to bash them, which keeps the SP down.

Win-win.

[winner (n)]

Peter . I think KW statement was about Kiwi getting a 4%/5% rental yield on these BTR things

[KW]

Do you realise that you need to deduct your personal taxes from the 6% bond yeild youmentioned, leaving, if you are lucky 4%for yourself. KPG's dividend however comes out of a PIE - taxes are already paid. I prefer to receive the 7% tax free KPG currently pays compared to the 6% from your star bond which needs to be taxed, but each to their own.

No, I was making the point that they would be better off putting their own money into the bank on term deposit, rather than investing it in a 4% return project. 

Just for comparative purposes, a few suburban "convenience malls" (as the Aussies call them) have traded recently, on 5.5%-5.75% yields.  One in a tiddly town in QLD sold for 7.7% yield but thats probably an outlier.  So if they wanted to recyle their IKEA sale capital there are plenty of good commercial opportunities going.  Note that TD rates in Aus are 5.10% currently.

And I'm not property bashing.  In fact, I'm buying AREITS at the moment.  But good quality ones, that have longevity in a high interest rate world.  Because if you cant cover your financing costs over the long term you're in trouble.

[Shareguy]

So management think people will be rushing to rent at Sylvia Park and pay $800 PW average price

I guess they think the quality and location will sell it (and that may be the case). Long leases not so sure.

We have been landlords for a long time. My experience is that renters do not want to sign long leases. They want the ability to move out when they want to, but they don't want to be locked into long leases. The most I can get a tenant to sign on a fixed term contract is two years and even that is hard work sometimes. Most are on 1 year.

It will all come down to the lease and what they offer. Car parks for example. To work it will have to have an out for tenants to be a success. Standard BTR have 56 days for a 10 year lease.

No question the location is first class. The shops, restaurants, bars below will be a big drawcard as well as the train station and access to the motorway.

A check on Trademe has the highest price properties in Mt Wellington as

1 bed $470
2 bed $720

No question the rents are going up and yes lots of demand. At the end of the day the price people can pay is determined by their income so I guess will see.

[Basil]

I assume you realize that property is over the long run appreciating with something like 6% to 8% p.a?

If you look at KPG, they paid over the last decades something like that amount basically taxfree to their investors year after year. So - why would we expect that their value appreciates on top of the dividend?
Blackpeter

I wasn't comparing KPG to bonds.  To be crystal clear, what I was saying is that the residential property index has gone up 600%+ in the last 30 years and KPG have not gone up at all.
Sure KPG have always paid out most of the income earned each year but a residential property would also have provided a yield all those years too and here's where I have a problem with KPG's development strategy.  If you go back 15 years they paid out 8.5 cps, next year they will struggle to meet this years 5.7 cps.  How on earth is that possible that in real inflation adjusted terms dividends now are only a fraction of what they were ?  Can you please explain that to me ?

Perhaps a worked example would help illustrate my point.   If I had of kept my first home as a rental 30 years ago it would have gone up about 600%, houses in Glen Eden Auckland are about $1m now and I paid $139K for it in 1991, ~ 7.2 times my money, but it would now be returning me 24% gross yield on initial cost, i.e. the yield on cost goes up over time not down.  It's remarkable that not only do KPG assets go down in real inflation adjusted terms over time but so do their dividends.  How on earth has that happened ?
Management have to be a very special breed of Muppets to achieve such "remarkable success".

I assume you've heard of the term "dividend trap"  Well, guess what, you're in a classic dividend trap with KPG with both the real inflation adjusted value of your assets and earnings declining over time.  Just as well the last 30 years are an unfortunate aberration (despite almost all being boom property years) and it's all going to be so much better going forward...or so KPG management would have you believe.

[BlackPeter]

I wasn't comparing KPG to bonds.  To be crystal clear, what I was saying is that the residential property index has gone up 600%+ in the last 30 years and KPG have not gone up at all.
Sure KPG have always paid out most of the income earned each year but a residential property would also have provided a yield all those years too and here's where I have a problem with KPG's development strategy.  If you go back 15 years they paid out 8.5 cps, next year they will struggle to meet this years 5.7 cps.  How on earth is that possible that in real inflation adjusted terms dividends now are only a fraction of what they were ?  Can you please explain that to me ?

...

Actually - its not that hard.

There is a good reason people call them quasi bonds.

You put in one dollar, you get out your interest rate every year of say 6 to 8 cents, and whatever is left the manager needs to use to pay for maintenance. You realise that it does cost money to maintain the value of any property, do you? And I suppose the manager wants some return as well, he is not a welfare organisation, either. Fair enough.

If you get out, you get your dollar back, and same as with bonds it might be a bit more (when interest rates are low) or a bit less (if interest rates are high).

Same as a bond ... or do your bonds deliver capital gains?

I am sure you understand the basics of investment and property management, don't you?

Ever thought about how much money the owner of a house needs to spend before they can enjoy their 600% "return"? Of course you need to deduct rates, insurance payments, maintenance repairs, mawing the lawns and many other things. Still sure they can cash in 600% - or is this just the payment they get to cover all the expenses they had accumulating over several decades??

As an owner of KPG shares all these things are taken care off, but of course - there is no free lunch.

[Basil]

So you get your dollar back after 30 years and its worth about 40 cents after inflation has eaten away at it.
Sounds too good to be true.

[KW]

Interesting to compare Vicinity's redevelopment metrics for Chatswood Chase with KPG's BTR development

Chatswood Chase redevelopment metrics on 100% ownership basis 
• Development cost: $620 million 
• Commencement of main construction works: March 2024 
• Completion: October 2025 
• Expected returns: Stabilised yield of >6.0% and Internal Rate of Return of >10.0% 
• Forecast valuation on stabilisation5 : approximately $1.5 billion, representing an estimated development profit of >$200 million 
• Pre-leasing of major development is well progressed; >45% of income secured via heads of agreement

[BlackPeter]

So you get your dollar back after 30 years and its worth about 40 cents after inflation has eaten away at it.
Sounds too good to be true.

Look, as with any other investment you can choose whether you want to enjoy the income or whether you want to reinvest it.

If you put in your dollar and reinvest all returns over 30 years, than obviously you will end up (assuming 7% average dividends) with $7.61, which happens to be pretty close to the 600% return you boosted for housing over 30 years. Not even magic, it is just what any asset with around 7% annual return will deliver.

Obviously - for your house, I hope somebody else paid for your rates, for insurance, for maintenance  and for management otherwise you won't get the 600% you are dreaming off.

While I understand that people want to eat their cake and have it too - I found so far nobody who actually managed to achieve that.

So - enjoy the returns and get the principal back, or reinvest your returns and enjoy the big payment at the end (like with the house ...) - or pick something in between.

Investment 101.

[BlackPeter]

Interesting to compare Vicinity's redevelopment metrics for Chatswood Chase with KPG's BTR development

Chatswood Chase redevelopment metrics on 100% ownership basis
• Development cost: $620 million
• Commencement of main construction works: March 2024
• Completion: October 2025
• Expected returns: Stabilised yield of >6.0% and Internal Rate of Return of >10.0%
• Forecast valuation on stabilisation5 : approximately $1.5 billion, representing an estimated development profit of >$200 million
• Pre-leasing of major development is well progressed; >45% of income secured via heads of agreement

I know a lot of organisations who started with big dreams ... and most of them don't achieve them. Obviously - if they measure these big dreams using non standardised measurements (i.e. they can make up the result on the go), than this makes it for them still a bit easier to claim afterwards that they have achieved them.

But apart from that - you understand that the purpose of the BTR development might not be to squeeze maximum dollars out of the rent? It well might be to increase the value of the other venues they are leasing out - providing close by workforce for the office buildings and close by customers for the malls.