BWP Trust (BWP) reported as expected and in line 1H22 results, as usual

Investment Thesis

Stable and sustainable distribution yield.
Trades on a ~6.4% premium to NTA.
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.

Key Highlights: Relative to the pcp and on a constant currency basis:

NPAT of $348.3m, which included $291.8m of unrealised gains in the fair value of investment properties.
Distributable amount of $57.9m was in line with the pcp. This equated to interim distribution of 9.02 cps, in line with the pcp.
BWP’s portfolio achieved like-for-like rental growth of 2.2%, weighted average lease expiry of 4.3 years and is 97.6% leased. BWP’s portfolio is valued at $2.9bn portfolio valuation as at 31 December 2021. This resulted in net tangible assets of $3.75 per unit, up 46 cents per unit, mainly due to net unrealised gains on revaluation of investment properties.
BWP maintained strong gearing (debt/total assets) of 15.5% and weighted average cost of debt of 3.2% per annum.
Property portfolio update. BWP’s property portfolio continues to retain solid operating metrics.
During 1H22, BWP’s entire investment property portfolio was revalued (10 by independent valuers and remaining 63 properties subject to directors’ valuations). BWP’s weighted average capitalisation rate was 5.11% (versus 30 June 2021: 5.65%; 31 December 2020: 5.84%). BWP’s portfolio value increased by $280.6m to $2,916.7m (which captures capital expenditure of $2.3m and revaluation gains of $291.8m, after adjusting for the straight-lining of rent of $1.0m and less net proceeds from divestments of $14.5m (In July 2021, BWP finalised its sale for its Mindarie, Western Australia property for $14.5m and did not acquire any assets during 1H22).
Occupancy and average lease expiry of 97.6% and 4.3 years (flat versus December 2021) respectively.
47 leases were subject to annual fixed or CPI reviews during 1H22 with a weighted average increase in annual rent for 23 CPI reviews of 3.3% and the 24 fixed reviews was 3.4%.
Excluding rental income from properties acquired, upgraded or vacated and re-leased since the pcp, rental income increased by ~2.2% over the pcp, which betters 1.8% for the 12 months to 31 December 2020.

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.

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