BWP Trust (ASX:BWP)

Michael J Wedgwood
MD
Market Cap (AUD): 2.44B
Sector: Real Estate
Last Trade (AUD): 3.8 +0 (+0%)
Tab Bar

1. About

BWP Trust is a real estate investment trust investing in and managing commercial properties throughout Australia. The majority of the Trust’s properties are large format retailing properties, in particular, Bunnings Warehouses, leased to Bunnings Group Limited. Bunnings is the leading retailer of home improvement and outdoor living products in Australia and New Zealand, and a major supplier to project builders, commercial trades people, and the housing industry.

BWP Trust is the largest owner of Bunnings Warehouse sites in Australia, with a portfolio of 79 stores. Eight of the properties have adjacent retail showrooms that the Trust owns, and are leased to other retailers. In addition, the Trust owns a fully leased stand-alone showroom property and a leased industrial property.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue ($’000)

% of total Revenue

% of Net Profit

Profit drivers[2]

Rental Income

$152,420

 

99.4%

100.0%

  • Total income for the full-year to 30 June 2018 was $153.4 M, up by 0.6% from last year. The increase in income was mainly due to rental growth from the existing property portfolio
  • Finance costs of $21.5 M were 2.4% lower than last year, due to the slightly lower average level of borrowings, which were 1.8% lower than the previous year ($470.6 M compared with $479.1 M)
  • For the year ended 30 June 2018, net profit was $183.1 M, including $69.9 M in gains in the fair value of investment properties. This compares with net profit last year of $223.8 M which included gains of $111.3 M in the fair value of investment properties

Other property income

$851

0.6%

Finance Income

$120

0.1%

3. Strategy

   

Key strategies include:[3]

 

The ongoing evolution and financial performance of the Bunnings business, and the higher and better use potential of properties in the Trust’s portfolio will be more important for the Trust’s performance in the longer term.

 

Economic and property market conditions

  • For the year ended 30 June 2018, there continued to be strong investor demand for Bunnings Warehouse properties
  • The ongoing resilience of the property market is reflected in the value of the Trust’s portfolio at 30 June 2018 and is likely to continue to do so until such time that a risk event occurs that reduces capital flows into the sector. The Trust will remain disciplined in its investment approach to ensure it is best placed to create value from any new property investments over the medium term
  • Approximately 59 percent of the Trust’s rental income is subject to CPI annual adjustment and 41 percent is subject to fixed annual adjustments, other than in years in which respective properties are due for a market rent review (typically every five years for most of the Trust’s existing portfolio). The Trust will have lower incremental rental growth while CPI remains low, compared to historical levels
  • For the year ending 30 June 2019, CPI reviews will apply to 47 percent of the base rent, with leases subject to a market rent review comprising 12 percent of the base rent, and with the balance of 41 percent reviewed to fixed increases of three to four percent
  • The level of income growth the Trust derives from market rent reviews will depend on property specific factors and what relevant evidence is available from time to time for comparable Bunnings Warehouses or other comparable properties. It is therefore difficult to predict the likely growth from market rent reviews, particularly when often the outcome of individual market reviews is the subject of a binding determination by an independent expert

 

Home improvement retail sector performance and growth

  • The strength and outlook for the home improvement and outdoor living market in Australia and the ongoing financial success of the Bunnings business is important for the future financial performance of the Trust
  • Bunnings is continuing to deliver solid organic growth, with 8.6 percent like for-like sales growth for the nine month period ended 31 March 2018,1 reflecting the strength of its Australian and New Zealand business model, and the home improvement and outdoor living market in general. It is also continuing to expand its network in Australia reflecting its ongoing confidence in its business

 

Outlook 

 

Macro economic environment

  • Demand for Bunnings Warehouse properties is expected to remain stable, subject to any significant risk events interrupting capital flows into the Australian property sector.

 

Rental growth

  • 45 CPI/ 42 fixed rent reviews in FY2019
  • 8 Bunnings MRRs to be finalised this financial year (plus 5 from FY2018)

 

Investment

  • Strong focus on achieving good outcomes on alternative use sites
  • Will progress opportunities to re-invest in existing portfolio and re-zonings
  • Portfolio growth opportunities will be influenced by market valuations

 

FY2019 distribution

  • For FY2019, the Trust expects further rental growth from its core Bunnings warehouse property portfolio. It is likely that the divestment of up to four properties will be completed during the year and that other ex-Bunnings Warehouse stores will be transitioned to alternative uses with some impact on overall rental income
  • The Company expects to be in a position to at least maintain distribution growth equivalent to that for the year ended 30 June 2018. Capital profits will be utilised to support distributions as required during this period of transition

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2018)

Growth Rate (annual 13-18)

Industrial and other property operators

$17 billion

13.2%

Retail property operators

$23 billion

6.0%

5. Competition

 

Major competitors include:[5]

 

  •   GPT Group (ASX: GPT)
  •   Mirvac Group (ASX: MGR)
  •   Investa Office Fund (ASX: IOF)
  •   Growthpoint Properties Australia Ltd (ASX: GOZ)

6. History

 

1998[6]  

Established and listed on the Australian Securities Exchange (“ASX”) in 1998

 

2001  

Bunnings Warehouse Property Trust to raise $53 million

 

2003  

$10 million acquisition of development site at Vermont South in Victoria

 

2008  

Bunnings Property Management Limited, the responsible entity for the Bunnings Warehouse Property   Trust, announced the acquisition from Bunnings Group Limited of an established Bunnings Warehouse in the Brisbane suburb of Mt Gravatt, Queensland

 

2010 

Property Trust announced the acquisition of a Bunnings Warehouse in the suburb of Port Melbourne, Victoria for a purchase price of $24.0 million

 

2012  

BWP Trust (“the Trust”), announced the acquisition of a bulky goods centre anchored by a Bunnings Warehouse and Harvey Norman in Gladstone

 

2013  

BWP Management Limited, the responsible entity for the BWP Trust (“the Trust”), announced the acquisition of Lincoln Mills

 

2014  

BWP Trust (“the Trust”), announced the acquisition of a 2.85-hectare development site in Australind, Western Australia, from Bunnings Group Limited (“Bunnings”) on which Bunnings will develop a Bunnings Warehouse

 

2015  

Completion of development of Bunning Warehouse - Maribyrnong, Melbourne, Victoria

 

2016  

The Directors of BWP Management Limited, the responsible entity for the BWP Trust, advised that Bunnings Group Limited has informed BWPML of its intention to vacate up to seven existing Bunnings Warehouse properties owned by BWP

Change of registered office

 

2017  

Folkestone enters an agreement to acquire land from BWP Trust enters a 4th joint venture with Wilmac properties

 

2018 

BWP has been assigned an A3 (stable) issuer credit rating by Moody’s Investors Service

7. Team

 

Board of Directors[7]

 

Erich Fraunschiel – Chairman

Michael Wedgwood – Managing Director

Fiona E Harris – Non-Executive External Director

Rick Higgins – Non-Executive External Director

Tony Howarth AO – Non-Executive Director

Mike Steur – Non-Executive Director

 

Management Team

 

Michael Wedgwood – Managing Director

Andrew Ross – Portfolio Manager

David Hawkins – Finance Manager


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[8]

 

Division

Revenue ($’M)

% Change

Net Profit ($’M)

% Change

Rental Income

$152,420

0.6%

N/A

N/A

Other property income

$851  

(1.2%)

N/A

N/A

Finance Income

$120

(11.1%)

N/A

N/A

Total

$153,391

      0.6%

$183,093

(18.2%)

9. Risk

 

Major risks include:[9]

 

Financial risks

The Trust is well positioned from a financial risk perspective with the majority of its counter party exposure to Wesfarmers Limited (A- S&P rating, A3 Moody’s rating). The Trust’s assets comprise a geographically diverse portfolio of large format retail properties, generally, with long-term leases in place, 98.8 percent leased at 30 June 2018 with a portfolio WALE of 4.5 years.

The Trust’s capital structure (preferred gearing range 20 to 30 percent) takes into account the dynamics of the property investment portfolio, and the lease terms of each asset. The Trust actively seeks to diversify its sources of debt funding, currently through two domestic banks, one international bank and via the domestic medium-term note market. As at 30 June 2018, the Trust had a portfolio of 79 properties, limiting the financial impact of vacancies or decline in rent for any particular property. The key economic risk for the Trust relates to interest rate movements, the impact of this on property capitalisation rates, and the cost of debt funding. All investment proposals are evaluated in relation to longer-term return objectives, which take into account interest rate cycles. The interest rate impact on debt funding is managed with Board approved levels of interest rate hedging.

 

Environmental Risks

The geographic diversity of the Trust’s property portfolio limits its exposure to periodic localised climate-related environmental events, such as flood and fire. The Trust reviews each property annually from an environmental risk perspective. The Trust undertakes detailed due diligence on property acquisitions to fully understand levels of site contamination, as well as the potential for exposure to climate related events, prior to committing to purchase.

 

Social Sustainability Risks

The Trust recognises the significant importance of ensuring that people’s health and safety is not to put at risk by its activities and operations. It has in place policies and practices to help identify health and safety risks and to manage those risks appropriately.

 

Cyber Risks

Credit risk is the risk of financial loss to the Trust if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Trust’s receivables from customers, cash, and payments due to the Trust under interest rate swaps.

 

Credit risk

Credit risk is the risk of financial loss to the Trust if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Trust’s receivables from customers, cash, and payments due to the Trust under interest rate swaps.

 

Liquidity risk

Liquidity risk is the risk that the Trust will not be able to meet its financial obligations as they fall due. To assist in minimising the risk of having inadequate funding for the Trust’s operations, the Trust’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and corporate bonds with different tenures, with the Trust aiming to spread maturities to avoid excessive refinancing in any period. In respect to the Trust’s bank loans, whilst these have fixed maturity dates, the terms of these facilities allow for the maturity period to be extended by a further year each year subject to the amended terms and conditions being accepted by both parties. The Trust also regularly updates and reviews its cash flow forecasts to assist in managing its liquidity.

 

Interest rate risk

Interest rate risk is the risk that the Trust’s finances will be adversely affected by fluctuations in interest rates. To help reduce this risk in relation to bank loans, the Trust has employed the use of interest rate swaps whereby the Trust agrees with various banks to exchange at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal amount. Any amounts paid or received relating to interest rate swaps are recognised as adjustments to interest expense over the life of each contract swap, thereby effectively fixing the interest rate on the underlying obligations. At 30 June 2018, the fixed rates varied from 2.39 percent to 5.54 percent (2017: 2.39 percent to 5.54 percent) and the floating rates were at bank bill rates plus a bank margin. The Trust has a policy of hedging the majority of its borrowings against interest rate movements to ensure the stability of distributions. At 30 June 2018, the Trust’s hedging cover (interest rate swaps and fixed rate corporate bonds) was 86.9 percent of borrowings. This level is currently above the Board’s preferred 50 percent to 75 percent range due to the corporate bond issuance in May 2017. Hedging levels are expected to return within the Board’s preferred range as existing interest rate swaps mature.

References

  1. ^ Annual Report 2018, P. 37-38
    https://www.listcorp.com/asx/bwp/bwp-trust/news/2018-annual-report-1940323.html
  2. ^ Annual Report 2018, P. 16
    https://www.listcorp.com/asx/bwp/bwp-trust/news/2018-annual-report-1940323.html
  3. ^ Annual Report 2018, P 20
    https://www.listcorp.com/asx/bwp/bwp-trust/news/2018-annual-report-1940323.html
    Investor Presentation 2018, P. 37
    https://www.listcorp.com/asx/bwp/bwp-trust/news/2018-full-year-results-investor-presentation-1940337.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=1895
    http://www.ibisworld.com.au/industry/default.aspx?indid=1894
  5. ^ https://quotes.wsj.com/AU/XASX/BWP
  6. ^ http://www.bwptrust.com.au/irm/content/overview.aspx?RID=347&RedirectCount=1
    https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=header&issuerId=3948&documentNumber=202460&documentDate=2001-09-26
    https://www.asx.com.au/asxpdf/20030519/pdf/00361535.pdf
     https://www.asx.com.au/asxpdf/20081204/pdf/31f14jvx651g99.pdf
    https://www.asx.com.au/asxpdf/20081204/pdf/31f14pmr1j3ck0.pdf
    https://www.asx.com.au/asxpdf/20101207/pdf/31vg6lqsbcpd00.pdf
    https://www.asx.com.au/asxpdf/20120919/pdf/428szdbtmq1745.pdf
    https://www.asx.com.au/asxpdf/20131223/pdf/42ltzdty747fy1.pdf
    https://www.asx.com.au/asxpdf/20141121/pdf/42tx2qgh8rfgh1.pdf
    http://www.asx.com.au/asxpdf/20150211/pdf/42wjnfw3zfs1pr.pdf
    https://www.listcorp.com/asx/bwp/bwp-trust/news/bunnings-replacement-stores-1393072.html
    http://folkestone.com.au/wp-content/uploads/2016/07/Folkestone-Acquires-Land-from-BWPT-and-Enters-JV-to-Develop-4th-Enterprise-Park.pdf
    https://www.listcorp.com/asx/bwp/bwp-trust/news/moodys-investors-service-credit-rating-1900348.html
  7. ^ http://www.bwptrust.com.au/site/About-Us/board-management
  8. ^ Annual Report 2018, P. 37-38
    https://www.listcorp.com/asx/bwp/bwp-trust/news/2018-annual-report-1940323.html
  9. ^ Annual Report 2018, P. 19, 44-45
    https://www.listcorp.com/asx/bwp/bwp-trust/news/2018-annual-report-1940323.html