Listed property stocks tend to track in much the same direction but the Covid-19 crisis has opened up a yawning chasm between Kiwi Property Group shares and Goodman Property Trust units, respectively the best and worst performers in the sector on the NZX.
Forsyth Barr analyst Rohan Koreman-Smit said the divergence between the two securities "is probably the widest it's ever been."
Some of that gap is because Kiwi's gearing, 32 per cent at March 31, is higher than Goodman's, which was 18.9 per cent at the same date.
But mostly it comes down to the types of property they own – Goodman specialises in industrial property and that part of the sector is running hot, at least partly because of the woes of retailers.
Covid-19 only exacerbated the existing trend for more retail sales to move online and away from bricks-and-mortar stores. That means large logistics centres are needed to service online orders and is bad news for traditional stores.
And Kiwi owns a lot of shopping centres – between its developing mixed-use centres such as Sylvia Park, and other shopping centres, including the Plaza in Palmerston North and Northlands in Christchurch, retail centres accounted for 68.5 per cent of its portfolio's value at March 31.
Goodman's portfolio is centred on Auckland and the two largest tenants of its industrial parks are NZ Post and DHL and four more of its 10 largest tenants are logistics-related firms. Retailers OfficeMax and Foodstuffs, Fletcher Building and fresh produce company T&G Global round out the top 10.
Hard hit, but some hits are harder than others
To be sure, both stocks took a hit as New Zealand headed into lockdown in March, but Goodman's was a lot less, taking its units down a little over 15 per cent year to date on March 23 while Kiwi's knock was more than three times greater, its shares down 52 per cent year to date on the same day.
Goodman's units have fully recovered – at $2.275 at Monday's close, the units were at a slight 2.5 per cent gain year to date and a hefty 31.7 per cent premium to their $1.727 net asset backing at March 31.
The units have also slightly out-performed the benchmark S&P/NZX 50 Index, which has gained 0.3 per cent year to date.
That's despite Goodman revising its distribution policy to better match cash flow, cutting the expected annual payout for the year ending March 2021 to 5.3 cents per unit from the 6.65 cents paid for 2020.
Goodman had been paying out more than its cash earnings in the last few years but will only pay between 80 per cent and 90 per cent from now on.
Kiwi shares have trimmed their losses but, at Monday's $1.17 close, were still down 25 per cent year to date and at a 7.1 per cent discount to their net asset backing of $1.26 at March 31.
Kiwi, of course, cancelled its final dividend for the year ended March and hasn't committed to resuming dividends, wanting to get a better view of the Covid impact before it does so.
However, it too has lowered its payout policy to 90 per cent of adjusted funds from operations from 100 per cent previously.
Jarden analyst Arie Dekker is forecasting Kiwi won't reinstate dividends until the second half of the current year while Koreman-Smit is forecasting the 2022 dividends will be about 15 per cent lower than pre-Covid levels.
Bottom-feeders and bulls
Craig Tyson, head of Australasian property securities at ANZ Investment Management, put the partial recovery in Kiwi shares down to "bottom feeders," but noted that its yield, even with the cancelled second-half dividend, was still superior to Goodman's for the year ended March.
At Monday's closing price at $1.17, Kiwi's annual payout for the year ended March, just the first-half 3.525 cent dividend per share, was still a 3 per cent annual yield.
Goodman's 6.65 cents payout per unit for the same year represented a 2.5 per cent annual yield on its closing price Monday at $2.275, and that was more than its 6.22 cents per unit cash earnings.
"It's still way more than you'd get elsewhere, but the rest of the sector's average yield is over 5 per cent," Tyson said.
"I would agree retail's on the nose and industrial's faring better, but in this market it appears people will pay almost anything for industrial – you're getting a very skinny yield," he said.
"Goodman's a great business with excellent assets and great management, but it looks expensive."
Matthew Goodson, joint managing director at Salt Funds Management, said there's a trend for all industrial property owners to be regarded as owners of logistics, currently flavour of the month, but not all industrial property is actually logistics.
"It's clearly been a red-hot sector for some time," and capitalisation rates - measures of buildings' value - are now lower on some properties than on retail or office properties when, traditionally, industrial cap rates have tended to be higher – the lower the cap rate, the higher a building's value.
The Goodman and Kiwi portfolios certainly demonstrate that. Goodman's average cap rate, excluding developments, at March 31 was 5.4 per cent while Kiwi's average cap rate was 6.11 per cent.
NZ's premier shopping centre
Sylvia Park, recognised as NZ's premier shopping centre, had a cap rate at March 31 of 5.5 per cent while its associated lifestyle properties had a 6.25 per cent cap rate.
Kiwi's office tower at 44 The Terrace in Wellington had a 6.38 per cent cap rate while Goodman's Highbrook industrial park had a 5.3 per cent cap rate at March 31.
Rents in Auckland for "a brand spanking new shed" are now up to $150 per square metre, higher than most rents for industrial property in Sydney and significantly higher than in Melbourne, Goodson said.
"The question for industrial property in Auckland is, is this as good as it gets? Rental levels in Auckland do seem unusually high."
But while Goodman looks expensive, Tyson isn't sure whether Kiwi shares are a bargain.
"We're in a market where it's all about the narrative" and, even pre-Covid, there was no doubt they were having to spend more to retain tenants and having to reconfigure and refurbish and to provide more leisure to draw people in and keep them at the centres for longer.
"The issue Kiwi has is 70 per cent of their portfolio is retail and retail is in a tough place and not just because of Covid," Tyson said.
Kiwi has already built an office tower at Sylvia Park and part of its strategy is to turn that and other centres, such as The Base, into mixed-use properties, perhaps including residential property.
But the Covid-induced recession means the company probably has development on hold.
Still, Goodson said investors shouldn't assume that NZ retail is under as much pressure as retail in Australia or the United States.
NZ isn't as over-shopped
The pressure is far less here, mainly because there is less square meterage per head of retail space in NZ. Australia has about twice the square meterage per head and the US about three times.
"It's a complete debacle in the US. You can't say that, because it's been so incredibly difficult in the US, that it's going to be the same in NZ."
Another mitigating factor for NZ retailers is that the cost of delivery to consumers, what is often called the last mile, is so expensive. That's why retailers are using a mix of sales strategies from pure online sales to click-and-collect methods.
Goodson said premier centres such as Kiwi's are likely to be less affected by online shopping and that it will be third-tier centres and high street shopping that will feel the pain the most and all the Covid shutdown has done is accelerate the trend.
Auckland's Queen Street is starting to show vacancies, he said, a trend that will probably be exacerbated when the Commercial Bay development opens this week – it will probably draw in consumers that otherwise would have shopped in Queen Street.
Another cushioning factor for Kiwi is that rents in centres in NZ are lower than in Australia at about 12 per cent of sales compared for about 16 per cent to 17 per cent at centres in Australia.
That's perhaps why Kiwi shares, depressed as they are, have still out-performed those of major shopping centre owners in Australia such as Vicinity Centres, whose shares are down 31.5 per cent year to date, and Scentre Group, whose shares are down 36.3 per cent.