KPG - Kiwi Property Group

[Basil]

Gearing still an issue at 38.5 percent.

Sorry mate, I don't get it, why is that an issue ?
From the presentation.
Interest rate is down 41 bps to 4.89%
$248m funding headroom
Pro froma gearing scheduled to reduce to 37.5% after large format retail fund establishment which releases $53m capital
3.10 times interest cover ratio is very comfortably above the bank covenant of 2.25 times
Sales of large format retail sites in Drury expected to cover future development costs there
All looks very reasonable and comfortable to me.
Noting also that KPG has has just stopped the dividend reinvestment plan so the directors think its not a concern.

From memory VHP gearing is over 40% ?  I don't especially like gearing over 40%, but given their long leases and the nature of the healthcare tenants its probably also quite comfortable.

[lorraina]

KPG Q & A
Q: gearing?
Answer: 35% target, and any additional asset sales may reduce that further

[Shareguy]

Not a major Basil and yes the Sylvia Park Lifestyle to Mackersy will release $53m, reducing gearing down to 37.5%. Note FY25 was 37.4 % so no improvement and also above KPG 35% medium-term target.

Have recently been to Sylvia Park and it was pumping. The signs are good with another OCR cut Tom and KPG paying a decent yield. If these economists are right we are in for a recovery in retail spending, housing, and the broader economy.

[LaserEyeKiwi]

Would also point out that the assets are poised for upward valuations, which will also reduce gearing when it occurs. Of note there is an obvious reason they for the first time gave the seismic budgets for their assets that currently weigh on their value, along with all the comments that once the new earthquake standards bill is passed, then Auckland buildings will not be subject to the same seismic ratings as the rest of the country.

I think management were obviously implying that the seismic budgets for the Auckland properties included in their valuations will be reduced/eliminated to some degree.         

[Basil]

Good point LEK.  Page 8.  https://api.nzx.com/public/announcement/463213/attachment/457436/463213-457436.pdf
Present value of provisioning for Auckland properties $83m and estimate of say half of the rest of north Island = $17m, that's approx $100m of asset provisioning that's set to be expunged, boosting NTA by 6.25 cps ($100m / 1600m shares).  Also set to reduce gearing further as you quite rightly point out.

[Shareguy]

Craigs like the result

Constructive Outlook Supported by Relative Value, maintain O/W
After updating our forecasts, KPG now offers a Yield + Growth of 8.6%, which
is ahead of the sector average of 7.8%. Its office and retail weighting makes it
one of the more pro-cyclical LPV exposures; however, with signs of recovery
in retail spending, housing, and the broader economy we have a constructive
view on KPG's outlook. We note our revised forecasts imply AFFOps growth
of +3.4% p.a. through to FY29, which is among the strongest growth profiles
in the sector and does not rely on overly optimistic or demanding
assumptions. This growth outlook is complemented by a high cash yield,
which our back-testing of the barbell approach suggests should relatively
outperform during a rate-cutting cycle. Having last traded below our revised
$1.20 target price, we maintain our rating of Overweight

[LaserEyeKiwi]

Excellent news! unconditional as well, very nice.

[URL unfurl="true"]https://www.nzx.com/announcements/463526[/URL]

Kiwi Property agrees unconditional sale of The Plaza

27/11/2025, 12:00 NZDT, GENERAL

Kiwi Property today announced it has secured an unconditional agreement for the sale of The Plaza shopping centre in Palmerston North to NZ Retail Property Group (NZRPG), one of New Zealand's largest privately-owned retail property development, investment and management companies.

The agreed sale price of $118.9 million is 0.9% below the held for sale value in the FY26 interim results. Following the sales of The Plaza to NZRPG and Sylvia Park Lifestyle to the Mackersy LFR Fund [Note 1], Kiwi Property's pro forma gearing will be 35.2% (based on September 2025 figures).

The sale of The Plaza is aligned with Kiwi Property's capital recycling strategy, which focuses on providing balance sheet flexibility and reinvesting asset sale proceeds into its mixed-use development pipeline and other growth opportunities. The Plaza, a regional retail asset located outside the Golden Triangle, is no longer central to Kiwi Property's long-term strategy.

Settlement is expected before the end of 2025, at which point ownership and management of The Plaza will transfer to NZRPG.

Notes: 1. Capital released from the Sylvia Park Lifestyle transaction assumes Kiwi Property acquires a 50% stake in the Mackersy LFR Fund as part consideration for the sale of Sylvia Park Lifestyle and provides an additional 25% equity underwrite on establishment.

[LaserEyeKiwi]

So lets discuss what this means.

Further elimination of seismic risk:

The plaza was one of the 2 remaining assets that is outside of the golden triangle, and which KPG was keen to sell. One key reason being that after 2 decades of having earnings impacted from large seismic issue costs across its portfolio in Christchurch, Wellington & Palmerston North - they made the decision to eliminate that from continuing in future.

With The Plaza sold, the only other asset left to sell in a location in a seismic area is The Aurora Centre Office in Wellington (leased to MSD) - which is currently worth $147m on the books.

Non-core asset sold:

The Plaza was a retail only asset, KPG is keen to leverage Mixed-use assets primarily going froward.

Impact on financials:

Pro: proceeds will mean gearing is reduced (less debt to assets).
Pro: The $119m sale will mean that amount less in debt is required, roughly equating to $6m less in annual interest costs using their current average debt cost

Con: The Plaza is generating approx $18m in annual operating Income so that is a sizable amount to lose of the approx $200m total annual operating income.
Con: With the reduction in operating income, the management overhead will make up a significantly higher percentage.

Net result:

With this transaction KPG significantly reduces its seismic risk, reduces its debt load, gets closer to completing its realignment to being focused on its mixed-use asset strategy. It does so however with the cost of a reduction in its revenue and income going forward.

[Basil]

I don't really understand why anyone would sell an asset returning $18m for $119m, that's a 15% yield so they repay bank debt at a 4.9% cost that was raised to invest in build to rent apartments yielding about 4%.

Obviously the very highly paid management know far more than I do, (or do they ?), , but this change in investment strategy makes very little obvious sense to me.  I get it that residents at Resido are most likely to shop at Silvia park and so there's some underlying benefit but I cannot see how that could possibly mitigate much of the obvious yield difference.    Put another way, they just sold 3.6% of the value of the companies assets but have lost 9% of annual income.
I knew this day would come  but I was hoping it would be years away...never mind, this is progress...or so management will assure us...

What am I missing LEK ?

[LaserEyeKiwi]

I don't really understand why anyone would sell an asset returning $18m for $119m, that's a 15% yield so they repay bank debt at a 4.9% cost that was raised to invest in build to rent apartments yielding about 4%.

Obviously the very highly paid management know far more than I do, (or do they ?), , but this change in investment strategy makes very little obvious sense to me.  I get it that residents at Resido are most likely to shop at Silvia park and so there's some underlying benefit but I cannot see how that could possibly mitigate much of the obvious yield difference.    Put another way, they just sold 3.6% of the value of the companies assets but have lost 9% of annual income.
I knew this day would come  but I was hoping it would be years away...never mind, this is progress...or so management will assure us...

What am I missing LEK ?

I agree it seems like a bargain for the purchaser given the gross yeild, but the sale was right around its independent valuation which perhaps reflected the more volatile nature of a retail only asset (cap rate used in valuation was significantly higher than for the mixed use assets) and that it still maybe required some ongoing seismic work to be done, or would soon need to be done.

When discussing its impact, the figures above are operating income, so excludes impact of lower debt costs from the sale, any employment/management cost savings (if any), and also before any required Capex costs.

In the end I think this is a case of both the buyer and seller being happy with the transaction, but I agree in the end it is a loss of income that will be noticed in the short term.

still should be able to maintain dividend at guided rate, but payout ratio will be higher, likely nearer 100% AFFO.

[Basil]

Thanks LEK.  Management have had a long time to think about it because they've had it on the market for a very LONG time and it was sold at close to independent valuation so I guess this is progress, of sorts.

[Buzz]

I agree it seems like a bargain for the purchaser given the gross yeild, but the sale was right around its independent valuation which perhaps reflected the more volatile nature of a retail only asset (cap rate used in valuation was significantly higher than for the mixed use assets) and that it still maybe required some ongoing seismic work to be done, or would soon need to be done.

When discussing its impact, the figures above are operating income, so excludes impact of lower debt costs from the sale, any employment/management cost savings (if any), and also before any required Capex costs.

In the end I think this is a case of both the buyer and seller being happy with the transaction, but I agree in the end it is a loss of income that will be noticed in the short term.

still should be able to maintain dividend at guided rate, but payout ratio will be higher, likely nearer 100% AFFO.

I agree and thanks for your insightful posts LEK. We all should have known about the divestments intentions and good to see they're getting it done, and regardless of revenue impacts it's good to see imo that the drag on these (seismic especially which change for the worse every year) are diminishing. I expect management costs to reduce as well.

KPG are smashing it out of the park imo, so glad I bought at an outrageously good yield over the past couple of years and seeing them go from strength to strength. A very satisfying investment, let's hope it continues.

[winner (n)]

Jenny Ruth has a piece out today starting "Kiwi Property's township/mixed use concept makes sense, but the financials of the build-to-rent component look problematic."

Seems something Jardens Arie says might have spooked her. He said '... that Resido cost $240 million to build and that its value at Sept 30 had dropped to $200 million "and the initial yield on cost looks like it is going to be in the order of just 3.5%."

[LaserEyeKiwi]

Jenny Ruth has a piece out today starting "Kiwi Property's township/mixed use concept makes sense, but the financials of the build-to-rent component look problematic."

Seems something Jardens Arie says might have spooked her. He said '... that Resido cost $240 million to build and that its value at Sept 30 had dropped to $200 million "and the initial yield on cost looks like it is going to be in the order of just 3.5%."

Yup they spent too much on construction, and they acknowledged at earnings that the rental market is softer than expected. Really wish they would partner with Simplicity who are the kings of BTR building efficiency, having built their own much better building system.

They did achieve revenue diversity though, which is part of the reason for introducing BTR to mixed use assets (which also enables higher overall mixed use valuations). 

 

[lorraina]

I would guess the residents shop at Silvia Park.
Their spending would increase shops turnover,which would mean KPG would get more % rents.
What I would call a win win situation.
ie Shops subsidizing residents rents.