KPG - Kiwi Property Group

[BlackPeter]

The residential rental market is struggling in Auckland. Demand and rental prices are falling and it's happened quickly. Winter is always slow as people don't generally like moving and tend to hunker down, so it's early days. Retail, well we are all aware of how that's going.

Divi cut again and are told due completely to depreciation changes.  Management saying they have a plan to support the gap in their cashflows going forward to support the current new div.

Still a great dividend currently but insiders including the ceo have been selling.

https://api.nzx.com/public/announcement/433928/attachment/422066/433928-422066.pdf

Today's announcement that the Government to 'flood' cities with more housing by liberalising planning rules has the potential to affect the value of Drury and also their residential portfolio.

https://www.nzherald.co.nz/nz/politics/government-to-flood-cities-with-more-housing-by-liberalising-planning-rules/K4LYY3G54BF5TIDRWTUEEOGYEU/

Interesting times..

Well, yes - looks like a lot of executives seem to need money for a new deck - maybe time to invest into a deckbuilding company?

Not so sure, though about the dropping rents and the flooding of our towns with affordable living room.

How many Granny flats can you fit on a 300 sqm section which is already occupied by a main house covering with garage already 240 sqm or so?

While it is desirable to increase the housing supply, and while I hope that this new policy might somewhat reduce the pressure on people who currently need to live in cars and garages ... I would not expect that everybody will now move out of a nice apartment building at Silvia Park into the Granny flat their parents erected on their newly build deck.

KPG (and other REITS) will recover as soon as interest rates will start to drop. They always do ;

[Basil]

Deal to sell the Vero tower has fallen over, OUCH!  That was a key plank to their efforts to close the gap to NTA and reduce their gearing.
https://api.nzx.com/public/announcement/435500/attachment/423892/435500-423892.pdf
Headed back into the late 70's cent range ?

[Shareguy]

Gearing back up to 39 percent.

[LaserEyeKiwi]

Still hope they can sell some of their office assets - this is two office sales in a row that have not completed (same thing happened to the Aurora Center sale).

Meanwhile the impacts of the cancelled deal, both pros & cons as follows:

- Rental Revenue: Net Rental Income from Vero is $25 million annually

Needless to say, overall company net rental income will increase by ~$25 million annually above what it would be without it.

For context the total company net rental income for the last year was $185m (this obviously included the Vero Center).

But retaining Vero means....

- Interest costs: Total net Debt(Cash) will be impacted by approximately the same amount as the now cancelled Vero sale price.

For context, the average net interest rate for KPG is in a similar ballpark to the net income yield of the Vero Centre. So while interest costs will be higher than what they would have been with the Vero sale, it is balanced out by the retention of Vero net rental income.

One possible silver lining is that interest rates appear to be reversing now, so as KPGs new bond issuance/bank lending facilities interest rates fall, Vero center (if still retained) will grow in profitability (from a net rental income less interest cost for holding), and its valuation may increase as cap rates improve with the falling interest rates.

- Developments: KPG had virtually no new developments in progress or ready to start in the near term. They had even let go of their development executive. Resido 1 (The first Build-to-rent apartment development) has been completed and tenancies have begun. The only other development related activity is the winding down of the end of the relatively low cost Stage 1 earthworks at Drury to be completed this year. I would not expect them to announce any new additional unexpected developments any time soon. The redevelopment of LynnMall is likely a long way away.

- Asset Sales: KPG has been trying to sell down its remaining standalone office assets for a few years now. It had floated the idea of a "co-investment" platform where it would offer other entities a way to buy stakes in its office assets. Perhaps that effort will be revived. Alternatively there may be opportunities to bundle them into another office focused listed fund.

Amongst its other assets, management has said the sale of Drury "Superlots" is on the table as an option to raise funds, and with significant profits resulting.

Oh and of course "The Plaza" mall remains to be sold.

=====================

Long Story short:

KPG tried to sell its biggest office asset at the bottom of the real estate cycle, and got what appeared to be a great offer. That offer fell through, which leaves a large net rental income generating asset on the books, but with the downside of no longer being able to eliminate a large chunk of debt. Overall no net change in net operating income financials (rental income balances out interest payments).

Pro: interest rates are falling, so medium term company may benefit from retaining Vero
Con: no longer reducing gearing to very low level, keeps any additional near term new developments probably off the table (some may actually see this as a "Pro")

[Shareguy]

Still hope they can sell some of their office assets - this is two office sales in a row that have not completed (same thing happened to the Aurora Center sale).

Meanwhile the impacts of the cancelled deal, both pros & cons as follows:

- Rental Revenue: Net Rental Income from Vero is $25 million annually

Needless to say, overall company net rental income will increase by ~$25 million annually above what it would be without it.

For context the total company net rental income for the last year was $185m (this obviously included the Vero Center).

But retaining Vero means....

- Interest costs: Total net Debt(Cash) will be impacted by approximately the same amount as the now cancelled Vero sale price.

For context, the average net interest rate for KPG is in a similar ballpark to the net income yield of the Vero Centre. So while interest costs will be higher than what they would have been with the Vero sale, it is balanced out by the retention of Vero net rental income.

One possible silver lining is that interest rates appear to be reversing now, so as KPGs new bond issuance/bank lending facilities interest rates fall, Vero center (if still retained) will grow in profitability (from a net rental income less interest cost for holding), and its valuation may increase as cap rates improve with the falling interest rates.

- Developments: KPG had virtually no new developments in progress or ready to start in the near term. They had even let go of their development executive. Resido 1 (The first Build-to-rent apartment development) has been completed and tenancies have begun. The only other development related activity is the winding down of the end of the relatively low cost Stage 1 earthworks at Drury to be completed this year. I would not expect them to announce any new additional unexpected developments any time soon. The redevelopment of LynnMall is likely a long way away.

- Asset Sales: KPG has been trying to sell down its remaining standalone office assets for a few years now. It had floated the idea of a "co-investment" platform where it would offer other entities a way to buy stakes in its office assets. Perhaps that effort will be revived. Alternatively there may be opportunities to bundle them into another office focused listed fund.

Amongst its other assets, management has said the sale of Drury "Superlots" is on the table as an option to raise funds, and with significant profits resulting.

Oh and of course "The Plaza" mall remains to be sold.

=====================

Long Story short:

KPG tried to sell its biggest office asset at the bottom of the real estate cycle, and got what appeared to be a great offer. That offer fell through, which leaves a large net rental income generating asset on the books, but with the downside of no longer being able to eliminate a large chunk of debt. Overall no net change in net operating income financials (rental income balances out interest payments).

Pro: interest rates are falling, so medium term company may benefit from retaining Vero
Con: no longer reducing gearing to very low level, keeps any additional near term new developments probably off the table (some may actually see this as a "Pro")

I agree this could be a good thing. However high gearing and the amount of insiders selling has me staying on the side lines.

[Basil]

I dumped the very small stake I recently bought this morning at break even on cost. You win some, you lose some and sometimes you just break even.

Good post LEK.

[BlackPeter]

Deal to sell the Vero tower has fallen over, OUCH!  That was a key plank to their efforts to close the gap to NTA and reduce their gearing.
https://api.nzx.com/public/announcement/435500/attachment/423892/435500-423892.pdf
Headed back into the late 70's cent range ?

Hmm - sounds like the buyer was a bit dodgy anyway. Not paying the deposit (as required by contract) and not even attempting to get OIO approval (as required by contract as well)?

Maybe they should have done due diligence of the suitor at an still earlier stage, but otherwise it sounds like they are better off without this suitor. Good riddance! Who knows - SP might go up ;

[Shareguy]

The Auckland rental market is the toughest I have seen it in a very long time. I would suggest that Resido will be struggling. 

The reviews on Reddit are interesting

[winner (n)]

The Auckland rental market is the toughest I have seen it in a very long time. I would suggest that Resido will be struggling. 

The reviews on Reddit are interesting

https://www.google.com/url?q=https://www.reddit.com/r/auckland/comments/1cgntoa/resido_at_sylvia_park_overpriced/&sa=U&ved=2ahUKEwi7gvS7vdWIAxXVzDgGHYepA1EQFnoECBYQAQ&usg=AOvVaw3p1zFjezzwoEvhfyDji8p_

Jenny Ruth article this week headlined " Does build-to-rent stack up as an investment?"

She was pretty disparaging of Kiwi and commented "It appears all but certain the company would have dismissed the idea if it had known what was coming." ...referring to what they outlined in 2021 (probably what was in this preso  https://api.nzx.com/public/announcement/379455/attachment/355092/379455-355092.pdf

[Shareguy]

Jenny Ruth article this week headlined " Does build-to-rent stack up as an investment?"

She was pretty disparaging of Kiwi and commented "It appears all but certain the company would have dismissed the idea if it had known what was coming." ...referring to what they outlined in 2021 (probably what was in this preso  https://api.nzx.com/public/announcement/379455/attachment/355092/379455-355092.pdf

Interesting. Kpg have been a serial under-performer for years. There is page after page of reviews on Reddit mostly negative. Can see why so many insiders have been selling.

[Ferg]

She was pretty disparaging of Kiwi and commented "It appears all but certain the company would have dismissed the idea if it had known what was coming."

Do tell - what is coming?

[Ferg]

Interesting. Kpg have been a serial under-performer for years. There is page after page of reviews on Reddit mostly negative. Can see why so many insiders have been selling.

Have you got a link?  The only stuff I have seen on Reddit is complaints from avocado eating millennials commenting on exorbitant rent prices.

[winner (n)]

Do tell - what is coming?

Referring to what has happened since their presentation of 2021 ....like if they knew back then what has happened they might have not gone ahead

[Shareguy]

Have you got a link?  The only stuff I have seen on Reddit is complaints from avocado eating millennials commenting on exorbitant rent prices.

No Ferg. It does not work for some reason. But yes its mainly about the costs being too expensive and above the market rents and what people can afford.

[Shareguy]

What's changed.

Auckland rental market has gone from under supply to over supply in many areas.

Why?

1/Due to developers unable to sell finished property's have put them into the rental pool.

2/ Imigration is declining and the people coming in can't afford in many cases the rents that Resido are asking.

3/ The job market has changed so young ones are staying at home longer and people for the first time in years are worried about loosing their own jobs.

4/ The cost of living has gone up and income has not kept up in many cases.

Anyway here is an Auckland property managers review from July. Opes property management

Auckland – Leah Cockroft

I'm seeing a few things happening. Firstly, the number of rental listings on the market (the rental stock) is the highest it's been since 2018.

Auckland's rental stock has risen by 40% in the last 3 months (REINZ). This will soften rents as there are a higher number of properties looking for tenants.

However, my advice to investors is to keep rents at the market rate and allow for a longer vacancy. Don't drop your rent just to get a tenant in.

Over the year, you'll be better off. But you might need to get through a few weeks without rent.

I'm also seeing a few new builds coming up for completion. This comes with its own complications. Let's say you bought a New Build back in early 2023. As part of that, they would have gotten a rental appraisal.

Back then, the Auckland Floods wreaked havoc on the rental market.. Both owner-occupiers and tenants had to move.

There were lots of people looking for rentals, but there was not much supply. This pushed up rents.