Kiwi Property Group Limited (KPG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Kiwi Property's Full Year Announcement Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Clive Mackenzie, CEO. Please go ahead.

Good morning, everyone, and thank you for joining us for the annual results announcement for Kiwi Property for the year ended 31 March 2020. I'm Clive Mackenzie, the CEO of Kiwi Property. And today, I'm joined by Steve Cooper, our General Manager of Finance and Shared Services. I assume you all have a copy of our presentation in front of you. If not, you can access one from the Half Year Results section of our website at kp.co.nz. I'll take the disclaimers read, so please turn to Slide 3, and we'll run through the agenda. New Zealand has experienced a remarkable series of events since the close of our financial year almost 8 weeks ago. The COVID-19 pandemic and the lockdown that followed have had a significant impact on business across the country, and Kiwi Property is no exception. No doubt the pandemic is top of mind for many on the call today, so we're going to start this morning's presentation and we look at how COVID-19 has affected our business, the way we've responded and perhaps most importantly, our plans for the future. After that, we'll provide an overview of our FY '20 performance highlights before opening the lines for questions. A quick reminder that as usual, we have included detailed financial and property slides in the appendices to this presentation. Now please turn to Slide 5. The health and safety of our employees, tenants, customers and communities is our top priority. We responded quickly to COVID-19's arrival in New Zealand with a number of operational and financial measures designed to protect the business and our stakeholders. First among these was the launch of a comprehensive new safety protocol across all our assets to help safeguard against the pandemic. Extensive cleaning and social distancing measures were put out in place at each of our shopping centers and office buildings to reduce the threat of the virus. Next, we took a number of measures to fortify the company's balance sheet. In March 2020, we successfully extended $361 million of bank debt facilities and now have no debt maturing until FY '23 as well as $291 million in available undrawn credit. Our gearing ratio currently sits at 32%, up slightly from last year, following the revaluation of our properties, but within our self-imposed gearing range. And thirdly, we've taken significant steps to control costs across the business, including suspending all nonessential capital projects and operating expenditure. The Board of Directors, executive team and I all took a temporary 20% reduction in pay while recruitment and employee salaries have been frozen. The company is also forecast to achieve property operating expense savings of approximately $2 million during FY '21 due to a combination of operational efficiencies and reduced overheads during the lockdown. Turning now to Slide 6. While these measures have gone some ways insulating the business from the full impact of the COVID-19 pandemic, we have not been a new experience a number of effects. Many of our tenants were unable to trade during the lockdowns at Levels 3 and 4, placing them under significant pressure. We are working with these businesses to share a fair proportion of the financial impact caused by the pandemic with a primary focus on supporting our SME and retail tenants. Kiwi Property will only be successful if our tenants come through the pandemic and be in a position to scale up as soon as possible. By providing assistance now, we increase the likelihood of them and us being in a strong position post COVID-19. Measures being offered include a combination of rental abatements and deferrals. Abatement supply to the quarter 1 of FY '21 are expected to impact FFO by $20 million or $14 million on an after-tax basis. This is equivalent to around 8% of FY '20 gross rental income. This cost will be partially offset by the reintroduction of depreciation allowances for commercial buildings, which is expected to increase Kiwi Property's after-tax earnings by approximately $4.5 million in FY '21. Turning to Slide 7. Beyond the immediate financial impact, COVID-19 has primarily affected 3 areas of our business. Firstly, as we've already reported, the material uncertainty caused by the pandemic prompted the valuers to significantly soften their assumptions around our asset values, resulting in an 8.5% or $290 million decrease in the fair value of our investment property portfolio. Following this write-down, the portfolio was worth $3.1 billion as at 31 March. Secondly, the construction halt that took place under the Level 4 lockdown has resulted in the delay to the opening of the Sylvia Park Galleria. The development is now scheduled to open progressively from the fourth quarter of this year rather than the third quarter as previously intended. We continue to have strong commitment from our key tenants, and we're currently working through the details relating to the timing for store openings. Finally, as you're well aware in March, the Board made the difficult decision not to pay a final dividend for FY '20. This wasn't a move they made lightly. However, given the inherent uncertainty caused by the pandemic, they believed and continue to believe it was necessary to further strengthen the balance sheet. The company has taken the opportunity to revise its dividend policy to ensure future payments are covered by underlying cash flows. Under the revised dividend policy, we will be targeting dividend payments that are approximately 90% to 100% of AFFO. Our aim is to resume paying a dividend as soon as the financial impact of COVID-19 on the company is more certain. Please turn to Slide 8. Within a matter of weeks, we've already seen the extent to which COVID-19 has changed New Zealand, and it's fair to assume it will change Kiwi Property as well. We must be agile addressing the coming challenges and taking advantage of emerging opportunities. To do this, we'll focus on 3 strategic priority areas, the first of which we coined resilient business. This is really about the immediate operational response to the COVID-19 pandemic and includes many of the measures I've already outlined. Resilient business centers on making sure our shopping centers and office buildings are safe with best practice cleaning and social distancing measures in place. This is a vital step to ensuring consumers and workers feel safe about returning to our assets and getting back to normal. In parallel, we're committed to ensuring we have strong tenants. Kiwi Property will only be successful if our tenants are. So we need to take steps such as offering rent relief to ensure they get through the pandemic and make it strongly through to the other side. We believe that supporting our tenants isn't just the right thing to do, it's also the smart thing. Finally, maintaining a resilient business requires strict cost control. We've already put a number of measures in place to reduce the expenditure across CapEx and OpEx. During this period of instability, we're acutely aware of the importance of being extremely disciplined in our expenditure. Our second priority is maintaining a resilient strategy. We've spoken at length about our mixed-use strategy, and we continue to believe this is an area of competitive advantage. Our significant landholdings at Sylvia Park, The Base, LynnMall and Drury are well suited to intensification with a range of asset types. We are focused on diversifying our portfolio, decreasing pure retail as a proportion of our asset base and increasing our exposure to higher growth categories. Industrial now makes up 6% of our portfolio, for example, and this could potentially increase over time. We also see significant opportunities around asset classes such as build-to-rent. More than half of Aucklanders are currently already renting and the time it's taken for people to save for deposit is increasing every year. The COVID-19 pandemic is likely to compound these trends, reinforcing build-to-rent's viability as an asset class in New Zealand. The final element of resilient strategy lies in being extremely customer-focused. We see significant potential to leverage the data and analytics in a range of areas, including optimizing our retail asset mix, helping retailers make more informed decisions of our store locations and providing a more seamless experience to our consumers. We intend to make strategic investments in this rapidly developing area with a view to better understanding and supporting our customers and consumers. Our final strategic priority is to create resilient assets. Since the arrival COVID-19, there's been a huge amount of speculation about the future of commercial property. It's still too early to know the pandemic's impact on the way we live, work and shop. Although a degree of disruption is likely, we must prepare for the future today. In office, that means having the ability to provide a range of solutions to meet the needs of our tenants. That could be a premium grade office in the city centers, such as the Vero Centre, a hub-and-spoke environment like ANZ Raranga or potentially some sort of co-working space. In the retail environment, we will have a vital role enabling our tenants to respond to the changing landscape and the needs of their customers. That could include working with a retailer to create a flagship store that underpins their omnichannel strategy. While for another, it could mean providing the infrastructure to enable last mile fulfillment and delivery. In either situation, the key is understanding and being responsive to our tenants so they, in turn, can be responsive to their customers. The final element of our resilient assets pillar is targeted development. Given the high degree of uncertainty in the market, it's vital we were highly disciplined about the opportunities we pursue. That means being smart with our capital, making strategic investments and only pursuing opportunity as tenant demand and market considerations support them. Please turn to Slide 9. The pandemic has created incredible uncertainty in the market. In this environment, our ability to be agile and adapt to market opportunities will be more important than ever. Pre-COVID-19, we made very good progress on the planning of a second office building at Sylvia Park and had received a strong response from potential tenants. Our intention is to continue moving forward with planning in anticipation of beginning construction as tenant demand and market conditions dictate. Following the completion of the galleria, we have no significant development cost committed and so we choose to begin construction on Sylvia Tower. That flexibility is extremely important in this climate and will enable us to move forward with our development pipeline at the right pace for the market. Diversifying our portfolio is central to Kiwi Property's long-term success. Our mixed-use assets and large landholdings enable extensive opportunities for mixed-use intensification, helping to decrease our exposure to pure retail. Build-to-rent is one such opportunity with plans already commissioned for our first potential [ 4 engineers ] into this new to New Zealand asset class. A good example of targeted development in action is the work being undertaken at Drury. The area has been flagged as a key transport-orientated development node and is expected to ultimately be home to 60,000 people. The government recently announced plans to invest $2.5 billion to accelerate infrastructure development in South Auckland, with Drury to be an area of focus. We're working closely with a group of other developers, including Fulton Hogan and Oyster Capital, and submitted a private plan change in December 2019, which is expected to be notified later this year. If we are successful in the process and the government continues to push forward with its plans for Drury, then construction could be permitted on our site as early as 2023. That's a snapshot of the impact of the COVID-19 pandemic on our business and the way in which we're responding. I'll take questions on these points shortly, but before we get to that, I want to also recap our FY '20 results. So please turn to Slide 11. For the year to 31 March 2020, Kiwi Property delivered a solid operating result. Net rental income was $186.8 million, up $6.1 million or 3.4% on the year prior. Rental income increased across all asset classes with office up 7.3%, mixed-use up 5% and retail up 0.9%. Funds from operations, a key measure of the underlying operating performance, grew $6.7 million or 6.3% to $113.6 million. Kiwi Property's operating profit for FY '20 was $129.7 million, up $5.2 million or 4.2% on the year before, highlighting the underlying strength of the business. Unfortunately, while the company delivered a robust operating performance in FY '20, as previously discussed, the inherent uncertainty caused by COVID-19 pandemic resulted in a significant decrease in the valuation of our property portfolio. This negative revaluation of our investment assets caused a drag on the company's full year financial performance, turning an otherwise healthy operating result into a loss after tax of $186.7 million. Turning now to Slide 12. Rental growth was again strong in FY '20, increasing 4% on the year prior. New leases were a standout, rising 11.9% in mixed-use and 10% in office. These figures reflect the strong tenant demand for our leading mixed-use and office assets, which has enabled us to grow rents over recent periods. While it's impossible to predict the impact of COVID-19, we expect the quality of those assets to make them more resilient to an anticipated market downturn. At the year-end, the portfolio occupancy remained strong at 99.5%, while our weighted average lease expiry sits at 4.9 years, down marginally on FY '19. Turning now to Slide 13. A note on the retail sales information shown here. Because of COVID-19, we have been unable to take sales data for the month of March '20 and have, therefore, shown annual statistics for the year end 29 March 2020. Across our traditional shopping center assets and excluding large-format centers, sales were $2.01 billion, representing growth of 2.8%. Specialty sales rose to $13,200 per square meter, up from $12,800 the year before. While GOC ratios remain low, these will provide a useful buffer for tenants under pressure in the new operating environment. In particular, we saw good growth in several discretionary spend categories. Department stores and DDSs were up 11.9%, underpinned by a strong opening from Kmart, Sylvia Park, while pharmacy and well-being grew by 5.2%. Turning to Slide 14. As previously discussed, Kiwi Property was active on the capital management front in FY '20. In November, we undertook a successful equity raise to reduce gearing and provide increased financial flexibility to the business. The raise delivered $193.7 million at $1.58 per share. Our weighted average cost of debt decreased to 4.35% in 2020, while our weighted average term-to-debt maturity increased to 3.9 years following the successful refinancing of our bank debt facility on a combination of 3- and 5-year terms. Our credit rating remains solid, with S&P Global continuing to give Kiwi Property a BBB issuer credit rating and BBB+ issuer rating. Turning now to Slide 15. The negative revaluation of our property portfolio resulted in an expansion of our gearing ratio later in the year, which increased to 32%. While up on FY '19, this is still within our target range of 25% to 35%. The decrease in the value of our asset portfolio also contributed to a drop on our net asset backing per share to $1.26 in 2020, down from $1.43 in the year prior. Turning now to Slide 16. FFO increased 1.7% to $0.0761 per share during FY '20, while AFFO grew 6.7% to $0.0684 per share. The FFO and AFFO ratios declined by 49% and 51%, respectively, due to the nonpayment of the final FY '20 dividend. We will provide additional dividend guidance for FY '21 as soon as we had sufficient clarity around impact of COVID-19. Our aim will be to provide this update no later than the half year. Turning now to Slide 17. New Zealand stating an unparalleled challenge, and the full impact of COVID-19 on the country and Kiwi Property is still unknown. We are firmly focused on navigating the pandemic in FY '21. We will do this by building a resilient business, embedding a resilient strategy and creating resilient assets. We will be pragmatic in our approach, working alongside our tenants through the downturn, pursuing targeted development opportunities and strictly controlling costs. With our diversified property portfolio, commitment to cost discipline and banking headroom, we will navigate the financial impacts of COVID-19 and strive to capitalize on the opportunities that follow. As we view all the uncertainty of COVID-19, we will remain committed to delivering for all our stakeholders, supporting our tenants, enhancing our communities and creating value for our shareholders. Thank you all for joining today. That concludes my overview for our 2020 annual results.