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Kiwi Income raised to 'buy' at Craigs on 'earnings accretive' plan to take management inhouse

Tuesday 12th November 2013

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Kiwi Income Property Trust was raised to 'buy' by brokerage Craigs Investment Partners on expectations its plans to internalise management will lift earnings and dividends, while reducing costs.

Commonwealth Bank of Australia has agreed to cede management control of KIP for about $70.6 million in a transaction that has to be ratified by unitholders at a special meeting on Dec. 12. The deal is expected to be tax deductible for KIP, reducing the effective payment to about $50 million.

"We view this as strongly positive for unitholders in that it is highly earnings and value accretive and increases the alignment of interests between unitholders and management," analyst Chris Byrne said in a note, upgrading the stock from 'hold'.

He has a 12-month price target of $1.21. The units gained 2.3 percent to $1.135 today.

The tax break could result in KIP paying no tax in the second half of 2014 and full-year 2015, based on an estimated annual tax bill of $10 million to $15 million, he said.

Byrne said the independent directors of management company Kiwi Income Properties had done a good job in negotiating a period of exclusivity for the transaction, meaning CBA can't enter talks for a sale with a third party or pay a break fee.

That means the unitholder vote is the only criterion and ensures unitholders can't be used as a bargaining tool over the next month, he said.

Kiwi Income's trust deed allows the manager to be removed with 75 percent unitholder support of a special resolution. Byrne said while that option could eject the manager for as little as $18 million it is

fraught with difficulty because only the funds management business is covered, not the property management.

Also, unitholders typically don't vote against earnings accretive deals and voting down the proposal could see CBA sell the management contract to a third party, preventing unitholders from gaining the benefits of internalisation.

Byrne raised his forecast for 2014 distributable profit by 15 percent to $71.5 million and his 2015 forecast by 33 percent to $88.3 million. He lifted his forecast 2015 and 2016 distribution per unit by 8 percent to 6.9 cents.

Kiwi Income, which has $2.1 billion of shopping mall and office tower assets, including Sylvia Park Shopping Centre, the Vero Centre and ASB North Wharf, said yesterday that the transaction amounts to about 6.6 times earnings before interest and tax, based on March 31 year results, which is in line with comparable New Zealand transactions.

The manager was paid a base fee of $5.7 million in the six months ended Sept. 30, up from $5.3 million a year earlier. It wasn't paid a performance fee in the latest half, compared to $1.4 million in the previous year.

Internalising the management would see Kiwi Income join an ongoing trend by property investors looking to shed external costs and align the interests of the manager with those of unitholders.

Mark Ford, independent chairman of the management company, says the cost of exiting the management contract won't put KIP's balance sheet under pressure.

The trust's gearing may rise to 38 percent on settlement from 34 percent in the first half, though it will reduce again on receipt of the first $47.5 million payment in the sale of its 205 Queen Street building. That sale, to Brisbane-based Bloomberg Inc, was announced last month.

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