BWP Trust (BWP.AX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the BWP Full Year Results Investor Briefing.[Operator Instructions] I'd now like to hand the call over to the Managing Director of BWP Trust, Mr. Mark Scatena. Please go ahead.

Thank you very much, and good morning, everyone. Thanks for joining us. My name is Mark Scatena, and I'm the Managing Director of BWP Trust, and I'm joining you from Perth. With me today is Andrew Ross, the Trust's Head of Property; and David Hawkins, the Trust's Chief Financial Officer. Today, we're pleased to announce the Trust results for the full year ending 30 June 2025. The Trust has released to ASX this morning its full year results announcement, annual report and investor briefing presentation. I'll now go through the presentation before taking questions. Turning to Slide 3. To commence today, we acknowledge the traditional owners of country throughout Australia and the continuing connection to lands and waterways upon which we depend. We pay our respects to their elders, past, present and emerging. Turning to Slide 6 and highlights for the year. The year saw a continued focus on portfolio optimization and profitable growth, which supported increased rental income and distribution growth. In optimizing the portfolio, the Trust recorded strong like-for-like rental growth of 3% over the year, with 12 Bunnings market rent reviews also completed, achieving a 3.4% weighted average increase. Our Northland property was leased to a single third-party tenant prior to lease expiry and at Fountain Gate, this major redevelopment was advanced with statutory approvals received and leasing well progressed. Specific to profitable growth, Bunnings upgrades at Scoresby and Dubbo were completed and agreements were reached for a $14 million Bunnings expansion at Pakenham and a car showroom refurbishment and expansion for $11 million at Midland. Portfolio renewals saw 2 property sales advance being Port Kennedy and Morley, with these divestment completions expected in the first half of the 2026 financial year, and progress was made on refinancing 2026 debt maturities. Finally, and importantly, the transaction comprising the BWP management internalization, Bunnings lease reset and extension and capital expenditure commitments was approved by unitholders after the end of the financial year, with transaction completion achieved on 1 August 2025. Turning to Slide 7 and key portfolio metrics. During the year, the balance sheet strength was maintained with portfolio quality and capitalization rate improved, and with weighted average lease expiry, or WALE, distribution and net tangible assets increased. In regard to some key portfolio metrics, total income for the year to 30 June 2025 was $203.3 million, 16.5% above last year. Net profit for the year ended 30 June 2025 was $265.6 million, including $135.9 million in net unrealized gains in the fair value of investment properties and derivatives. This compares with net profit, including fair value gains of $180.2 million in the prior year. Net profit before revaluations was $129.7 million, up 8.7% on the prior year. And excluding $3.3 million of one-off transaction costs incurred during the year, net profit before revaluations was up 11.5%. The net tangible asset backing of BWP's units was $3.98 per unit at 30 June 2025, an increase of 5% on last year. And a final distribution of $0.0945 per ordinary unit has been declared and will be made on 27th of August 2025 to unitholders on the register at 5:00 p.m. Eastern Standard Time on the 30th of June 2025. The final distribution takes the total ordinary distribution for the year to $0.1865 per ordinary unit, an increase of 2% on the previous year. Turning to Slide 9 and financial performance. Whilst I won't spend time on Slides 9 and 10, they provide an overview of financial performance for the year with key metrics focused on income, expenses, portfolio valuation, distributions, investments and cash generation and capital structure. And turning to Slide 12 and the strategic framework. In delivering BWP's objective of providing unitholders a secure and growing income stream and long-term capital growth, the group's key areas of focus aligned to its 3 strategic pillars: portfolio optimization, profitable growth and portfolio renewal. To enable these strategic pillars, BWP prioritizes commercial discipline, effective capital allocation and access, sustainability and active and effective collaboration with key stakeholders. Portfolio optimization focuses on optimizing and leveraging the existing network while managing asset repurposing requirements. Profitable growth seeks to expand the core portfolio, assess adjacent growth segments and addressable markets where feasible. And portfolio renewal focuses on active value creation through capital recycling and reinvestment in growth initiatives to complement the core portfolio, while maintaining a strong and flexible balance sheet. Our supporting principles of operating excellence, efficient capital structure and effective asset management underpin these strategic pillars. Now turning to Slide 14 and an update on the proposed transaction. The transaction, which we announced on the 27th of June and we completed on the 1st of August, involved forming a new company, BWP Property Group, distributing one fully paid ordinary share in this new company, BWP Property Group for each existing unit held by BWP Trust Investors at the stapling record date, Stapling [indiscernible] BWP Property Group share to each BWP Trust unit to form a new stapled security BWP Property Group acquiring BWP Management Limited, together with its subsidiary entities from Wesfarmers, the current owner of the management company, thereby internalizing the management of BWP. Wesfarmers agreeing to provide transitional services to BWP. BWP and Bunnings resetting the terms of 62 Bunnings leases and BWP and Bunnings committed to enhance the quality of the portfolio through a combination of store expansion and network upgrade capital expenditure. We were very pleased to hold our AGM on the 28th of July, at which BWP unitholders approved the resolutions in relation to the transaction. Turning to Slide 15. The proposed transaction comprised 3 elements. Firstly, the internalization to create an independent platform, allowing BWP unitholders to enjoy a lower cost of doing business and enhance the opportunity for growth whilst being immediately accretive to distributions. Secondly, the lease reset and extension, where Bunnings has made a long-term commitment to occupy BWP's properties. This represents strong alignment with BWP's largest tenant Bunnings, with this commitment providing investors with certainty of income and security of tenant covenants through a materially longer weighted average lease expiry. Thirdly, the capital expenditure commitments, which see BWP and Bunnings both committing capital to BWP's assets to fund store expansions and network upgrades, which will increase income and enhance asset life. Turning to Slide 16. BWP has demonstrated a prudent and disciplined approach to acquisitions and developments with a track record of generating superior returns for investors since listing in 1998. BWP was established as a platform for income and capital growth and has sought to sustainably deliver this objective during its 27 years since listing. The transaction represents a significant development and reflects BWP's disciplined approach to capital allocation and also the attractiveness of the opportunity. The transaction further enhances BWP's platform for future income and capital growth, consistent with BWP's objective of providing unitholders a secure and growing income stream and long-term capital growth. In highlighting the key benefits of the transaction, it secures one of Australia's leading retailers in Bunnings for additional lease terms certain, ensuring continued covenant strength and income certainty for BWP. The transaction is also an important enabler for growth, increasing the addressable market via a lower cost of capital and affording increased optionality regarding growth platforms. Turning to Slide 17. Following the transaction, portfolio WALE increases to 7.7 years and the Bunnings WALE increases to 9.1 years, removing all short- and medium-term Bunnings vacancy and income risk. The transaction is also expected to be accretive to FY '26 distributions, where following implementation, BWP's distribution forecast for FY '26 is $0.1941, reflecting 2% accretion to the forecast FY '26 distribution pre-implementation and 2.3% accretion on a pro forma full year basis. BWP's forecast distribution for FY '26 of $0.1941 represents a 4.1% increase on the FY '25 distribution of $0.1865. Turning to Slide 19. For the 12 months to 30 June 2025 and excluding rental income from properties acquired, sold, upgraded or vacated and re-leased during or since the prior corresponding period, rental income increased by 3% on a like-for-like basis compared to 4.2% for the 12 months to 30 June 2024. For the year ending 30 June 2026, CPI reviews will apply to 46% of the base rent, with leases subject to a market rent review comprising 3% of the base rent with the balance of 51% reviewed to fixed increases of 2% to 4%. Turning to Slide 20 and market rent reviews. Market rent reviews on 12 Bunnings Warehouse -- Bunnings Warehouse properties were finalized during the year, with rent increasing on average 3.4% on the passing rent at the time of the market rent review. 10 of the 12 reviews were negotiated between the parties and were based on available market evidence. And while slightly above the 3-year average of 3%, we remain of the view that overall, the portfolio is largely at market. Reflecting the lease reset component of the transaction, only 2 market rent reviews are scheduled for the 2026 financial year, both of which are unresolved reviews carried forward into the new financial year. Turning to Slide 21 and lease covenants. The Trust lease covenant mix remains strong with Wesfarmers group covenant coverage at 80.8% at the end of the year and national retailer coverage at some 97% of rental income. Turning to Slide 22 and capitalization rates. Interest rate outlook and increased alignment between buyer and seller expectations supported an increase in transaction activity over the 2025 financial year. This continued interest and support for the Bunnings covenant, together with this improved investor appetite were reflected in transaction capitalization rates compressing over the year. Turning to Slide 23 and valuation summary. During the 6 months to 30 June 2025, the Trust's entire investment portfolio was revalued with property revaluations performed by independent valuers for 29 properties. The remaining 53 properties were subject to directors' valuations. Following the revaluations, the Trust's weighted average capitalization rate for the portfolio at 30 June 2025 was 5.40%, down 14 basis points from 30 June 2024 and 3 basis points compared to 31 December 2024. At 30 June 2025, the average cap rate for the Bunnings warehouses within the portfolio was 5.06% with a tighter cap rate for stand-alone Bunnings properties, reflecting the relevant -- the relative covenant strength of these single tenanted assets. Turning to Slide 25 and profitable growth. During the 6 months to 30 June 2025, the Trust's [Technical Difficulty] during the year, BWP committed to fund the expansion of its Pakenham Bunnings Warehouse, Victoria, at a cost of $14 million, which included the acquisition of adjoining land with the annual net rent increasing by approximately $0.9 million, reflecting a rentalization rate of 6.5%. BWP also committed to fund the redevelopment and car showroom expansion at Midland Western Australia at a cost of $11 million, with capital to be rentalized at a rate of 7.5%. Following completion of the expansion, a new 15-year lease will be entered into with [ 1 ], 10-year option. In March 2025, the expansion of the Dubbo Bunnings Warehouse was completed at a cost of $13.1 million, inclusive of the acquisition of adjoining land of $0.4 million. The parties have entered into a 10-year lease with 6 5-year options exercisable by Bunnings with annual rent increasing post completion by $0.5 million. Finally, in the second half of the financial year, car park works totaling $1.4 million were completed at the Bunnings Warehouse in Scoresby. The parties have entered into a 10-year lease with 3 5-year options exercisable by Bunnings. Turning to Slide 27 and portfolio renewal. The 2026 financial year sees material repositioning works planned, which includes significant redevelopments with increased activity reflecting cumulative Bunnings lease vacancy impacts. As an example, at Noarlunga, development approval for a 12,100 square meter large-format retail center with a food and beverage pad site was received in April, and negotiations were advanced with several large-format retailers, representing more than 60% of the available lettable area. Turning to Slide 28 and Fountain Gate. The Fountain Gate redevelopment reflects BWP's repurposing capabilities, including feasibility assessment, planning approval, construction and leasing. The scope of the project includes the subdivision of the ex-Bunnings Warehouse into multiple large-format retail tenancies, extensions made to the northern and southern ends of the existing building and the inclusion of a stand-alone quick service restaurant to be constructed in the Northwestern corner. Construction is expected to commence in September 2025 for an approximate cost of $35 million with agreements for lease executed with the Super Retail Group for a significant portion of the site. Further to Super Retail Group, leasing is well advanced with another large-format retailer and a food and beverage restaurant operator. Turning to Slide 29. In renewing the portfolio, the group continues to recycle actively by divesting noncore assets, currently focused on Port Kennedy and Morley and reallocating capital to high-returning opportunities and reinvesting in growth initiatives to complement its core portfolio. We expect the Port Kennedy and Morley divestments to complete by the end of the 2025 calendar year. Turning to Slide 30 and debt. Finance costs of $35 million were 37.7% higher than last year, largely due to a higher level of average borrowings for the year with borrowings of $799.9 million, 36.2% higher than the previous year at $587.5 million, with increased borrowings largely due to the NPI debt acquired as part of that acquisition. The weighted average cost of debt for the year was 4.4%, in line with the previous year. During the year, the group extended the terms of facilities with Bank of China, Commonwealth Bank of Australia, Sumitomo Mitsui Banking Corporation and Westpac Banking Corporation. An additional $50 million facility was also entered into with Bank of China for 4 years maturing in June 2029. The next debt maturity is April 2026 with the tranche of the Trust corporate bonds maturing. The Trust is currently considering various refinancing options for this tranche, including the potential for a new bond issue, obtaining additional finance from current debt providers and exploring options with new lenders. The group's gearing ratio at 30 June 2025 was 21.6%, which compares to 21.5% at 30 June 2024, which is at the lower end of the Board's preferred range of 20% to 30%. The group entered into interest rate swaps and fixed rate corporate bonds to create certainty of interest costs over the medium to long term. At 30 June 2025, the group's interest rate hedging cover was 48.3% of borrowings, and the weighted average term to maturity of hedging was 1.4 years. BWP is committed to maintaining an investment-grade rating, currently A- stable by Standard & Poor's and A3 negative by Moody's through appropriate capital and balance sheet management. Now turning to Slide 32 and outlook. The 2026 financial year sees the peak impact of Bunnings vacancies with material site repurposing activity impacting rental income and capital profit release to support distribution growth. As the charts illustrate, during FY '26, there is an expected increase in rental income downtime and site repurposing capital expenditure, reflecting known Bunnings departures. This results in the requirement for additional capital profit release to support DPU growth, excluding the benefits of the internalization and lease reset, with CapEx spend in 2026 expected to be some 4x that of 2025. Turning to Slides 33 and 34. In delivering BWP's strategic agenda of portfolio optimization, profitable growth and portfolio renewal, BWP's focus for the 2026 financial year will continue to include progressing the repurposing of ex-Bunnings properties, filling any vacancies, progressing and completing store upgrades. As discussed, the 2026 financial year sees the peak impact of Bunnings vacancies with a material increase in site repurposing works. The benefits of internalization and lower operating costs are expected to support earnings with the release of capital profits from prior asset disposals expected to support distributions to mitigate the impacts on rental income due to increased repurposing activity. The completion of the transaction achieved in early August 2025, the coming year will see a strong focus on the transition to an internalized model. where management will focus on optimizing operations, including in collaboration with Wesfarmers under the Co-Operation and Services Agreement. Management will also focus on leveraging the reduction in the cost of doing business via a lower cost of capital and the increased available time and resources to assess and action opportunities to grow the portfolio and create value. This activity will focus on reinvesting in the core portfolio to support tenant optimization plans, acquiring accretively and growing the portfolio. In renewing the portfolio, the group will recycle actively by divesting noncore assets, focused on Port Kennedy and Morley, reallocating capital to high-returning opportunities and reinvesting in growth initiatives to complement the portfolio while maintaining a strong and flexible balance sheet. Following unitholder approval of the transaction at the EGM of 28 July, the number of market rent reviews has reduced significantly. To that end, for the year ending 30 June 2026, leases subject to market review represent only 3% of the base rent, with CPI reviews to apply to 46% of the base rent and the balance of 51% to be reviewed to fixed increases of 2% to 4%. Prior to the transaction, the distribution for the 2026 financial year was forecast to be $0.1903 per BWP Trust unit, including capital profits released of $5.6 million, reflecting 2% growth. Following implementation of the transaction and subject to no major disruption in the Australian economy or material change in market conditions, BWP expects the distribution per unit for the year ending 30 June 2026 to be $0.1941, representing a 4.1% increase on the prior year distribution of $0.1865. Now that concludes my prepared remarks, and I'll now hand back to the moderator to facilitate any questions where myself, Andrew Ross, the Trust Head of Property; and David Hawkins, the Trust's CFO, are available.

Your first question today comes from Tom Bodor from UBS.

Good morning, Mark. I'd just be interested in the acquisitions -- the set of acquisition opportunities out there. And particularly, any comment on the BPI portfolio that Wesfarmers took back on balance sheet? Is that something you could look at or would be of interest to you?

Hi, Tom, yes, so broadly, that suite of acquisition opportunities is, I think, like it's always been, Tom. So clearly, assets that are aligned to the foundation of the business. So Bunnings Warehouses, large-format retail centers that, as we discussed before, carry similar traits in regards to addressable markets, industry structures, et cetera, covenants. So there are things clearly we're always looking at. The internalization supports that as we've guided in regards to perhaps having the capacity at the right time to leverage a lower cost of capital. So specific to BPI, Tom, yes, that process, I think there's been some market commentary in regards to that process being live. We participated in that process, and we understand we weren't successful in moving through to the next phase. So yes, that sub tranche of that BPI was it was a tranche of the BPI assets that was put to market. We were interested, but there are other preferred bidders, we understand probably a question for Wesfarmers as well, Tom.

Yes. I understand that. And then in terms of the cap rates, if I look at the transaction cap rate slide, it sort of feels as if everything is pretty centered in around that 5.8% sort of mark. I'd be interested in your comments around where you sort of think you can acquire things successfully sort of post internalization. Obviously, it improves your cost of capital, but getting assets in the low 5s, I presume is a bit of a stretch. So it seems to be where the market is.

Yes, Tom, I think that's right. And I think even that chart, Tom, is relatively illustrative in terms of perhaps where we've seen value in a recent transaction, where the market is at. Clearly, I think as you said and as we've indicated, a lower cost of capital and the absence of that full management fee provides more currency in terms of our ability to acquire. But yes, relative to the cost of capital, Tom, of course, something at that absolute margin that can be challenging from an accretion perspective. So we're very mindful of clearly unitholder returns, Tom. So we -- hopefully, over time, we can leverage that cost of capital to deploy really effectively. And yes, just a constant focus, Tom.

Just a final one for me. I mean, how do you see your current valuations relative to those transactions? Do you think you're conservative? Or do you think you're sitting where you should be at the sort of mid-5s on the cap rate?

Tom, Andrew, Ross here. Maybe if you have a look at Slide 23, what we've done there is we've shown the cap rates for the individual stand-alone Bunnings Warehouses BWP has in our portfolio. And you'll see that our weighted average cap rate for those properties is almost 5%. So we feel like our valuations are of the stand-alone Bunnings Warehouses are consistent with the transactions.

Your next question comes from Lauren Berry from Morgan Stanley.

Thanks for the additional disclosure around the CapEx. Just on your [ fact ] that it's going to be 4x step-up in FY '26. Are you able to talk about what you think the quantum of CapEx will be after FY '26? Like is this a 1-year step-up and it will taper off after that? Or are we looking -- are we heading into a period -- a prolonged period of really high CapEx requirements?

Yes. Thanks, Lauren. Look, I think the reason we called that out Lauren is exactly that point. And that is, as we've guided again in the commentary, it is peak what we call repurposing activity reflective of very -- 3 relatively significant projects, including Pakenham, Noarlunga and Fountain Gate and some repurposing of Rocklea and some other support of customers like Midland. So there is clearly a swing and an increase to CapEx in '26. Some of that repurposing activity, a little bit of that will carry forward into '27, but we do expect that to fall back again in '27, Lauren, perhaps somewhat in line with history. But again, that will just be a reflection of perhaps timing of construction and where those projects ultimately end through the course of the '26 financial year. But yes, a material step down again in CapEx in '27.

Great. And then in terms of the capital release to support the distribution, again, is FY '26, it's obviously a big step up this year. Should there be a material step down in FY '27 in line with the CapEx requirements?

I think probably a number of factors in that probably Lauren, if you think about the transaction support to earnings from a lower cost of doing business as it relates to the internalization and lease reset, that will be a tailwind in the run rate from '26 into '27. So that will defray some of the requirement to release capital profits. So we expect a lower capital profit release in '27. But again, some of that will be timing of tenanting, timing of construction completion, and that will go ultimately to how we've retenanted those repurposed activities that are in a heightened sense of activity at the moment. So yes, we expect certainly that to fall, Lauren.

Great. And then final one for me. Just on Fountain Gate, I mean you've given the additional disclosures about the CapEx, but it looks like the CapEx is over 100% of your book value for the asset at the moment. Are you able to give a bit more color on the step-up in rents that you're expecting following the completion of that development, particularly in regards to what Bunnings is paying on that pre-kickoff?

Yes, Lauren, Andrew Ross here. There's a significant step-up in the rents for this asset. We're still finalizing lease negotiations on a couple of tenancies. So I wouldn't guide you to anything, but what I could guide you to, though, is the valuation on completion is circa $90 million.

[Operator Instructions] Your next question comes from Richard Jones from JPMorgan.

Mark, can you just recap who drove the internalization? And then just as a follow-on, how you see your business changing as an internalized vehicle and anything you could perhaps call out within the first 2 weeks that you've been internalized for a few days I should say.

Yes. No, sorry, thanks, Richard. In terms of the transaction itself, I think not dissimilar to NPR. You can imagine that our corporate plans, our strategic plans over many years have addressed different drivers of value. Internalization was clearly one of those drivers of value. And so through that kind of strategic planning process in the middle part of last year, we resurfaced the concept. We integrated to some degree, NPR at that point. So if you think about the third quarter of last calendar year, we started to think about how do we, again, foundationally improve this business. So its outlook in terms of prospects was a little bit more prospective. So the cost of doing business and cost of capital was one of those drivers and internalization was an enabler of that. So we took, obviously, at length, we went through a review process with the Board. And then towards the back end of the calendar year, we clearly very formally approached Wesfarmers with a concept, which included the 3 elements being the internalization, the extension and reset of the lease portfolio with Bunnings and also some commitment to expansion and upgrade. So that was very much at our instigation. So we took that to Wesfarmers and that negotiation took more than about 6 months, Richard, to complete. And in late May, we executed a binding term sheet and then we went through that process of documenting the relevant transaction document. So it was a very strong process and long process. And -- as you can imagine, Richard, negotiating with Wesfarmers and Bunnings is not necessarily easy. So that did take some time. So that was a very formal process. And then I suppose the second part of the question, which is about what perhaps is different, what do we see is different. Well, I think a couple of things even in this early period, Richard, whilst we're still clearly, as I've said in the comments, we need to internalize well, and we need to set ourselves up structurally really effectively as we move forward. from a property perspective, a growth perspective, there is more time available to think about incrementality and growth and options for the portfolio. So I even see that in Andrew already. I won't speak on behalf of Andrew, but I see him having capacity to think about growth and investment in a slightly different way perhaps than when we were focused on market rent review exchanges for many months in relatively competitive ways. So that's one discernible change, which will continue. Clearly, there is a stronger alignment, Richard, in regards to unitholders. So very simplistically, my remuneration is now far more aligned as is all of the team's remuneration to outcomes for security holders of the BWP Stapled Group. So -- there was always an incredibly acute focus on unitholder returns, as you would know. I suppose we're even more aligned now in terms of remuneration mix as it relates to that. And I think, Richard, with this focus on optimizing the cost of capital, that's a very strong focus and continued focus. So we want to leverage that as best we can. And so making sure that we're evaluating opportunities really effectively. We're spending more time on that. [ They ] are a couple of the very near-term opportunities. Of course, Richard, we are -- we have a relationship with Wesfarmers from a shared service perspective. So making sure we set up well and foundationally, we're well established to exchange and over time, separate, that's really important as well.

What's the headcount of the group?

Yes. It's not particularly big, Richard. We've got about 13 in the team.