BWP Trust (BWP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the BWP Trust 2021 Full Year Results Briefing. [Operator Instructions] I would now like to hand the call over to the Managing Director of BWP Trust, Michael -- Mr. Michael Wedgwood.

Good morning, everyone, and thanks for dialing in to our full year results teleconference. As you'll be aware, we've released to the ASX this morning our full year results announcement, our 2021 annual report and the presentation slides, which we'll go through now before we take questions. The slides are also up on our website if you need to access them from there. Andrew Ross, our Head of Property; and David Hawkins, our Finance Manager, are also on the call from Perth and will be available to answer any specific questions at the end of the presentation. We'll go straight to Slide 5, which summarizes the full year outcomes. You'll see on that slide that revenue for the year ended 30h of June 2021 was $152 million, which is down marginally from the prior year. Revenue in the year prior included a couple of one-off impacts, deposit payments from -- which had been forfeited by prospective buyers of 2 BWP-owned properties, and that resulted in a higher revenue in that year. COVID-19-related shutdowns, trading restrictions and border closures continued to impact various sectors in the Australian economy during the year. The trust was well positioned with a significant majority of our rental income exposure to Bunnings and other national large-format retailers. Most of our retailers generally traded pretty strongly throughout the year, and the impacts were a lot less significant than for others. The trust collected almost 100% of its rent for the 12 months, and that was after accounting for approximately $473,000 of rent abatements that were provided during the year. There was portfolio rental growth during the period from scheduled increases and from additional rent from completed developments. And this offset some of the loss of rents due to some stores that are in the process of being repositioned at the moment, also the rent abatements and the fact that we're also cycling against the reducing impact of straight-lining rent, which was an accounting standard that we had to adopt a couple of years ago. The distributable profit for the year was $117.4 million, and that was the same for the prior year. That included $3.5 million of capital profits. And I mean as we've done in the last couple of years, we are using a bit of capital profit to support our distribution when there's timing differences in terms of vacancies and repositionings, which we are going through a bit of that in the portfolio at the moment. The full year distribution was $0.1829, and that was in line with the prior year. NTA increased about 3% in the last 6 months and 7.5% for the year. And that was just driven by the increases in the value of a number of properties in the portfolio. And that's being driven in part by rental growth and also by cap rate compression. We'll talk a bit more about that in a moment. The trust's property portfolio generated 1.6% like-for-like rental growth on an annualized basis, and that took into account for those CPI leases in the portfolio. The CPI for the year was at 0.5%. So that, at the moment, is having a bit of an impact on that like-for-like growth. The portfolio cap rate reduced to 5.65% at 30th of June, and that was from 5.84% at the 31st of December and from $6.08 million presented at the 30th of June 2020. And that was a result of portfolio revaluation uplift of almost $150 million for the year. There were -- I mean as we've said at the half year, through the year, there's been a number of transaction -- Bunnings Warehouse property transactions, particularly in the first half of the year. And pretty much all of those properties were trading at cap rates well below 5%. And that continued to provide very strong market support for valuations, and that's why you're seeing that reflected in the increases in values. Portfolio WALE at the 30th of June 2021 was 4.2 years, and that was similar to that reported at the half year and slightly higher than that reported for 30th of June 2020. Bunnings exercised options on 10 properties during the year. At 30th of June, there were 74 properties in the portfolio and -- with about 98% occupancy. Gearing was about 18% with cost of debt a little bit over 3%. If we go to Slide 6 just in terms of climate risk and sustainability actions. We have done quite a bit of work during the year to improve our understanding of the potential impact of climate risk in our business and also to quantify and further reduce carbon emissions. We had an independent view undertaken of our methodology for calculating carbon emissions, which took into account our structure and also the nature of leases in place in our properties. The carbon emissions that are a responsibility of the trust are limited to common areas of some of our multi-tenanted properties. Lessees are generally responsible for the emissions in relation to energy use at the significant majority of our properties. And most of the emissions from electricity usage relate to Bunnings. Bunnings is separately targeting net 0 Scope 1 and 2 emissions by 2030. The trust generated operational carbon emissions of 177 tonnes for the year. We actually avoided carbon emissions well in excess of that amount from solar energy generation across the portfolio. We're continuing to invest in solar and LED lighting to further reduce our emissions. We're also in the process of purchasing Australian Carbon Credit Units to offset that residual 77 tonnes. And we'll continue to do that until such time as we've completely offset the carbon in the portfolio. During the year, solar was installed with a further 3 properties. And that brings, at the moment, the total number of properties in the portfolio with solar to 23. 96% of the properties in the portfolio have LED lighting installed in all or at least some areas of the property. We are also progressing towards finalizing the implementation of Task Force on Climate-Related Financial Disclosure recommendations. During the year, we completed the climate scenario analysis, which assumed 2- and 4-degree temperature changes and the potential impacts of that. At this point in time, the outcome of that analysis was that neither of those scenarios are currently considered a material business risk for BWP on the basis of assumptions applied. And I guess that's something that you have to keep revisiting as time goes on. If we then go to slide -- well, I won't talk to this slide, but we've shown on Slide 8, 9 and 10 a summary of our financial performance on a 6 monthly, yearly and 5-year basis. The one thing I will note, at the half year, we had agreed with the Board a management fee waiver on $75 million of assets, and that was for a 6-month period to the 30th of June 2021. The Board has extended that waiver to the 31st of December 2021, and it will continue to be reviewed on a half yearly basis thereafter. If we go to Slide 12. We show on that slide the outcomes of 13 market rent reviews finalized during the year. Overall, as you can see, the outcome was flat. As advised at the half year, there was a 13% reduction in the rent at Albany in Western Australia, which had been arrived at by third-party determination. As you may recall, Albany is an original store. And in that particular case, the comparable market evidence was at a lower rent, and that rent -- or that evidence was used by the determining valuer in assessing the rent on our property. As you can see from the chart, for some properties, the rent didn't change. And there were other positive and negative outcomes. When we've talked about it before in terms of how that process works, that -- I mean each property, you have to look at the relevant market evidence to that property, and that's why you get different outcomes on an individual property basis. And the way we look at it is on an individual property basis. But that being said, we have said for a little while that we think broadly, the portfolio is at about market, and I guess these most recent market rent reviews support that view. We do have a number of other market rent reviews, which we are in the process of finalizing at the moment. On Slide 13, we just show the makeup of the rent reviews for the year. And I mean as I just said then, there are a number of market rent reviews still in process, and we expect a number of those to be resolved this year. On Slide 14, we just provide a little bit of detail on our like-for-like rental growth calculation. And as I said in the summary for the year, it was 1.6%. And that took into account CPI of 0.5% for the portfolio. On Slide 15, as we normally do, we show a slide of the cap rate trends for the sale of Bunnings Warehouse properties over time. And as you can see, that trend is continuing to trend downwards. The most recent sale was on a cap rate of 4.2%. That was a property outside -- or between Toowoomba and Brisbane, a bit of a smaller property, so slightly lower capital value than some. But it still attracted a very strong -- it attracted a number of bids and achieved a very good outcome. And the most recent sale of an existing third-party-owned Bunnings Warehouse property [ where it ] was on a cap rate of 4.5%. So generally, cap rates are very -- still remaining very strong for Bunnings Warehouse properties. Slide 16. We've provided a bit of information there on our portfolio revaluations. And I mentioned that cap rate compression in the summary at the start. For this 6 months, there were 8 independent valuations and 66 directors' valuations. Cap rates on 24 properties tightened, 42 remained the same, and cap rates on 8 properties increased. And generally, particularly in this market, if cap rates are increasing, it's -- in some cases because it's getting to the end of the term. And for other cases, it may be properties that Bunnings has indicated that it's going to move out of. On Slide 17, we show the results of those independent valuations during the period. As you can see, cap rates for Wallsend, Gladstone and Southport and Bayswater were tightened, in line with market conditions. And the cap rate for Joondalup, which is now a non-Bunnings property, increased slightly. And that reflects a short term remaining on the lease on that property at the moment. If we go to Slide 19. We just provide a summary of the metrics for our core properties in our portfolio. And if we then go to Slide 20. We just show the weighted average lease expiry profile of the core portfolio. And you can see from that, that it's not until FY 2026 that there is a number of properties that get to the end of their current lease term. And that, as we've explained previously, lines up with previous portfolio acquisitions. So that's why you end up with, in a particular year, more properties that are reaching the end of their current term. On Slide 21, we just show, as we've done previously, expiries for the next 3 years. And on that list, the only property that we're aware of currently that is at risk of Bunnings moving is Hervey Bay. It is actually -- and I think we mentioned this at the half year, that Bunnings have a site next door to the existing property, and we understand they're looking to build a new store on that. So we have started a leasing campaign and looking to redevelop our property for large-format retail, and that's on the basis that if Bunnings does actually move at the end of this term. And our property is a pretty well-located property in Hervey Bay. It's right next to the Stockland Shopping Centre on the main road, and it's on the higher side of the road. So it has great visibility and good access. So we would -- in the event the Bunnings does move, we'd expect to be able to achieve a further good outcome on that property. In terms of the rest, we're certainly not aware of anything at the moment. On Slide 22, we've completed an upgrade of our Croydon store in Melbourne. We've just provided a summary of what that means. I mean importantly, our valuation uplift on that property at 30th of June is well in excess the cost of our upgrade. So that's been a good outcome. And similarly, on Slide 23, we've just shown a summary of the outcome of the upgrade of the Port Melbourne store. And again, that's had a good valuation uplift at 30th of June as well. On Slide 25, we've -- and we have talked about Underwood previously, that we're in the process of selling that. That sale completed during the half. And we've just shown there some metrics of the performance of that property while it was a Bunnings Warehouse, and it certainly generated great returns for BWP. I mean we looked at a number of redevelopment options for that property but in the end thought that divestment was the best outcome. So that's why we've proceeded down that path. And on Slide 24 -- sorry, Slide 26. We've also shown the outcome for our Mindarie property, which we actually settled on the 30th of July, after year-end. But similarly, in the period that was leased to Bunnings, that property generated very good return for BWP. We did go through a rezoning of that property and looked at various development options for ourselves. But again, in that particular case, we opted to go down the divestment path. On Slide 28, we've just given a summary of the other properties in the portfolio that are going through or are or likely to go through some sort of redevelopment over the next few years. I should just note that we've now got 2 development managers in our team, one that's been with us -- both employed during various stages of COVID and both based in Melbourne. But one's been with us for a bit over a year and previously had 10 years' experience at Aventus. And the other one who recently joined us has had a number of years' experience with Audi and also some time with Coles. So it's great to have them both on the team, and certainly some of the properties that we're looking for options for over the next few years will certainly benefit from that increased development experience. Just going through that list briefly. At Cairns, we've actually entered into a nonbinding lease agreement to lease the building as a film studio. And we're just in the process of finalizing leasing arrangements on that. We're actually quite happy with that outcome. And one, hopefully, it's going to be an employment generator for Cairns. Well, it is to a good covenant, and we'll certainly talk a bit more about it once the lease is in place. And also because it's just -- and it's a whole building lease, so we're not required to spend any CapEx on it. But it does leave surplus land for us in the front and behind the building, which is not needed for that purpose. So we are looking at redevelopment options for both of those areas and particularly on the front there is likely to be some sort of large format retail. So ultimately, if that redevelopment also goes ahead, the overall returns on that could be quite attractive, I think, given that it's taken a while to find the right outcome. Morley in Perth, we're working through a leasing campaign on that property at the moment. And it's probably likely that the current uses for the property is -- and particularly given its location is lifestyle leisure, and we are receiving quite a bit of interest in the property in that regard. I mean as was indicated before, there is pretty attractive zoning on that property, and it's why we want to keep it in the portfolio. But the work that we've done previously indicates that from a higher, better use perspective, it's probably a bit longer term. So our focus, at the moment, is on a sort of short- to medium-term outcome with a potential better longer-term outcome. Belmont North, we've actually just entered into an arrangement with the New South Wales state government to turn Belmont North into a vaccination center for COVID for a period of up to 2 years, and that's up and operating now. At the same time, we've just received approval for the rezoning of that property, which does broaden the potential uses at that location. So we're working alongside -- during that time while it's being used as a vaccination center, we're also working up what will be a best outcome for that property longer term. Port Kennedy in Perth, we've got a leasing campaign underway on that, and that's to position that property for large-format retail. And we are actually getting some very good interest in that at the moment. So we're pleased with how that's progressing. Midland is still leased to Bunnings. Bunnings moved out in December last year, but -- so it's leased to Bunnings until September this year. We have entered into a lease with a car dealership to just take over the property again. We -- it's a lease where we don't need to spend any capital. It's just taking the property as is. And again, we're viewing that property as a very well-located property. And so we've taken a short- to medium-term outcome but also looking at the longer term in terms of what the long-term use for that property might be. Hervey Bay, I've already spoken about. Albany, as you can see from the slide, that's still leased to Bunnings until October 2024. So we're still working through what the best outcome for that property is. Same with Northland. That's leased to Bunnings until August 2025. And given the location of that property, we're certainly looking at longer-term uses for that property, which might include rezoning. It's a very, very well-located property and a very sought-after area. So that's certainly a property that we want to keep in the portfolio and want to find the best longer-team use for. Wagga is the last property on that list. I mean it's leased to Bunnings till March '26, and Bunnings is obviously still operating from the store. We are aware that Bunnings is seeking to get a DA on another property in Wagga, but as far as we know, they don't have a DA at the moment. Our property is in a strong commercial precinct in Wagga. So while we've got a bit of time on that property, we are again working on what is the best use of that property in the longer term in the event that Bunnings doesn't move on. Turning to Slide 30. We just provide an update on our debt facilities. We did issue a new 7-year bond in March. We've also extended our CBA and Westpac facilities for a further year each. And we've also restructured -- we had a 5-year facility in place, which was drawn down with SMBC. We've restructured that facility. So it's now a 5-year forward start facility, which is not yet drawn down. And at the moment, we've got a bond maturing in May next year. So we will use that SMBC restructured facility to repay that bond in May next year. Certainly, that's the -- our position on that at the moment unless something else changes that down the track. Slide 31, we just show a graph of debt duration. You can see it's fairly well spread. And that debt profile is on the basis of what I just said about the SMBC facility, repaying the bond from next year. On Slide 32, we just show what's left of our hedging. I mean currently, we're well hedged, and our bond issues are fixed rate bonds. So we don't need many swaps in place at the moment. And so that's why our hedging looks like it does for the moment. If I now turn to Slide 34, which is the last slide and just in terms of outlook. Look, from an operating point of view, we remain pretty well positioned with most of our income obviously coming from Bunnings and other -- from other national large format retailers, all who have been trading well over the last year and are continuing to trade well. I mean as I've said at the start, our impact to date from COVID has been relatively minor. And while we can't know for certain what's going to happen with COVID, certainly, we expect something similar this year unless things change significantly from what we can see at the moment. Demand for Bunnings Warehouse properties has continued to be strong during the year. We haven't seen any change in that investor attraction to Bunnings Warehouse properties. So basically, in this interest rate environment and particularly given the Bunnings covenant, we're not expecting much change there at this stage. We just show, also on that slide, rent reviews coming up over the next year -- or this financial year. In terms of our focus, I mean, we do have some properties that we're working through in terms of repositioning at the moment. So that is a focus -- that is a major focus for us because it does have an impact. So we're putting quite a bit of effort into that. We're likely to have some other store upgrades, which will also progress, and obviously, continuing to work with Bunnings on any other potential store upgrades and also on extending leases and exercising options where it's relevant. We're also continuing to be pretty active in terms of looking for assets. We didn't bid on a few during this last financial year. We certainly [ bid at prices ] and we thought we're pretty aggressive, but the market was obviously slightly more aggressive than we were. And so we haven't been able to add any properties to the portfolio. We'll obviously continue to do that. You do go through periods of time when good properties come up and when others come up that are not so attractive. Certainly, in the last 6 months, there have been a few that have come up, which we thought would have been really good assets for our portfolio. So it remains to be seen what will come up over this next year. In terms of distribution, and I guess this is a subject to there being no sort of major COVID or other disruption over the current financial year, but we expect our distribution for the year ending 30th of June 2022 to be similar to the ordinary distribution paid for the year ended 30th of June 2021. And as we've done in the last year, if required, we may utilize some capital profit to support that distribution as necessary. And what -- I guess what drives that is timing on -- because we pay out 100% distribution and it's timing on when vacancies get filled and also when vacancies occur in the portfolio or at a time when we think the best outcome is to divest properties, so that's why that occurs. Look, that's a summary of the outcomes for the year and the year ahead. So I'll hand back to the call organizer and then take some questions.

[Operator Instructions] First question is coming from the line of Adrian Dark of Citi.

Michael, I was interested to pick up your comments about potential acquisitions. I think there's a comment in the release that you made offers on a number of properties, which hasn't been included previously. Could you talk about any shift in your thinking on the strategy for the trust or whether that's reflecting a change in market conditions and perhaps the type of properties that you're looking at and how close you were on pricing, please?

Yes. Yes. Okay. I'll talk to those points, Adrian. I don't think it's a shift in strategy. I mean I think we certainly look for properties. I guess by the nature of BWP, you tend to be an owner of property for a long period of time. So we're looking for properties that we think can create property over the cycle of the property as opposed to, I guess, going with the trend on external cycle because we tend to take a view that we will own a property for more than one cycle. So that hasn't changed. Obviously, the market remains very tight in terms of cap rates. I think it's really been more the quality of properties that have become available. And we have seen a few large-format retail properties come on the market which had a Bunnings in them and also some other large-format retail. And so they were attractive to us, one, because they've got a Bunnings in them, but they are also -- they are quite defensive in terms of their other tenants. So we thought over the longer term, even if you have to pay a very tight cap rate for them, it's still sort of, I guess, supportive of our thinking on what type of asset we expect for the trust. So to answer your question, yes, I don't think it's a change of strategy. And I guess the external environment hasn't changed, but assuming some of the assets coming on the market certainly had in terms of -- I mean we were fairly or very close on a couple of the properties, and I think we're certainly bidding as close as we could to the market. But if someone thinks it's -- ultimately, if it's worth more than you do, I guess, that's what happens. But I would say we were right there with the market on those properties.

That's good color. Can I just check, please, have there been any shift in your return hurdles? Are they stable? And if you were to execute on an acquisition, how you would look to fund that, please?

I mean our -- I guess cost of capital is coming down as interest rates and other returns come down. So I mean our cost of capital adjusts with that. I mean we haven't suddenly changed our methodology. It's more being driven by the market. Sorry, Adrian, what's the second part of that question?

Second part was around funding. How would you fund acquisitions if you were to...

Yes, sure. Look, our preference is to put in place -- particularly when you're buying things at fairly tight cap rates, is to put in place a bond and a longer-term duration bond and with fixed rate at about the same time. So certainly, if we'd acquire any of those assets that we've been looking at, that was our intention to do that. And certainly, you can't always say that, that market is going to be open. But certainly, in the period of time when we've been active, the market for doing that has been open. And I think it's just -- obviously, it's * preferable, I think, where you match assets and liabilities if it makes sense to and it certainly would have done if any of those acquisitions have been successful.

Next question will come from Lou Pirenc from Jarden.

Two questions, if I may. First of all, for the alternative use in Cairns, Belmont and Midland, can you just give an indication for the short-term leases where rents are roughly compared to where you would consider market for commercial rent?

Sure, Lou. Andrew, why don't you answer that question?

Yes, sure, Lou. look, I think across all 3 assets, we feel that the rents are at about market. For the Cairns property, it was a 5-year lease term that we're going to enter into, similarly at Midland. And Michael has mentioned to you that Belmont North short-term leases are up to 2 years with the New South Wales Health Department for the mass vaccination center.

Great. And then I mean you clearly did well with Croydon and Port Melbourne developments. Is there anything in the pipeline for this year and next year in terms of smaller upgrades?

Yes. Look, I mean, we've got one which was just Board -- approved by the Board yesterday, which is -- well, it's in Lismore in New South Wales. And we are talking to Bunnings about a couple of others at the moment. So I mean they're not sort of set in concrete at this point in time, but certainly, there are potentially some more in the pipeline.

And Coburg as well, Michael, we have approval for.

Yes. Yes.

Great. Again, what was the CapEx on those 2 that are approved, Lismore and Coburg?

Lismore is at [ $13 million ] and Coburg is at [indiscernible].

[Operator Instructions] We have the next question from the line of Richard Jones of JPMorgan.

Michael, what's the return on those CapEx projects? And is that just a negotiated outcome?

Yes, it is, Richard. So -- and it sort of varies by property. And so are you talking about the actual return on CapEx or the sort of IRR of -- the project return? I mean in terms of IRRs, they're probably -- just trying to remember, but it has sort of been 7% to 8% IRR range for those sort of upgrades.

And what is the [indiscernible]?

I beg your pardon.

[indiscernible] [ 6% ] yield on cost?

I think -- Andrew...

5.5%.

Yes. And Lismore is a bit less than that, and that was more driven just by the overall package on that property.

Can you elaborate a little bit more on that?

Yes.

Sorry, Michael...

What's that?

Can you elaborate a little bit more on that, sorry?

Lismore is 4% on the CapEx.