BWP reported as expected and in line FY22 results, as usual, BWP’s total income of $153.3m, was up 0.7% on pcp

Investment Thesis:

Stable and sustainable distribution yield.
Strong and experienced management team.
WES stake in BWP (24.75%) provides security against risk of non-renewal of leases by Bunnings.
High quality property portfolio with long weighted average lease expiry, strong lease covenants, and high occupancy.
Low interest rate environment is encouraging for the housing industry and hardware sales however any sudden increase in interest rates provides risk to both revenue and debt financing costs.
Solid balance sheet with low gearing levels.
Risk of poor execution in redevelopment of assets vacated by Bunnings to other uses.

Key Risks:

Any slowdown in demand and net absorption for hardware space.
Persistent lower inflation (and deflation) affecting retailers.
Economic conditions affect property fundamentals such as values (cap rates and rental growth), vacancies, retail activity (and hence demand for space at big-box retail sites).
Risk of non-renewal of leases by Bunnings Group.

FY22 Results Highlights. Relative to the pcp: BWP declared final distribution of 9.2cpu, which brings full-year ordinary distribution to 18.29cpu, and in line with the previous year.

BWP conducted 14 market rent reviews (including 10 Bunnings Warehouse properties) which saw rents broadly in line with the market.
BWP saw like-for-like rental growth of 3.3% which takes into account average inflation on Consumer Price Index (“CPI”) linked leases of 3.3%.
Weighted average cost of debt of 3.0% for the year, 2.7% at FY22-end.
Weighted average lease expiry (“WALE”) of 3.9 years at FY22-end.
BWP’s portfolio remains 97.5% leased.
BWP’s portfolio achieved net revaluation gains on the property investment portfolio of $371.9m for FY22. Net tangible assets of $3.87 per unit at 30 June 2022 (versus $3.29 per unit in FY21), up 17.6% on the previous year.
Gearing (debt/total assets) is at 15.1% at FY22-end, versus 17.7% in FY21, and is below the BWP Board’s preferred range of 20 to 30%. The interest cover ratio (earnings before interest /interest expense) was 9.6x (versus 8.8x in FY21).
Property portfolio update. BWP’s property portfolio continues to retain solid operating metrics. Key highlights include: BWP’s entire portfolio was revalued at 31 December 2021 and again at 30 June 2022, including 24 property revaluations performed by independent valuers – The value of the portfolio increased $365.1m to $3,001.2m, post capex of $6.0m and revaluation gains of $371.9m, after adjusting for the straight-lining of rent of $1.7m and less net proceeds from divestments of $14.5m. Net revaluation gain was mainly a result of rental income growth and average decrease in capitalisation rates across the portfolio. BWP’s weighted average capitalization rate was 5.04% (versus December 2021: 5.11%; June 2021: 5.65%).
BWP’s portfolio was 97.5% leased.

During FY22, 81 leases in the portfolio had annual fixed or CPI increases, resulting in an average increase of 3.2% in the annual rent for these tenancies.
There were no properties acquired during FY22 but management did highlight that BWP made offers to purchase a number of properties.
In terms of developments: (i) Lismore, NSW: BWP committed to acquire adjoining land for $1.5m and expand its Lismore Bunnings Warehouse at a cost of $11.3m. (ii) Coburg, Victoria: BWP committed to expand its Coburg Bunnings Warehouse, Victoria at a cost of $3.5m.

Company Description:

BWP Trust (BWP) is a real estate investment trust focused on operating, owning, and divestments and acquisitions of large format retailing properties, in particular, Bunnings Warehouses, leased to Bunnings Group Ltd (‘Bunnings’). Bunnings is the leading retailer of home improvement products in Australia and New Zealand and is a major supplier to builders and trades people in the housing industry. BWP is managed by an external responsible entity, BWP Management Ltd who is paid an annual fee based on the gross assets of BWP. Both Bunnings and BWP Management Ltd are wholly-owned subsidiaries of Wesfarmers (WES), one of Australia’s largest listed companies. WES owns ~24.75% of BWP. Currently, BWP is the largest owner of Bunnings Warehouse sites, with a portfolio of ~80 stores. Eight properties have adjacent retail showrooms leases to other retailers. BWP also owns one stand-alone showroom property. The assets have a current value of ~$2.9bn, WALE of ~4 to 5 years, 97.5% occupancy rate.

(Source: Banyantree)

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