Roy Davidson, 22 June 2017

Stock Comment - Kiwi Property KPG

Kiwi Property Group (KPG) is New Zealand’s largest diversified property trust, with approximately $2bn invested in a portfolio of office, retail and industrial assets throughout the country. KPG owns several recognisable office buildings such as the Vero Centre in Auckland and the Majestic Centre in Wellington. Its retail assets are also very well known, with shopping malls such as Centre Place in Hamilton, Northlands in Christchurch and Sylvia Park in Auckland.


KPG offers some level of sector and regional diversification, although it remains largely a retail property exposure. KPG’s portfolio comprises 67% retail, 30% office, with the remaining 3% being made up by various other property assets. KPG has recently increased its retail exposure via the acquisition of a 28 – unit retail development bordering STR’s NorthWest development at Westgate, Auckland. The development is 87% pre-committed to a variety of tenants, including Harvey Norman and Briscoes, and trading commenced in March 2016.

KPG is now managed by Kiwi Property Management (NZ) Limited, which is a newly established company controlled by unit holders. Internal management is a superior structure, in our opinion. It is more efficient, more transparent, less costly, and more closely aligns investor interests with those of the management team.

KPG is seeking to raise around $161m to help fund the development of the following at Sylvia Park Shopping Centre: A new office building ($80.2m, target completion April 2018), expanded dining precinct ($9.1m, target completion December 2017), and a new car parking building ($36.3m, target completion November 2018). KPG is also investigating further retail expansion at Sylvia Park, and further development opportunities at Northlands Shopping Centre in Christchurch and the Base in Hamilton (in which it recently acquired a 50% stake). KPG has plans to sell non-core assets (e.g. Majestic Centre in Wellington) to fund further development. The capital raise reduces timing risks and shores up the balance sheet ahead of numerous developments. FY18 dividend guidance is unchanged but the offer is earnings per share dilutive.

KPG’s internalisation better aligns unitholder interests with that of management, as well as delivering some earnings growth due to lower fees and increased cost efficiencies. KPG has also been benefiting from strong property markets, and recently reported a 7% increase in the value of its portfolio. However, the listed property sector has performed exceptionally well over the last year and valuations are now looking more stretched, while we expect rising interest rates to be a headwind.

Risks to KPG include; 1) economic downturn, 2) rising interest rates, and 3) development risk.