The malls, the merrier
Kiwi Property’s discounted shares offering healthy yield, writes Jenny Ruth
SAn investment in Kiwi Property is certainly riskier than a term deposit, but is it more than twice as risky? Of course, the
devaluation is purely reflective of rising interest rates, rather than any reflection on
the quality of Kiwi’s properties.
hould a company with a solid asset base, steadily improving underlying earnings and a track record of improving dividends have a dividend yield of more than 9 per cent?
And, given the improving underlying earnings, should valuers be slashing the value of its assets by more than $213 million between March and September this year?
This is the conundrum presented by Kiwi Property; its net rental income was up 6.3 per cent to a record $100m in the six months ended September compared with the same six months last year, while adjusted funds from operations were up 35.8 per cent to $65.2m.
The company confirmed it is going to pay 5.7 cents per share in dividends for the year ending March 2023, up from 5.6cps last year and 5.15cps in the 2021 financial year.
With the shares closing at 91c on Friday (November 25th) that put the gross yield for a 33 per cent taxpayer at 9.3 per cent.
That’s a hefty 30.5 per cent discount to net tangible assets (NTA) of $1.31 per share at September 30 — the devaluation meant NTA fell from $1.45 at March 31.
How risky is it?
The yield is also more than double the 4.5 per cent one-year term deposit rates the four major banks are currently offering. An investment in Kiwi Property is certainly riskier than a term deposit, but is it more than twice as risky?
Of course, the devaluation is purely reflective of rising interest rates, rather than any reflection on the quality of Kiwi’s properties.
And Kiwi Property is far from the only property stock beaten up by the market — its near 24 per cent decline year-to-date isn’t out of whack with Goodman Property Trust’s almost 23 per cent fall or Argosy’s more than 26 per cent drop.
But Kiwi’s shares enjoyed by far the smallest recovery from the plunge after Covid first arrived — its shares traded between $1.52 and $1.59 through January and early February 2020.
This suggests investors don’t buy its vision of creating centres that included shopping, entertainment, office and apartment buildings combined with strong transport links.
Its flagship Sylvia Park centre is the most advanced of the four properties it is developing as mixed-use centres.
The shopping centre and two developments, Kiwi’s first build-to-rent (BTR) apartment building and a second office and medical building, had a combined September 30 valuation of $1.96 billion, down from $1.07b six months earlier.
Rising rents
The devaluation was despite combined net rental income rising more than 15 per cent to $27.5m and reflected increases in capitalisation rates of 25 basis points to 5.63 per cent — the higher the cap rate, the lower a building’s value.
The BTR project is now up to three levels, while the building at 3 Te Kehu Way is now 60 per cent leased, with advanced negotiations likely to take that to two-thirds, and is on track to be completed in the first quarter of 2023.
The company plans to develop its Lynnmall centre in Auckland, The Base in Hamilton and bare land at Drury along similar lines as Sylvia Park.
It has already started earthworks at Drury after getting Environment Court approval and expects that work to take two years and cost $30m, although chief executive Clive Mackenzie stressed to analysts that the company can stop at any time,
should macroeconomic conditions worsen.
Mackenzie noted that the Drury land is now worth more than double its purchase price and that he expects it to increase further once the earth and civil works are completed.
The company is engaged in a fasttrack consenting process, which, if successful, will create 13 residential super-lots — the company may sell those lots to release capital to build a large-format retail development on the site.
Unloved retail
Since Covid struck, retail property has been somewhat unloved, given the acceleration of online shopping the lockdowns sparked.
But Kiwi’s latest results show a strong rebound in the popularity of shopping in actual physical stores, with sales through the company’s centres up 9.6 per cent to $1.51b in the latest six months.
Mackenzie noted that NZ Post has reported two successive quarters of declining online sales, suggesting consumers have relished being able to return to physical stores.
The latest results showed Kiwi has at last sold the 44 The Terrace office tower in Wellington and the Northlands shopping centre in Christchurch — the properties have been on the market for years, so it’s a relief to see the transactions eventuate at last.
They will help reduce Kiwi’s gearing to about 32 per cent from the 35.7 per cent September 30 level. That leaves a lot of daylight between actual gearing and the 45 per cent covenant on Kiwi’s listed bonds.
The company also wants to sell its Westgate Lifestyle centre in Auckland, which has a book value of $95m.
Kiwi also owns three other office towers, the Aurora Centre in Wellington and the Vero Centre and ASB North Wharf buildings in Auckland.