The BWP Trust released their half yearly report to December today, with results continuing to demonstrate the resilience of the portfolio despite COVID.
- Net profit for the six months was $144.0 million
- Distributable amount of $57.9 million for the six months
- Interim distribution of 9.02 cents per unit
- Like-for-like rental growth of 2.0 per cent for the 12 months to 31 December 2020
- Weighted average lease expiry of 4.3 years at 31 December 2020 with 97.4 per cent leased
- Gearing (debt/total assets) 17.8 per cent as at 31 December 2020
- Weighted average cost of debt of 3.2 per cent per annum for the six month period
- $2.6 billion portfolio valuation as at 31 December 2020
- Net tangible assets of $3.20 per unit at 31 December 2020
Total revenue for the Trust was line ball with the previous corresponding period, with gross income gains offset by COVID rental relief and higher expenses. Overall Net Profit (excluding valuation gains) was down -0.5% to $56.9m.
Property revaluations were recorded in the portfolio of $8.4m (+6%) due in part to rental growth and a 24bps sharper cap rate. Only 11 of the assets were independently revalued. Of these cap rate compression of 32Bps was recorded.
The Core portfolio consists of 64 properties with a weighted average lease expiry of only 4.5years and an Occupancy of 97.4%. Fifteen properties have lease expiries over the next 3 years which may present both opportunities and challenges for rental growth.
Eight market rental assessments were completed during the period with 3 recording a negative adjustment, including Bunnings Albany WA which saw the independent market value assessment result in a -12.7% decline in rent, and the Bunnings Wollongong, fall -4.4%.
There remain 19 market rent reviews of Bunnings Warehouses that remain unresolved for the year ending 30 June 2021 and are in the process of being finalised.
It would be good to understand from valuations how the current incomes compare to the valuations.
The average level of borrowings was 6.6 per cent higher than the previous corresponding period ($467.8 million compared with $439.0 million). Average utilisation of debt facilities (average borrowings as a percentage of average facility limits) for the period was lower than for the previous corresponding period (77.3 per cent compared with 79.1 per cent).
The Trust is well positioned in the current COVID-19 environment with the significant majority of rental income being from Bunnings and other national large format retailers which are all trading well during this time.
Rent reviews are expected to contribute incrementally to property income for the half-year to 30 June with 41 leases to be increased by CPI or by a fixed percentage however there is some risk in the 19 market rental reviews that remain outstanding.
Investment demand for Bunnings Warehouse properties is expected to remain relatively stable in the near-term given the current low interest rate environment and the strength of the Bunnings covenant.
BWP’s primary focus for the remainder of the 2021 financial year will be on leasing vacancies in the portfolio, progressing store upgrades, and extending existing leases with Bunnings through the exercise of options.
The Trust has indicated that the distribution for the year ending 30 June 2021 is likely be similar to the ordinary distribution paid for the year ended 30 June 2020, but notes that capital profits may be utilised to support the distribution as necessary.
BWP Trust is trading well above NTA of $3.20 and its growth in unit price over the past 9 months is reflective of the demand for defensive stocks. The distribution forecast for FY21of 18.29cents (same as for 2020) equates to a distribution yield of just 4.26% (based on todays open of $4.29).
There remain risks to the rental growth as a result of the large number of market reviews that are outstanding. Without further information on these it is hard to see the income growth for FY21 exceeding 2%.
Whilst we like the exposure to the underlying tenant base and the diversification offered by the Trust, the relatively short date yield, increases the risks in this fund.
BWP are seeking to extract higher returns from value adding to stores with capital expansion or re-use proposals, which may assist over time.
The average Cap Rate of 9 Bunnings stores transactions recorded by RESourceData in the 6 months to Dec 2020 was 4.8%. This suggests that the market would premium for liquidity is circa 50Bps.
We feel that the BWP is priced fairly.