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

Thank you all for standing by, and welcome to the Kiwi Property Interim Results Announcement. [Operator Instructions] I'd now like to hand the conference over to your speaker for today, Mr. Clive Mackenzie. Thank you. Please go ahead.

Thank you, Tara. [Foreign Language]. Good morning, everyone, and thank you for joining us for Kiwi Properties interim results announcement for the 6 months ended September 30, 2021. I'm Clive Mackenzie, the CEO of Kiwi Property, and today I'm joined by our CFO, Gavin Parker, and our Investor Relations lead, Cam Hodgetts. I assume you all have a copy of our presentation in front of you. If not, you can access one from the Annual Results section of our website at kp.co.nz. A quick reminder that, as usual, we have included detailed financial and property slides in the appendices to this document. I'll take the disclaimer as read. So please turn to Slide 3. Despite the impact of COVID-19, Kiwi Property posted a solid financial result for the first half of the 2022 financial year, reporting an uplift in all key operating metrics, including growth in income, profitability, asset values, and interim dividend. I want to start this morning's presentation by calling out a few key figures that provided a snapshot of our interim performance. As you can see here, Kiwi Property's operating profit before tax grew 8% on the prior comparable period, climbing to $62.5 million. This is particularly pleasing outcome given the headwinds caused by the pandemic. Net profit after tax also increased to $143.2 million, up significantly on the same time last year, assisted by a $93.6 million fair value gain on our property portfolio, which also saw net tangible assets per share grow to $1.42. Adjusted funds from operations, or AFFO, rose 31.6% to $0.0306 per share, enabling the company to pay an interim dividend of $0.0275 per share, well on our way to the 3 point -- sorry, $0.053 per share FY '22 minimum dividend target we've previously outlined. Turning now to Slide 4. By now, many of you are hopefully familiar with the diagram shown here, which outlines Kiwi Property's business strategy. This strategy is based on 3 priorities. The first of these is to intensify our mixed-use assets, particularly Sylvia Park, LynnMall, and Drury, to accommodate a broad range of complementary uses, including office, retail, and residential. We believe that our focus on creating mixed-use communities has never been more relevant, helping to provide income diversity and smoother returns through the property cycle. Our second strategic priority is to grow with third-party capital. Kiwi Property has an expansive development pipeline and creating significant competitive advantage for the company. A variety of mechanisms are available to fund this program, including asset sales and the establishment of joint ventures across our mixed-use properties. By introducing capital partners at one or more of these assets, we will be in a strong position to accelerate their transformation and create additional value for our shareholders. Our third strategic priority is to empower the success of our customers. This pillar reflects our belief they will only be successful if our tenants are too. To this end, we will continue to work with our customers to identify opportunities for collaboration and growth, as well as supporting our small- and medium-sized tenants, in particular, through COVID-19 to ensure they're able to rebound quickly once trading conditions normalize. By successfully delivering on our strategy, we will help unlock additional value, which we do in 4 main ways: firstly, by investing in outstanding opportunities; secondly, by developing quality assets that align to our strategy; thirdly, by curating sustainable connected communities; and finally, by optimizing our portfolio performance through active management. Turning now to Slide 5. Last month, we proudly began construction of New Zealand's first major build-to-rent development, marking an important milestone in the delivery of our mixed-use ambition. The $221 million, 295-apartment complex will be located at Sylvia Park, accelerating the site's evolution into an integrated retail, office, and residential community. As previously flagged, Sylvia Park BTR will target a stabilized net yield of approximately 4.5% and a 10-year property IRR of over 8%, delivering returns that compare favorably to Kiwi Property's existing asset classes. Based on current plans, there is potential for more than 1,200 residential apartments to be added to Sylvia Park in the next decade. The structural case for build-to-rent is strong, particularly in Auckland. More than half the people living in the city and aged over 15 years currently stay in rental accommodation. With this number expected to rise to 60% by 2043, the asset class has the potential to play an important role in helping alleviate New Zealand's housing shortfall. We believe we are in a unique position to successfully deliver BTR at scale in New Zealand for a number of reasons. Firstly, our large mixed-use landholdings give us the ability to overlay multiple BTR developments through the medium term, creating an area of distinct competitive advantage. Secondly, by continuing to diversify our mixed-use assets beyond the traditional retail focus, we will encourage cap rate compression across the entire site, not just the new developments or specific asset class. As an example, Sylvia Park's cap rate firmed by 12.5 basis points over the last 6 months with the announcements of BTR and 3 Te Kehu Way being important factors. And thirdly, by leveraging the asset management, security, and maintenance platforms already in place at assets such as Sylvia Park and LynnMall to also operate BTR, we're able to create synergies and deliver economies of scale. Of course, residential is just one part of our vision for Sylvia Park's future, with the ability to build up to 72 meters in height across much of our 35-hectare landholding. Our intention is to develop a city within a city, creating a thriving mixed-use community unlike anything previously seen in this country. On now to Slide 6. Construction of Sylvia Park second office building, 3 Te Kehu Way, has now begun, marking the next step in the creation of a thriving commercial precinct at the site. The $63 million, 6-level office building has been developed in response to the growing demand for hub-and-spoke workplace configurations and will be well suited to a range of medical and office tenants. While COVID-19 related lockdowns have disrupted leasing activity, we are pleased with our progress and expect the building will be fully leased when it opens in Q1 of 2023. Sylvia Park is a clear focus of our development program. However, our mixed-use assets at LynnMall and Drury are also poised for significant intensification. Resource consent has now been granted for 25-level mixed-use development at LynnMall, which will integrate an exciting combination of ground floor retail, 3 commercial office levels, and a 19-floor build-to-rent tower. Located on LynnMall's south west corner, the proposed development is expected to become the tallest structure in West Auckland and will connect directly into the existing shopping center, offering residents unparalleled access to a wide range of retail, dining, and transport options. Construction of the development could begin as early as 2022 pending funding and approval. There is the potential to build as many as 600 build-to-rent apartments at LynnMall in the coming years, transforming the asset into a major residential hub. Elsewhere, our Drury Fast-track application has been referred by the Minister for the Environment to the Environmental Protection Authority consenting panel. This is the final stage in the Fast-track process, with a decision possible as early as the first quarter of 2022. If we are successful, earthworks could begin almost immediately, unlocking up to 35,000 square meters of large format retail, 7.1 hectares of land for residential development, and setting the platform for the creation of exciting new Drury town center. On now to Slide 7. We continued to make significant progress on our sustainability journey in the first half of FY '22, achieving a number of impressive milestones during the period. The Global Real Estate Benchmark, or GRESB, awarded Kiwi Property a score of 80 out of 100 for its ESG performance in 2021, a strong result for a first-time submitter to the index. This proud achievement places the company among an impressive group of real estate organizations and sets a platform for further progress. On the social front, none of our recent social activities has been more important than supporting Waikato-Tainui and the Waikato District Health Board to establish the region's largest vaccination center at Te Awa, The Base. The facility has administered more than 50,000 vaccinations since it opened in July, helping keep the local community safe from COVID-19. When Kiwi Property released its refreshed sustainability strategy last year, we committed to achieving a minimum 4-star NABERSNZ rating for all our office buildings. We're on track to meet that goal. This month, when we receive the rating for 44 The Terrace, having already achieved 4.5-star NABERSNZ ratings for 3 of our office assets and a 5.5 star rating for the Aurora Centre. Going forward, we'll continue to set aspirational sustainability targets and have already announced, we're aiming to secure a 6-Green Star rating for 3 Te Kehu Way and a 7- to 8-Homestar rating for the Sylvia Park BTR development, further adding to our pool of green assets. That's a snapshot of some of our business highlights over the past 6 months. Let's now take a closer look at our financial results commencing on Slide 8. As you can see here, net rental income increased 11.5% to $94 million in the first half of FY '22, underpinned by a full period of trading at Sylvia Park's Level 1 expansion. This income growth drove a corresponding uplift in operating profit before tax, which rose 8% to $62.5 million, a pleasing outcome given the challenging macroeconomic climate. Net profit after tax was also up, growing 164.1% to $143.2 million, following a $93.6 million fair value gain on our investment property portfolio. Adjusted funds from operations increased 31.6% on the prior comparable period to $48 million, while we expect the cost of abatements to be around $7.4 million for the 6 months through September 30. This figure is down significantly on the rent relief paid in the first half of FY '21. Moving now to Slide 9. Kiwi Property maintained its track record of sustained rental growth, delivering a 3% increase in the first half of FY '22. This uplift was driven by a positive movement in both rent reviews and new leasing, which increased 3.7% and 0.6%, respectively. At September 30, our mixed-use and office portfolios were 99.8% occupied, defying the impact of COVID-19 and highlighting the quality of those assets. Our weighted average lease expiry was a robust 5.2 years at September 30, broadly in line with FY '21. Moving on to Slide 10. Retail sales and pedestrian counts bounced back from the prior comparable period due to a combination of reduced store lockdowns and the benefit of a full period of sales at Sylvia Park's Level 1 expansion. Total sales were $1.41 billion for the period, up from $1.22 billion last year. On an MAT basis, sales were up 15.5% on the prior year across our mixed-use and large-format retail centers combined, or 14.1% across Sylvia Park, LynnMall and The Base. Specialty sales per square meter were $12,900, up from September 2020, while specialty GOC ratios reduced to 11.4% in the first half of the year, reducing the risk of rental reversions and providing headroom for growth once trading conditions normalize. Turning to Slide 11. Kiwi Property undertook a number of significant capital management activities in the first half of FY '22, with a view to enhancing our overall debt profile. In May, we refinanced $700 million of bank debt facilities with an additional $100 million being refinanced in August 2021. In July, we issued our first green bond, following an extremely successful and heavily oversubscribed offer process. The $150 million, 7-year bond was priced at a 2.85% coupon, providing endorsement of Kiwi Property's commitment to sustainability. After these activities, Kiwi Property's weighted average cost of debt decreased to 3.77% at September 30, 2021, down from 4.19% at March 2021. In parallel, the company's weighted average term to debt maturity increased to 3.9 years, up from 2.9 years for the prior financial year. On to Page 12. The company's property portfolio was worth $3.5 billion at September 30, 2021, up from $3.3 billion at the close of the previous financial year. This includes a fair value gain of $93.6 million, partially reversing the negative revaluation that followed the arrival of COVID-19 in March 2020. The increase in the value of our property portfolio also contributed to an improvement in our gearing ratio, which decreased to 30.7%. Now to Slide 13. Funds from operations was $0.0367 per share, up 3.7% on the prior comparable period, while adjusted funds from operations increased 31.6% to $0.0306 per share. As previously noted, this uplift was driven by a reduction in the payment of COVID-19 abatements compared to the first half of the last financial year. Please turn to Slide 14. Kiwi Property will pay an interim dividend of $0.0275 per share for the period ended September 30, 2021. Rental abatement costs for the second half of the financial year are expected to be similar to those recorded in the first half. Despite this, however, the company continues to project a total dividend of no less than $0.053 per share for FY '22, up from $0.0515 per share the year before. As always, the payment of any final dividend is contingent on the performance of the company through the second half of FY '22 and barring material adverse effects or unforeseen circumstances. On now to Slide 15. Kiwi Property took a number of important steps forward in the delivery of our strategy over the past 6 months. Our priority is to maintain this pace of execution while continuing to unlock additional growth and development opportunities. COVID-19 will invariably cause challenges in the months ahead, but we will tackle them head on as we continue striving to create long-term value for our shareholders. In order to achieve this, we will focus on 4 specific priorities in the second half of FY '22. Firstly, we will move ahead with exciting new Sylvia Park BTR and 3 Te Kehu Way developments at Sylvia Park. Secondly, we will strive to secure a fast-track approval for our development at Drury East with a view to getting earthworks underway as early as the first quarter of 2022, if we're successful. Thirdly, we will advance the sale process for The Plaza and Northlands, enabling us to rebalance our asset portfolio and down-weight our retail exposure. And finally, we'll progress opportunities to grow with third-party capital, with a focus on advancing our funds management strategy. We enter the second half of FY '22 with significant momentum and a commitment to creating value for our shareholders in the months ahead. Thank you all for joining today. That concludes my overview of our interim financial results. I'll now hand over to the moderator, who will open the phone lines for questions. Thank you.

[Operator Instructions] Our first question comes from Arie Dekker at Jarden.

The first question is just in relation to the COVID relief. Just to get a sense of how well progressed you are in negotiations with tenants, over what period you expect that they'll likely be concluded, and then just any observations in terms of their approach since that government legislation was introduced and then passed?

Yes, look, we're in the midst of it all at the moment, as you can understand, given that we're just coming out of lockdown in Auckland. But as we've proven in the -- after the previous COVID lockdowns we had, we've worked constructively with all our tenants to find an amicable solution and a way forward in terms of sharing on the COVID pain. And that will be exactly the same approach that we'll adopt going forward and have adopted to date with this lockdown. It's still early days, but the vast majority of our tenants want to work with us to be able to find an amicable solution and a way forward, and we'll put that in place. My view is that it will probably take 3 to 4 months to work through that process, given that we got Christmas and we want our retailers ready to be focusing on maximizing their sales through that period. But yes, we'll work constructively to find a solution with all our tenants. And especially, we want to help the small- and medium-sized businesses that have really been hurt through this really, really lengthy lockdown in Auckland.

Sure. And then just in terms of -- and obviously, it's provisional at this point, the reliefs, I think, with what you're, I guess, tentatively guiding to in the second half is less than last year. Obviously, this lockdown has been probably more severe. Is the reason for the relief being lower is a combination of your intention for it to be more targeted this time and also because retailers have been able to respond and done better online wise this time around? What are the factors driving that?

Yes. The factors you called out are all relevant. The other thing to bear in mind is that last year the whole of New Zealand was placed in lockdown, and this time around, we've been fortunate that out of Auckland centers have been able to trade. Obviously, the Hamilton centers have come in and out of lockdown, but they have been able to trade. And also, retailers on the whole are a lot better at organizing the sales on an online basis. That said, the hospitality and personal services have really been hard hit, and we'll be looking to support those sectors.

Great. Just in terms of LynnMall and build-to-rent, you've got the resource consent. Could you just provide a little bit more clarity on what those conditions -- the funding condition and approvals that could see you begin in 2022? Presumably, are you saying you won't commence unless those divestments have completed? Is that what you mean around the funding and then any other approvals that you need before you would actually kick off on that?

Yes. Not surprising, we've got resource consent, but we're still in detailed design at the moment, so we have to conclude that process. And then we also need to obviously price up the construction and make sure the metrics make sense at that point before we go to the Board for a final approval. Obviously, the funding solution is also part of that in terms of how we look to fund it. But as we've called out before, we have a number of options in terms of funding as we move forward, and it's a relatively long build cycle. So we got -- we do have time to be able to work through that process.

Yes, okay. So in terms of those other options, would that -- included in that is external funds or what else outside of the divestment proceeds?

Well, obviously, we have a whole range of options in front of us. We obviously -- we have debt availability. We can look for joint venture partners. We could go down the funds route, we have the divestment route, and we also have the equity route as well, yes.

Yes, okay. Yes. And just, obviously, conscious of committed gearing and then also where you're trading versus NTA on the equity, so -- and sort of the clarity. And then just on the office at Sylvia Park, you've noted on the call that, obviously, COVID's probably impacted that a little bit. Has there been any -- what is the committed leasing at this point on office too?

We're very close to a number of deals to be finalized at the moment. And we just -- obviously, COVID hasn't helped that in terms of being able to sit around a table and get through that process. But we're seeing strong demand coming through for that building. So yes, we're very relaxed about the leasing of that building, yes.

Sure. And then just a final one for now. Just in terms of the 2 properties held for sale, can you just talk to what you saw with -- I know Centre Place North was included -- the 50% interest was included at the last balance date. What did you see with the valuation of those 2 properties and cap rates in this half?

You're referring to The Plaza and Northlands, Arie?

Yes, yes.

So Plaza is held at its contract price and Northlands was independently valued. No cap rate movement, but just some softening in terms of income. And so that you'll see a fair value movement of close to $5 million down on that asset.

[Operator Instructions] Our next question comes from Nick Mar at Macquarie.

Just following on, on those 2 assets up for sale. Was Northlands previously held at a contract price, and is there a change in terms of whether that's now falling away?

Yes. So Northlands, we had a group of buyers that we were under contract with. That group has -- group's composition has changed. So we're just in the process of refinalizing the agreement on that. And so we took that asset at its current value.

So does that mean they have the right to reprice based on their previous contract?

Well, it's ending up being a different contractor as a result.

Right. So they can renegotiate the price?

Yes. Well, it's not just price. It's every -- we're negotiating over everything. And it's not necessarily a down. It could be enough as well.

Yes. Do you have any indication of what the timing could be on both those 2 assets?

Look, the issue from our perspective has been twofold. Firstly, COVID, as you would imagine, hasn't been helpful given that people can't actually travel around New Zealand to be able to conduct their due diligence. So that's definitely slowed us down, and not just buyers but their professional services that you would have around seismic, et cetera. The second is, and it's worth calling this out is, that these are large assets within multiple buildings part of -- in the dozens of separate buildings making up a shopping center. And each building has to be separately seismically assessed, and that's quite a lengthy process that we're going through on both of those assets with the buyers. So it does take time and, unfortunately, COVID hasn't helped that process.

So within the dividend guidance, do you assume that those -- any of those properties still within the financial year?

Nick, we're targeting one sale in Q4. So it has relatively small impact on earnings.

Yes, that's fair enough. Just on the provision for COVID relief, just to clarify, because it is provisional, does that mean you haven't taken the tax deduction through the first half?

That is correct. We can't take the deduction until those agreements are finalized, Nick.

Yes. No, that's good. And then just on the rental levels and the rent reversion on the mixed-use, given that you've had this pretty stable for quite a while and the GOCs are where they are, what's your perception on whether those assets are underrented? Obviously, the valuers took a knife to the market rents on those as they went through COVID and you've seen a little bit of improvement since then. But most of it this time was the cap rate. What's your view on the [ rents set ] versus what market is and where you think they are sustainable on a go-forward basis?

Well, firstly, just to correct you, we've had no rent reversions at all on our mixed-use assets. So they've held their -- held the rents through the cycle, which has been I think amazing. And if you compare our assets to what's happened in Australia, I think that's a remarkable outcome. And we're not expecting any reversions going forward either in terms of those assets. But I think what's happening is the valuers are clearly seeing that these assets aren't being impacted to the extent that they first thought last year and obviously they're starting to be more bullish in terms of cap rate compression and also the work we're doing around mixed-uses is giving them additional positive view in terms of firming up these cap rates with the addition of offers and the addition of residential, especially at Sylvia Park has seen them being able to move forward and firm those cap rates. So we see that as a positive, yes.

[Operator Instructions] Our next question comes from Rohan Koreman-Smit at Forsyth Barr.

Just looking at the guidance that you've got out, it does imply a softer second half. Are we to think that's more the sustainable level going forward? I noticed you've only got one sale penciled in the fourth quarter. But can you provide a bit of a bridge to get to that level of decline in dividend?

You mean the decline for the second half, Rohan? Is that what you're referring to?

Yes, versus the first half?

Well, the guidance is no less than $0.053, and we aim to do better than that. But as I mentioned, it does assume an asset sale in Q4.

Okay. Maybe put it another way. Normally, you have your dividends evenly split through the year. If you were to just a bridge between having a flat dividend half-on-half for the full year and what your guidance is showing at the bottom end, what's the moving parts there?

I'm not sure I follow your question, Rohan. The $0.027 for the first half, with $0.053 full year targeting to -- aiming to beat that. So with some wind in our sails, we'll hopefully match that dividend in the second half.

And maybe if I jump in, it still is an uncertain environment that we're in right now, given that we're actually in a lockdown and we're just starting to move from it. And so there's still a lot of uncertainty around us as the pandemic tracks forward.

Yes, okay. Maybe we can take us offline later.

Yes. And obviously, Rohan, yes, there will be further amortization in the second half. There's a number of moving parts. And obviously, the tax deductions on the abatements in the second half. There's general doubtful debt provisions, expected credit loss provision letters. So there are a number of moving parts.

Okay. Okay. Cool. And second question is just when you talk about JVs and other capital partners, are you able to give us just a flavor of the level of interest you've got in terms of other people putting -- or capital partnering with you on these projects?

Yes. Look, there's definitely interest. The market understands we've got quality assets, and we have a quality portfolio. And there's obviously opportunities in some of the growth areas that we're looking at as we move forward. But at the moment, it's all very difficult, especially for offshore finance, to look at the New Zealand market right now, given that they can't travel here to do any due diligence or to advance those type of discussions. So yes, it's probably something for next year, to be honest, when hopefully things open up a bit more, yes.

Our next question comes from Arie Dekker at Jarden.

Just a couple of follow-ups. Just in terms of the office -- potential for an office in Hamilton, just any update there around assessing that and timing?

Yes, we continue to work with TGH, or Tainui Group Holdings, around that opportunity. It's still relatively early days, but yes, that is advancing at the moment.

Do you think it's likely that you could commence construction there in 2022? Or is it likely a longer timeframe than that?

I wouldn't want to put a date on that just yet. It's still too early in the process for that. But we see it definitely be a great opportunity around that property for jointly redeveloping that property going forward.

Sure. And then just in terms of Sylvia Park, I think there was just a touch under $23 million of capital movements there. Can you just talk to what the investment there was in the half, presumably a little bit of a start maybe on build-to-rent? And then on build-to-rent, will you separate that out for Sylvia Park like you do Sylvia Park Lifestyle?

So just answering the $23 million, I suspect there was a little bit of the galleria still flowing through. We had the old H&M space that needed to be backfilled. You'll see that we just opened JD Sports now, which really just wraps it up alongside Culture Kings, which is a great retail offer. So -- and there probably obviously would have been to kickoff for some of our works around 3 Te Kehu Way and the BTR. In terms of the treatment of BTR at Sylvia Park, we've spoken extensively about these being mixed-use sites, and we don't call out the individual office assets and we don't intend to call out the build-to-rent side. But given it's a new asset class, we'll probably provide some metrics around that to help the market understand how it's going when it comes on stream.

[Operator Instructions] We have a question from Nick Mar at Macquarie.

Sorry, just one more. In terms of rent collection for the first half, do you know what the proportion of contracted rent you collected for the period was?

I can't give that detail, Nick. But you can see the debtors position at the half year. And once we process those rental abatements, that will bring that down to a reasonable level. We know from the last lockdown that debtors, obviously, elevated and we were successful in bringing that back down post the last lockdown to normalized levels.

We've had no further questions queued, so I'll hand it back to you if you have any closing comments.

Thank you, Tara. Thank you, everybody, for joining this morning. Have a great day, and we'll probably talk later. Thanks. Bye.

Thank you so much. This does conclude our call today. Thank you all for joining. You may now disconnect.