Kiwi Property Group receiving as few NPT securities as possible as part of the proposed strategic partnership, was Morningstar's preferred option, analyst Tony Sherlock said yesterday.
A decision on Kiwi's proposed partnership with NPT had been pushed back further after NPT deferred a shareholder vote on the proposal from March to April.
Details of the proposal were unchanged and involved Kiwi transferring both the North City shopping centre and The Majestic office tower, collectively valued at $230million, to NPT, and receiving a mix of cash and NPT securities as a consideration, he said.
''Given the consideration, being a mix of cash and NPT securities, is yet to be determined, it is difficult to form a definitive opinion on the financial implication and merits of the proposal.
''Given we view the two properties being transferred as some of the least desirable in Kiwi's portfolio in terms of growth prospects and risk, we'd prefer Kiwi receives as few NPT securities as possible.''
At a strategic level, the decision to sell the two assets to NPT made sense as wholesale property investors tended to have a preference for investing in assets of a similar risk profile, rather than across different asset types, Mr Sherlock said.
The two assets Kiwi was proposing to sell were more in keeping with NPT's ''core-plus'' strategy, than with Kiwi's investment strategy which was centred on owning assets designated as ''core''.
Although property strategies were subject to interpretation, the general definition was a core strategy involved owning low-risk property assets in built-up areas.
In contrast, the core-plus strategy involved owning medium-risk assets, where the properties presented some form of value-added element, he said.
Kiwi's operating risks appeared low and its earnings were underpinned by good-quality tenants, a relatively long-weighted average lease expiry and solid occupancy.
Like other property firms, Kiwi had benefited from a sharp reduction in borrowing costs in recent years.
Earnings and distributions would be materially affected if interest rates unexpectedly increased.
Kiwi had advised a 1% increase in borrowing costs would affect 2017 earnings by $13million, roughly 13% of forecast funds from operations of $106million, Mr Sherlock said.
Downside in earnings would likely require a recession, where weaker economic conditions would hurt office occupancy rates and office and retail market rents.
