However, the move was embraced by shareholders, shares hitting a two-year high, and backed by rating agency Standard and Poor's.
Heartland, which became a bank last December after a multi-finance company merger, said in a market update yesterday that after this year's profit decline to $7 million, it had ''preliminary anticipation'' of an after-tax profit for the year to June 2014 of between $34 million and $37 million.
Forsyth Barr broker Suzanne Kinnaird viewed the strategy change as ''positive'' as it gave greater certainty to the value of the non-core legacy property assets of $139 million.
Heartland shares rose to a two-year high after the announcement, up more than 7.5%, to trade around 85c yesterday.
Shortly after, Standard and Poor's said Heartland's credit rating, BBB-, had been left unchanged after the announcement of the property review.
''We consider that Heartland's projected risk-adjusted capital ratio after the write-downs will remain more than 15% over the medium to long term. This level supports our current very strong assessment of the bank's capital and earnings, and the current issuer credit rating,'' Standard and Poor's said.
Ms Kinnaird said the assets had been managed under a five-year exit strategy by Real Estate Credit Unit Ltd (RECL), a Pyne Gould Corp subsidiary, where RECL underwrote losses on the assets up to a limit of $30 million, with settlement in January 2016.
''Heartland has decided to terminate the RECL contract and will receive the balance of compensation outstanding, being approximately $26.7 million,'' she said.
As a result of the termination of the RECL contract, Heartland will write off the $6 million balance of the fee in the full-year 2013 accounts.
''While the RECL contract was not a related party, the market was clearly uncomfortable with the arrangement,'' Ms Kinnaird said.
Heartland said the new strategy was preferable because it created flexibility for Heartland to possibly exit assets faster than under RECL management and, for some assets, allowed a longer time frame to realise value.
Although the change of strategy gave rise to a risk buffer through a write-down of assets, it should also mitigate the current negative market sentiment concerning the ''property overhang'', Heartland said.
The non-core legacy property asset portfolio has a book value of $139 million as at March 31, 2013. The assets in that portfolio will be divided into three classes: ''performing'' (which will continue to be held); ''acceleration'' (which will be exited during the next 12 to 18 months); and ''extend''.
The latter loans will be converted over time to real estate, individual properties to be held for up to five years and possibly improved for sale.
''The market was concerned over the limited progress in monetising the assets. The new strategy appears to accelerate the process,'' Ms Kinnaird said.
Heartland said, while the cost was uncertain, recognising a write-down ''up front'' removed the potential for property losses to detract from underlying earnings in the future and, if not realised, could be written back.
It was also proposing a share buy-back programme to allow it to manage its capital base, further details of which would be released, Heartland said.
