Kiwi Property/NPT deal gives scope to sharpen focus on Sylvia Park

Sylvia Park preparing for the opening of Zara and H&M earlier this year. Photo / File

A deal which would see Kiwi Property Group, the country's largest listed property investor, sell two buildings to NPT and take on the management of the smaller company's portfolio would allow it to advance its strategy of selling non-core assets, while also growing funds under management arm, analysis from First NZ Capital has concluded.

Auckland-based NPT had been in a battle with major shareholder Augusta Capital, with Augusta seeking to take control of NPT's board and for NPT to buy three buildings for $329 million. That dispute had been wending its way through the courts because of the time it was taking to organise a shareholder meeting.

Instead, NPT had been looking at rival options, receiving four. NPT's board has backed the proposal by Auckland-based Kiwi Property, which would see Kiwi Property sell NPT the North City Shopping Centre in Porirua and Majestic Centre in downtown Wellington to NPT for cash and shares worth $230 million, with NPT raising $100 million of new equity as well as a $50 million issue to Kiwi Property for a 19.9 percent stake to help fund the deal.

At the same time, Kiwi Property would pay $6 million for the management contract of the enlarged portfolio, which it would more than recoup within three years of collecting fees of about 0.5 percent of assets under management, reaping an annual $2.1 million.

First NZ estimates that the deal would dilute Kiwi Property's earnings per share by about 4 percent. However, the analysts conclude that "the proposal provides it with the ability to build on its funds management platform to generate additional management fee income, which represents a significantly less capital intensive revenue stream than direct property ownership."

While Kiwi Property's proposal states the current board would remain in place, analysts at First NZ warn "in the medium term shareholder activism may see change within the current board." One of the current directors is due for re-election in 2017.

If the deal goes ahead, NPT's earnings will rise by 16 percent in the 2018 financial year, rising 17 percent by 2020.

The analysts say the proposal allows Kiwi Property to divest non-core assets that do not fit into its core strategic focus of Auckland retail assets, corporately occupated prime Auckland office space and government occupied Wellington offices. Centre Place North in Hamilton will be the last of Kiwi Property's assets that would be classed as non-core, but the brokerage said it doesn't expect it to be sold into NPT given its recent underperformance.

The sale of the two sites would also free up capital to be redeployed towards Kiwi Property's planned Sylvia Park expansion. The analysts conclude that the re-development of Sylvia Park would build on the company's most successful retail asset to date, and they support plans to cycle out of assets in regions that are likely to underperform in the coming years.