BWP Trust (BWP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the BWP Trust Half Year Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand the conference over to your speaker today, Michael Wedgwood. Thank you. Please go ahead.

Good morning, everyone, and welcome to our half year results teleconference. We've released to the ASX this morning our half year results announcement, our half year report and the slides, which I'll go through now and before taking some questions. I have with me Andrew Ross, our Portfolio Manager; and David Hawkins, our Finance Manager. We'll go straight to Slide 5, which just provides a bit of a summary of our half year outcomes. The focus in BWP continues to be very much on the existing assets in the portfolio in terms of upgrading stores occupied by Bunnings, wherever that's required, repositioning assets exited by Bunnings and improving the zoning on properties in the portfolio when it's the right time to do so. We remain mostly exposed to the Bunnings business, and we expect Bunnings to continue to be very resilient as a business given its ability to keep evolving regardless of what's going on in the broader economy. And we don't see any change in that. We're still not seeing good opportunities for growth, particularly in our structure as a long-term owner of assets, but we remain active in looking. In terms of the results, total revenue fell slightly for the half on a comparative basis, and that reflects the rent foregone from divestments that occurred last financial year and a couple of rent-free periods while properties are being repositioned, and I'll talk more about that in a moment. Distributable profit for the half was up 1%, and that was from portfolio rental growth, a reduction in funding costs and a modest relief with capital profits. The half year distribution grew 1% to a bit over $0.09 per unit, and that was in line with the distributable amount. NTA has grown about 5% in the last 12 months, and that's mainly due to increases in the value of a number of properties in the portfolio. And particularly in this last 6 months, I think, 4% of the 5% growth occurred in this round of valuations. We did revalue or independently revalue a number of properties [indiscernible] I'll talk more about those in a moment. The Trust property portfolio has generated 2.2% like-for-like growth on an annualized basis, and that takes into account the average inflation of our CPI-linked leases of 1.6%. Our portfolio cap rate as at the 31st of December was 6.08%, and that's tightened from 6.3% at the 30th of June 2019. There haven't been that many new Bunnings sold recently. But whatever has been sold, continues to be strongly bid for and there have been a couple of recent transactions below 5%. So that's indicative of continued strong support for Bunnings properties. Portfolio WALE at 31st of December was 4.3 years, and that's similar to what it was at the 30th of June. During the period, we completed capital works for the repositioning of our ex-Bunnings Hoxton Park property in Sydney. I'll talk a bit more about that. And we also finalized the rezoning of our Mindarie property in Perth. And we also completed the upgrade of our Villawood store in Sydney. All of our other repositioning upgrade work is progressing in accordance with our plans, and I'll touch on a bit of that in a moment. At 31st of December, there were 75 properties in the portfolio, and about 98% occupancy. Gearing remains at about 18%, and our cost of debt as at the 31st of December was 3.5%. If we go to Slide 7, it just shows the key aspects of the Trust financials for the period to the 31st of December compared to the prior comparative period. I mean I can take questions on that. The one thing I will comment on is there was a bit of an increase in expenses during the period. And that was mainly attributable to increases in Victorian land tax and also outgoings on properties, which are currently redeveloped -- being redeveloped, where those costs would normally be paid by the tenant. But during the redevelopment, we're paying them. If we now go to Slide 9, it just provides an update on market rent reviews that were finalized during the period. There were 4. The overall outcome was flat, and that's in line with our view on overall portfolio momentum at the moment, which is broadly in line with market. And I think we've been saying that for a little while. We expect some ups and downs of individual properties depending on what evidence is available. But overall, we think it's generally at market. So in terms of these rent reviews, Coburg had a good increase, Balcatta in Perth had a bit of a decrease. But you need to take into account it had quite a large increase at the last market rent review when the risk movement were fairly close to market. We do have a number of market rent reviews in determination at the moment. It is a process that takes time and requires quite a bit of detailed work to make sure there is relevant market evidence and that it's taken into consideration. There are also a number of market rent reviews fall in June's half. So we are doing quite a bit of work at the moment around rent reviews. Some of the rent reviews have been outstanding for a while. Any of those are in determination, so we're literally waiting for that process to complete. And also, as I think we've said before, you do need to take into account the fact that these reviews form evidence for other market rent reviews. So there needs to be a bit of a sequence to some of them. But we are making good progress on any of those outstanding reviews. If we go to Slide 10, we normally show this slide in terms of transactions. As I mentioned at the start, we are starting to see new stores selling on cap rates below 5%, one in Brisbane, one in Melbourne. And that, I think, it continues to be just indicative of the strong support and obviously it provides support for our current valuations. If we go to Slide 11, in terms of the revaluation that occurred during the period, as mentioned in the highlights, the portfolio cap rate's lower at 6.08%. There were 18 independent valuations undertaken during this period and 57 internal valuations. During the period, 38 properties had cap rate contraction. 32, there was no change and 5 property, there was an increase in cap rate. Cap rate compression occurred for properties -- either way, options have been exercised or were particularly independent valuations. We're just adjusting to the market. Where the cap rates expanded, though, were mainly for properties that Bunnings has indicated. It's moving out of or they're nearing the end of the lease term, and we're not 100% certain what's going to happen at that time. On Slides 12 and 13, we've just shown the results of the independent valuations during the period. Probably the most significant increase in value on those 2 pages was for a Port Melbourne property. And that's really a function of the location of that property and the increase in land value and the fact that, eventually, that property will get a higher and better use as will most of the properties around it. So it is indicative of the -- where the location is right, the long-term value of this property can be quite significant. In terms of -- if we go now to Slide 15, we normally just show this slide in terms of the makeup of what we call our core portfolio. Currently got 67 properties in it. Typically, we exclude any properties that are currently being repositioned. We do -- or we have included in that 67 Hoxton Park on the basis that the CapEx has been completed, and it's over 90% leased in its new form. So that is, from our perspective, a core portfolio. On Slide 16, we just have shown here the graph that we normally provide in terms of weighted average lease expiry profile. I think as we've indicated previously, in years like 2021 and 2025, there are a number of lease expiries, and they coincide with previous portfolio acquisitions. And that's just how they fall. What we've always tried to do and what is included on Slide 17 is lease expiries out for the next 3 years, and I guess our view of what may or may not happen. And any further out than that, it becomes -- the information becomes less relevant. But we do feel, over a 3-year period, we have a fairly good view in terms of what's going on. So on Slide 17, since we've last provided an update, there's been options exercised at Fountain Gate and at Port Melbourne. In terms of other properties on that list, Northland, we've previously indicated that Bunnings is seeking planning approval on an alternative site. At this stage, we're still not aware the timing of that. So we'll just have to wait and see as to whether Bunnings exercises another option or not. In the meantime, we are working on alternative scenarios for that property. We've talked about it previously. It's very well-located right next to the Northland shopping and quite a strong retail precinct in that area. In terms of other properties, in the 2011 portfolio, Wagga is included in that. We're not 100% sure with Wagga. There is potential Bunnings, mainly there are larger store in that location. Wagga's quite a strong regional center and performing quite well, so we're waiting to see on that one. Then the only other one that we've previously mentioned is Midland in Perth, which we are aware that Bunnings is seeking an alternative site. But again, I'm not sure about the timing. And again, we are working on alternative scenarios if we need to. Midland is strong. We have commercial area, and we expect it to present some other options for that site. That site has been a very good performing site for Bunnings. It's a very old store. It's one of the original stores. So I think it's been a great performer for Bunnings. But with the -- with some of the changes in the Bunnings model in that location, they have a preference for a larger store. Other than that, there's probably nothing else to update on that site -- on that slide at the moment. We're not aware of anything else going on. So if we turn to Slide 18, we have agreed an upgrade with Bunnings on the Coburg store. The details of that upgrade are on that slide. Importantly, on completion of the upgrade, Bunnings have entered into a new 10-year lease with -- under the same terms that are in place at the moment. If we go to Slide 19, we've just provided a bit of detail there on our Hoxton Park repositioning in Sydney. We're pretty happy with the outcome on this property. Bunnings surrendered its lease in June 2019. There was a bit of lease tail remaining, but it's allowed us to start construction. Construction or total project cost of about $13 million. As we speak, the property's a bit over 90% leased and mainly national tenants. And we've got 2 relatively small tenancies remaining, which we expect to have filled midyear. WALE has increased to over 10 years, compared to quarter, an uplift in value on that property of over $20 million on completion, taking into account the extended WALE and the new leases in place. So that has -- or is a good example of, I guess, of what can happen with the next Bunnings property [indiscernible] replaced. We've got one here that's turning out. In terms of other stores being repositioned, if we go to Slide 21, we've just provided a quick brief on where we're at on those properties. Mandurah, Amart is operating, Snooze is operating. We do have 2,500 square meters there to fill. We are in discussions on that property -- on that remaining space. So we hope to have that resolved shortly. Cairns, we do have a concept and feasibility finance -- finalized for a development there. We've got heads of agreement secured for 2,500 square meters, and we're in discussions with 2 other tenants for the balance. So we'd stick to report on further progress on that one in due course. Port Macquarie, Bunnings has moved to another property down the road. Construction is well underway. We should have that finished in the next few weeks. Amart going to that property. And we have a gym tenant as well, and we're working on the balance of leasing for that property. Morley is one of the properties that Bunnings syndicated a few years ago. It was going to move out of into an ex-Masters store. It's been trading in that ex-Masters store for a couple of years, but has kept trading from the Morley property as well. It has indicated that it will be leaving the Morley property mid this year, so we are working on what to do that property. You may recall, it's located adjacent to the Galleria Shopping Centre. It's in a pretty good location. So we do expect to be able to find a good option for the property. Northland, we've already spoken about, and Mindarie, I touched on. We're talking to some potential interest in that property. Now that we've got rezoned, it has a lot more flexibility than what it did prior to that. If we now go to Slide 22. Just in terms of divestments. We've spoken previously about Underwood and Belmont North being under conditional option agreements, but subject to the satisfaction of various conditions. At this stage, those conditions haven't been met. We're still working on that. But it was always going to take quite a bit of time. So we'll report more on that when there's something more concrete to talk about in due course. Slide 24 just provides, I guess, the current position in terms of our debt. Our cost of debt is still coming down as of 31st of December at 3.5%. If we go to Slide 25, it just shows the debt duration graph. And Slide 26 shows our current hedging. [ I said ] because of the bond issues being fixed rate, most of the hedging is attributable to those fixed rate bonds and our swaps that are rolling off at this stage to get us back into the range of hedging that we prefer over time. So that just leads our outlook on Slide 28. From our perspective, the outlook for the Australian economy is for continuing low growth, with interest rates to continue to stay low for as far as we can see. Asset values across the board are quite elevated. Returns are low. We're not expecting these conditions to change anytime soon unless there's some risk events which causes a broader impact in the economy. In this environment, demand at Bunnings Warehouse properties, we think, is likely to remain stable, and that's certainly supported by continued strong bidding for anything that comes available. I mean, in terms of Bunnings Warehouse properties, we think that if it's being changed in net, it will be more macro-driven rather than being a retail-driven thing for Bunnings, relative to maybe some other retail, as far as we can see Bunnings, it's still in pretty good shape. And given the strength of its business model, we can't see why that's likely to change anytime soon. In this environment, we still believe we're in a pretty good position with low gearing and sustainable cash flow, and we still have a good access to funding if we need it. At this stage, we just can't see value for the BWP structure with some of the properties that are available at the moment. We expect the portfolio rent to continue to grow as a result of CPI and fixed rate rent reviews. As I mentioned earlier, we've still got a lot of market rent reviews underway. And as indicated, we think most rents are fairly close to the market, so we're not expecting big swings either way, other than if there's some particular evidence on a particular property. But on balance, we think the portfolio rent is at market. Our short-term focus remains on achieving good outcomes for any properties vacated or to be vacated by Bunnings, and we're continuing to make good progress on that. We continue to talk to Bunnings in terms of upgrade. And over time, we're being able to do more of those. Obviously, we're dependent on planning and also agreement terms with Bunnings. We haven't stopped looking for opportunities to expand the portfolio. I mean, I guess, our focus is on long-term rental growth and occupancy. And our strong preference is for property with high revenue potential over the longer term. In terms of -- or finally, and in terms of the distribution for the balance of the year, we think we'll deliver a distribution about 1% higher than what we pay or what our ordinary distribution paid for the year into 30 June 2019, which is in line with the -- our interim distribution. And if necessary, we can use a bit of capital profit to support that growth, depending on the timing of things. So that's a summary of where we're at. Happy to hand back to the conference organizer to take any questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] But your first question comes from Adrian Dark from Citi. Adrian?

I had a question in relation to changes in the portfolio valuations, particularly the independent vals, which I think are on Slide 12 and 13. It looks like cap rates have tightened on a number of properties even where there is quite a small amount of time remaining on the leases of those assets. Should we be thinking about that as an indication of the risk that the values are seeing at Bunnings with vacating those properties? And perhaps any reassessment of that?

Thanks for the question, Adrian. I will pass it on to Andrew as well to comment on, but it would have -- there has been a bit of a shift in terms of how they're looking at, I guess, the remaining lease term. And to your point, I think the value is particularly, this time around, are prepared to take more of a view on -- in terms of what they think is likely the longer-term occupancy than maybe they have done in the past. But Andrew, do you want to make any further comments on that?

Yes. Just in addition to that, Adrian, I think, look, what the valuators need to do is they need to reflect what's happening in the market. And what's happening in the market is that investors are not as concerned with that 12-year terms as they have been in the past. And in addition to that, I think investors are looking -- or some investors are looking at location. And some investors are just seeing that it's a Bunnings covenant and it doesn't matter where it's located, they're still going to pay a tight yield on it.

Okay. And then the distinction in the portfolio that you've been talking about for a number of periods now, the sort of core versus alternative use. Is that something that you see as ongoing or more of a temporary thing that you're working through? Ultimately, all of the assets come back into the core category and perhaps growth sort of reverts to something like its prior trajectory?

Yes. Certainly, Adrian. I mean that is the objective. And yes, providing we're happy with the longer term outlook for any property will go back into the core portfolio. Otherwise, we may look to divest things. But -- and yes, over time, we do expect it to normalize. Because we sort of pay out 100% of our profit at any time, we think the right thing to do to sell a property, you obviously make that a little bit more difficult to achieve in the short term. But certainly that is the objective; that, that will kind of balance out over time.

Okay. The CY21 expiry is about 19% of the portfolio, presumably will have a big impact on that? Is it like a view on how we're tracking.

In terms of potentially Bunnings not exercising options, is that what you're saying?

That's right. So [indiscernible] new assets going into alternative use.

Yes. Look, look, we -- I guess in terms of 2021, I mean, we're highlighting 3 years out, which includes 2021 of what we think is going on. And yes, there are very few properties in that list, which we are concerned about it at the moment, and we've highlighted them if we are. So certainly, at this point in time, our expectation is that the vast majority of those properties' options are likely to be renewed unless something happens between now and then.

Okay. And sorry, just finally for me. I think you touched on other expenses, a couple of moving parts, including Victorian land tax. Could you perhaps give us a sense of what a sensible run rate is for that bottom as you see it, please?