Outlook revision for $3.2b landlord Kiwi Property Group: stable to negative

S&P Global Ratings has revised the outlook for New Zealand’s biggest listed landlord which is selling assets but the company did not express disappointment with the re-rating and said change was afoot.

S&P said Kiwi Property Group’s sale of non-core assets had cut the scale and diversity of its portfolio and would likely diminish rental income.

So it changed Kiwi’s outlook from neutral to negative but retained its BBB rating on the business.

That hasn’t dented the confidence from Kiwi, with $3.2 billion of property including Shortland St’s Vero office tower and New Zealand’s biggest shopping centre, Mt Wellington’s Sylvia Park.

The company has headed in an entirely new direction lately, pioneering New Zealand’s biggest build-to-rent apartment scheme

In response to S&P, a Kiwi spokesman said: “While we’re pleased S&P has affirmed Kiwi Property’s BBB rating, we note the revision to our outlook. This change is due to the temporary decrease in our funds from operation/debt ratio, which we expect to resolve in FY25 as the additional revenue from our new developments, such as build-to-rent and the 3 Te Kehu Way office building, come on-stream.”

Kiwi says it owns and manages $3.2b of New Zealand property and manages more than $400 million on behalf of third parties.

S&P said money from assets Kiwi was selling would be used to fund ongoing capital expenditure associated with the company’s mixed-use development pipeline.

Build-to-rent apartments under construction at Sylvia Park for Kiwi Property. Photo / Michael Craig

Kiwi had sold two malls and one office block, worth a total $282.7m since December. It announced the conditional sale of Wellington’s Aurora Centre for $142.8m in June.

Further devaluations are likely, so Kiwi’s portfolio “scale, diversity and profitability will be at risk with additional asset sales, in our view”, S&P said.

Last year, Kiwi sold its Christchurch mall Northlands at Papanui to Mackersy Property for $160m.

In 2021, Kiwi announced retail properties held for sale were valued at $347.5m: its Palmerston North mall, Northlands and 50 per cent of its Hamilton mall. Those three assets were previously collectively valued at $402m in 2020.

The company is pouring money into its new 295-unit $200m build-to-rent Sylvia Park scheme where Naylor Love is building three towers up to 12 levels. Kiwi’s BTR target completion date is next year, “but it will take 12 to 18 months to fully rent the buildings”, chief executive Clive Mackenzie said when he took the Herald on the first tour last month.

This is the largest residential project by any NZX-listed developer, bucking the trend for the big businesses listed on the sharemarket to invest only in commercial, industrial and retail properties. Housing has previously been out of their orbit.

Clive Mackenzie, chief executive, Kiwi Property, Sylvia Park at the build-to-rent complex. Photo / Michael Craig

Arie Dekker, managing director and research head at sharebroker Jarden, said Sylvia Park’s mixed-use strategy was playing out, with office development well progressed, two of those buildings already up while the more ambitious BTR scheme rises.

“This isn’t without risk and there is a lot riding on a successful launch of this as construction completes, with Kiwi needing to execute well on tenanting it up and operating the asset to ensure it delivers on a stand-alone basis,” said Dekker. “If successful, there should be positive ramifications for the value of the core retail asset over time, given success would pave the way for a lot more development intensity of the site, with Kiwi seeing a number of follow-on build-to-rent opportunities at Sylvia Park.”

S&P forecast Kiwi’s ratio of adjusted funds from operations to debt would weaken below 8 per cent during the fiscal year 2024. That is for the full year to March 31, 2024.

Higher interest rates and operating conditions in New Zealand would continue to challenge the company and the wider industry, it said.

The agency affirmed its BBB long-term issuer credit rating on the company but explained the downgrade.

“The negative outlook reflects our view that Kiwi’s credit metrics will be constrained by diminished earnings, high interest rates and elevated capex requirements over the next 12 months. That said, we expect the company will pursue capital management initiatives to restore weakened credit metrics without compromising its asset portfolio quality,” S&P said yesterday.

The agency also stressed the positives, noting the successful execution of its mixed-use strategy would likely restore and enhance portfolio quality over the long term.

“The company’s high-quality, well-located properties underpin its competitive position. We believe the improvements and successful implementation of its mixed-use strategy at existing assets such as Sylvia Park Precinct will progressively improve portfolio quality and diversity,” it said.

Occupancy remains high at 99.3 per cent with a well-spread lease expiry profile.

“We believe Kiwi remains well-placed to maintain strong occupancy and attract new tenants. While there are risks during the transition period for new developments, management’s track record will likely support the successful execution and delivery of the company’s mixed-used strategy, in our assessment,” S&P said.

“The negative outlook reflects our view that ongoing capex requirements and elevated interest costs will pressure Kiwi’s key credit metrics over the next 12 months. In addition, recent asset divestments have diminished the group’s earnings and portfolio diversity without a commensurate reduction in debt,” it said.

Shares are trading around 88c, down 11 per cent annually. The market cap is $1.3b.

Anne Gibson has been the Herald’s property editor for 23 years, having won many awards, written books and covered property extensively here and overseas.