Morningstar | Ceasing Coverage of Kiwi Property
We intend to cease coverage on Kiwi Property Group in July 2019. We periodically adjust our coverage as necessary based on stock outlook, client demand, and investor interest.We ascribe a narrow moat to the firm, reflecting the efficient scale of its retail assets, the barriers for new entrants, and the network effect of larger retail assets. In its fiscal 2019 results, rental growth across Kiwi’s portfolio was ahead of expectations, which led to an increase in fair value to NZD 1.40 from NZD 1.35. Nonetheless, shares screen as slightly overvalued, and based on guidance for fiscal 2020 distributions of NZD 7.05 cents per security, imply a yield (before imputation credits) of 4.6%.
The office portfolio delivered a weak result for fiscal 2019, mainly due to a vacancy at the Vero Centre in Auckland. Nonetheless, Kiwi reported new leases at the Vero Centre were negotiated at a 9.3% premium to previous rents. Office vacancy in Kiwi’s two office markets of Auckland and Wellington of 1.4% are well below long-term average of 7%-8%. This bodes well for growth in market rents, but Kiwi will get little benefit from this for the next seven years as most of the office portfolio are on long-term leases with fixed increases. The Vero Centre is the only major office asset that will benefit in the near term from rising market rents and falling vacancy, and this asset will be the major driver of office rent growth in fiscal 2020.
Meanwhile, our forecast for long-term annual rent growth in Kiwi’s retail property remains at 2.8% for Sylvia Park and 2.2% for the remaining retail assets. The lower rental growth for the smaller retail assets reflects their location in smaller cities where income and population growth are expected to trail that of Auckland. Key drivers underpinning these forecasts are annual New Zealand population growth of circa 1% and inflation of 1.5% to 2.0%, with detractors being a loss of sales to digital sales channels and intense competition among centres.
Kiwi Property Group is engaged in investing in New Zealand real estate. The Trust's objectives are to maximize earnings and to provide long-term sustainable returns to investors through the strategic acquisition, intensive management and ongoing development of office, retail and industrial property assets. Co.'s business segments comprise retail (representing Co.'s investment in retail property), office (representing Co.'s investment in office property) and other (representing those items which are neither retail nor office). As of Mar 31 2010, Co. had total assets of NZ$1,984,822,000.
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