KPG - Kiwi Property Group Limited

[LaserEyeKiwi]

Results! Big announcement regarding Office portfolio! (will sell percentage of entire office portfolio to other investors)

23/5/2022, 8:30 amFLLYR
• Net profit after tax: $224.3m (+$14.1%)
• Property fair value movement: +$120.5m (+3.5%)
• Net tangible assets per share: $1.45 (+9 cps)
• Net rental income: $187.1m (+7.8%)
• Operating profit before tax: $124.8m (+7.3%)
• Adjusted funds from operations: $100.4m (+12.3%)
• Gearing: 31.6% (FY21 31.2%)
• FY22 cash dividend: 5.60 cps (+8.7%)

FY23 dividend guidance: “No less than 5.70 cps”

My brief thoughts on earnings highlights:

- despite covid abatements during year (rent relief for lockdown periods), the company is achieving strong operating profit leverage on its growing asset base and rising rents. The best example of this: Rental income increased by $12.8 million, while property related expenses only increased by $1.8 million.
- Interest costs actually decreased by $2.4m from $44.6m to $42.2m. KPG had a large bond at 6.15% rate that finally matured and was replaced by a new bond at a 2.85% rate.
- divestment of perhaps half of office assets (via selling~ 50% share of combined portfolio) will provide a large amount of cash while also continuing to de-risk seismic risk to portfolio at it will remove half of Wellington exposure.
- value of “properties held for sale” (which now only includes two items: Northlands mall & the land to be sold to IKEA) increased in value during the year by $35.3m, from $172.1m to $207.4m.

Notes from conference call:

- Current construction Projects remain within contingency budgets despite recent building industry cost increases.
- IKEA land sale is conditional (transaction not yet completed, no funds received)
- Looking forward to announcing a sale of Northlands “at appropriate time” with the potential offshore buyers. “number of parties” interested (delayed by Covid).
- Plaza removed from sale temporarily while undertaking seismic evaluation (expect to list towards end of financial year). Car park building area specifically the issue in terms of potential works (either for KPG or potential buyer once design quantified).
- Reduction in average cost of debt (thanks to elimination of a long dated 6.1% bond replaced by a 2.85% bond)
- CBD office co-investment platform Financial Q3 announcement likely (? - may have misheard what Q3 reference was on the call), so towards end of calendar year perhaps. OIO approval for international parties may be a factor for timeline. Very opportune time to realize funds from office assets given current cap rates. KPG will retain strategic ownership position & management contract of office assets. Management implied it will be closer to a 50% sale than a 25% sale. In response to last analyst question about either 25% or 50% sale this year, management said 25% sale probably wouldn’t be large enough opportunity for the potential buyers in this market that KPG is looking to attract.
- Covid abatements provision adequate.
- Dividend guidance assumes northlands sale and possible further minimal covid lockdown cost.
- Enough capital to fund existing commitments (Sylvia BTR, Drury earthworks, 3 Tekuku way office).
- Northlands sale & CBD office co—investment platform will fund Lynnmall BTR & Drury development.
- Large format retail at Drury will be the first capital cost project there following earthworks completion.

[Rawz]

AFFO up 12.3%
Dividend up 8.7%

Good result!

[Habits]

Results! Big announcement regarding Office portfolio! (will sell percentage of entire office portfolio to other investors)

23/5/2022, 8:30 amFLLYR
• Net profit after tax: $224.3m (+$14.1%)
• Property fair value movement: +$120.5m (+3.5%)
• Net tangible assets per share: $1.45 (+9 cps)
• Net rental income: $187.1m (+7.8%)
• Operating profit before tax: $124.8m (+7.3%)
• Adjusted funds from operations: $100.4m (+12.3%)
• Gearing: 31.6% (FY21 31.2%)
• FY22 cash dividend: 5.60 cps (+8.7%)

FY23 dividend guidance: “No less than 5.70 cps”

My brief thoughts on earnings highlights:

- despite covid abatements during year (rent relief for lockdown periods), the company is achieving strong operating profit leverage on its growing asset base and rising rents. The best example of this: Rental income increased by $12.8 million, while property related expenses only increased by $1.8 million.
- Interest costs actually decreased by $2.4m from $44.6m to $42.2m. KPG had a large bond at 6.15% rate that finally matured and was replaced by a new bond at a 2.85% rate.

Notes from conference call:

- Current construction Projects remain within contingency budgets despite recent building industry cost increases.
- IKEA land sale is conditional (transaction not yet completed, no funds received)
- Looking forward to announcing a sale of Northlands “at appropriate time” with the potential offshore buyers. “number of parties” interested (delayed by Covid).
- Plaza removed from sale temporarily while undertaking seismic evaluation (expect to list towards end of financial year). Car park building area specifically the issue in terms of potential works (either for KPG or potential buyer once design quantified).
- Reduction in average cost of debt (thanks to elimination of a long dated 6.1% bond replaced by a 2.85% bond)
- CBD office co-investment platform Financial Q3 announcement likely (? - may have misheard what Q3 reference was on the call), so towards end of calendar year perhaps. OIO approval for international parties may be a factor for timeline. Very opportune time to realize funds from office assets given current cap rates. KPG will retain strategic ownership position & management contract of office assets. Management implied it will be closer to a 50% sale than a 25% sale. In response to last analyst question about either 25% or 50% sale this year, management said 25% sale probably wouldn’t be large enough opportunity for the potential buyers in this market that KPG is looking to attract.
- Covid abatements provision adequate.
- Dividend guidance assumes northlands sale and possible further minimal covid lockdown cost.
- Enough capital to fund existing commitments (Sylvia BTR, Drury earthworks, 3 Tekuku way office).
- Northlands sale & CBD office co—investment platform will fund Lynnmall BTR & Drury development.
- Large format retail at Drury will be the first capital cost project there following earthworks completion.

Lots of information such as BTR numbers at sylvia, there are def positives. Why no numbers for IKEA sale, that would be very pertinent. Reval gains while positive are still small at 3.5 percent. Given the drury zone change it should be more. I wonder what the net reval gains since 2020 have been, not that much. Market likes the result however market price is lower than a couple months ago, prob due to rising interest rates, 10 year bond. Div yield ok but not high, final div 2.85 cps vs 2.75 cps, increase of 3.6 percent. They say the div is up 8.7 perc but maybe that is more due to div going down over last two years. The shares could struggle.

Discl, I have sold out remaining 15000 shares this morn. Will watch and wait

[Rawz]

Hopefully the guidance for FY23 dividend of "no less than 5.70cps" is just them being really really conservative. Otherwise its only going to be up 1.7% from this year and with all this inflation around....

[Biscuit]

All the numbers are moving in the right direction. Hard to see anything not to like, still looks under-valued to me.

[LaserEyeKiwi]

Lots of information such as BTR numbers at sylvia, there are def positives. Why no numbers for IKEA sale, that would be very pertinent. Reval gains while positive are still small at 3.5 percent. Given the drury zone change it should be more. I wonder what the net reval gains since 2020 have been, not that much. Market likes the result however market price is lower than a couple months ago, prob due to rising interest rates, 10 year bond. Div yield ok but not high, final div 2.85 cps vs 2.75 cps, increase of 3.6 percent. They say the div is up 8.7 perc but maybe that is more due to div going down over last two years. The shares could struggle.

Discl, I have sold out remaining 15000 shares this morn. Will watch and wait

Going from management comments on call:
- IKEA sale still conditional and sale price confidential
- Omicron surge lead to very conservative revaluations on assets (was done in March at height of outbreak), but despite that still increased.
- stated dividend was aimed to be consistent sustainable amount, and will be no less than 5.7cps even with expected sales of cash generating assets in year ahead (Northlands & just announced office portfolio outside investment partnership).

I think they are focused on maintaining the dividend at this new level while also generating a very large cash amount on the books from the asset sales.
Over $200 million from Northlands & IKEA land sale, and then potentially another $500 million from selling 50% of the Office portfolio (currently valued at $1.04 Billion, which excludes the Sylvia Park office towers).

Given ballpark construction project costs in current financial year (Sylvia Park BTR & 3 Te Kehu way), KPG could be sitting on anywhere between $500-$600 million in cash by this time next year if both expected large capital recycling projects are completed within the financial year.

EDIT to add: Drury development was approved just a few weeks ago (early May), so any revaluation on that land would not be included in the current report which is to March 31st. Also, I have no idea when Drury assets would actually be revalued to capture that new value - woudl it be before or after earthworks are completed, or even after after further construction has begun/finished?

[LaserEyeKiwi]

A bit of Pros & Cons of the office co-investment plan.

On the pro side:
- Releases a large amount of cash potentially, highlighting share value in KPG which are currently trading at a large discount to NTA. A 50% sale at the current 4 tower office portfolio value of $1.042 Billion would be $521 million, or the equivalent of 33c per share in cash
- KPG will receive a management fee on the amount they sell off to a 3rd party.
- Will mean they can fund capital projects for the next several years without needing to add additional debt while interest rates are heading higher.
- ensures they have a large amount of cash to maintain dividend while net income fluctuates (see “Cons” below).
- further reduces “seismic risk” as 50% of the value (and any future seismic exposure) of the two Wellington office towers would be removed.

Cons:
- reduces income. The Office portfolio generated $48.8 million rental income (out of $183.1 million total company rental income - or 26.6%). So with rental growth we can say that if they sold 50%, that rental income will decrease by ~$25 million, or approx 13.5%. To counter that they will receive a new management fee of presumably single digit millions, and also some interest income on the $521 million in cash raised. The reduced level of income will also reduce operating leverage. While rental income will reduce, expenses will not reduce by the same amount (meaning we get the opposite of operating leverage in the short term). Other income from the companies portfolio will continue to grow as rents increase, especially once 3 Te Kahu way (early 2023) & Sylvia Park BTR (early 2024) are finished, but it will take a couple of years or rental growth to return to a similar level of net rental income, especially when Northlands income is also removed (as well as Plaza Mall if that manages to sell once it again goes to market).
- in the short term will increase “Mixed used” as a proportion of assets, which has a higher level of speciality retail exposure. Medium term the cash from the office sale would fund the build out of more BTR & Office assets at its mixed use locations (Sylvia, LynnMall), as well as new Large Format Retail (Supermarkets & Big box retailers) at Drury.

[LaserEyeKiwi]

On the hypothetical outcome of proposed transactions, and the impact on ex-cash NTA discount:

Presuming Northlands, IKEA land & 50% sell down of office assets are done at current valuations:
Cash from sales: $795 million = 50.6 cents per share
Non-cash net assets: 94.4 cents per share
(Total NTA = 145 cent per share).

So if you were working on an ex-cash basis, you could subtract 50.6 cps form the current share price (105.5cps) and would have a share price of 54.9 Cents per share against non-cash net assets of 94.4 cents per share - a 42% discount to non-cash NTA in this scenario.

If someone wanted to invest in KPGs office portfolio, they would probably be better off acquiring KPG entirely, and then selling off/re-listing the assets they don’t want. They would get a much better deal, even assuming a 20% premium needed for takeover.

[Waltzing]

Mr B might be wondering just how much of a management fee they can try and get their hands on.

All that cash washing around in the bank accounts.

That all sounds pretty good modelling LEK.

[Habits]

Just wondering the cap rate used to value the offices. I think if I was in the market for a half share of offices in Welly with potential seismic problems I would be wanting above average yield 8 to 10 percent. Meaning a lower purchase price than 500 mills. Try 400 mills. Depends how serious is the seller and how desperately they need the funds. Any likely buyer could easily find out a lot about their future partners motivations from the AR