BWP Trust (BWP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the BWP Trust 2022 Half Year Results Briefing. [Operator Instructions] I would now like to hand the call over to Managing Director of BWP Trust, Mr. Michael Wedgwood. Please go ahead.

Good morning, everyone, and thanks for dialing into our half year results webcast. We've released to the ASX this morning our half year results announcement, our half year report and the presentation slides, which I'll go through now, and we can take questions at the end. Andrew Ross, our Head of Property; and David Hawkins, our Finance Manager, are also on the call and will be available to answer any specific questions at the end of the presentation. I'll turn now to Slide 5, which summarizes the half year outcomes. Revenue for the half year ended 31st of December 2021 was $75.9 million, and that's similar to the prior comparable period. The trust continued to be well positioned with a significant majority of our rental income exposure to Bunnings and other national large-format retailers. Those retailers generally traded well during the period, and that's despite ongoing COVID-related shutdowns, trading restrictions and border closures. The trust collected 99% of its rent for the 6 months, and that was after accounting for approximately $330,000 of code of conduct rent abatements provided during the period to a small number of impacted tenants and are mainly tenants like gym operators. There was portfolio rental growth during the period from scheduled increases and additional rent from completed developments, and that offset some loss of rent, while properties in the portfolio are being repositioned and from the divestment of the Mindarie property and also from those rent abatements that I've just mentioned. Our distributable profit for the half year was $57.9 million, and that was the same as the prior corresponding period, and that included about $1.5 million in capital profits. Half year distribution, $0.0902 per unit, which was in line with the prior corresponding period. NTA increased about 14% in the 6-month period and a bit over 17% for the last 12 months with those increases driven by increased values of a number of properties in the portfolio. The trust property portfolio generated 2.2% like-for-like rental growth on an annualized basis, and that reflected the change in quarterly CPI over the 12-month period, and I'll talk a bit more about that in a moment. Portfolio capitalization rate reduced to 5.1% at 31st of December 2021 from 5.65% at 30th of June 2021, and that was -- well, that resulted in a portfolio revaluation uplift of about $292 million for the 6-month period. There were 4 Bunnings Warehouse property transactions in the period. The most recent sale was a regional store, Hervey Bay, which is still being built, and that sold on a cap rate of 4%, and that reflects the continuing strong investor interest in Bunnings Warehouse properties. The continued strong demand and pricing for Bunnings Warehouse properties provided strong valuation support, which is reflected in the property revaluations during the period. Portfolio WALE at the 31st of December 2021 was 4.3 years, which is similar to that reported for the 31st December 2020 and slightly higher than that reported at 30th of June 2021. We've agreed a $13 million upgrade of the Lismore property with Bunnings, and I'll talk more about that in a moment. Five market rent reviews were completed during the period, which I'll talk more about, and Bunnings exercised 6 options on properties during the period. At 31st of December, there were 73 properties in the portfolio and 90% -- or about 98% occupancy. Gearing was about 15% with cost of debt fairly stable and a little over 3%. While it's not clear what will transpire in the next 6 to 12 months in terms of the macro environment, we think there's certainly potential for more volatility as central banks sort of move to adjust their settings here in Australia and offshore. We feel we're in a good position regardless of the external environment as we move forward. The Bunnings properties in the portfolio are currently mostly consistent with Bunnings' current format or are in areas where it's difficult to expand or find alternative sites. So in those areas, Bunnings is looking to different sorts of solutions to -- if it needs to increase its exposure in those catchment areas. And I mean, that has been the case particularly in Melbourne, in some areas, they can open more than one smaller store in the same catchment area if they can't get a hold of larger sites. A number of the properties in our portfolio are benefiting from increasing land values. While that doesn't, at this stage, really reflect in valuations, which are typically based on cap rates, it does have an impact in relation to potential future use of those properties. Over time, we're seeing more and better options for repositioning ex-Bunnings properties, and we expect that to continue to evolve. 55% of the trust's income is CPI based. So we are positioned to benefit from any sustained inflation increases over the next year or so. The rest of the income is mostly 3% fixed annual increases. So that provides a pretty good balance in the portfolio as well. With the potential for increased volatility, we're fairly comfortable entering this phase with low gearing because we see that will be more beneficial with -- if there is more volatility. If we now turn to Slide 7. This shows the key aspects of the trust's financial performance for the half year ended 31st of December 2021 compared to the prior comparative period. Expenses were stable for the 6 months. I note that the Board had previously agreed to a management fee waiver on $75 million of assets for the period to 31st of December 2021. I note that, that waiver has not been extended beyond this time. So going forward, we'll be back to paying a full management fee. If we now turn to Slide 9, and we've shown on that slide, the outcomes of the 5 Bunnings market rent reviews, which were finalized during the period. The overall outcome was a slight reduction in reviewed rents. All the market rent reviews were determined by an independent valuer and were a function of available market evidence for each property. This was particularly the case for the Belmont property in Perth. We don't look at individual property outcomes as an indicator of the rent for the whole portfolio. As always, there will be variations at a local level. We remain of the view that the overall portfolio rent is broadly in line with market. We currently have a number of market rent reviews which are in determination, and so we expect, over the 6 months period, there will be a number of other market rent review outcomes. We've also shown on this slide the quarterly CPI figures that go into determining like-for-like rent. The timing of lease anniversary dates during the year impacts the relative impact of the CPI in that period on the like-for-like number. So it does take a while for higher CPI numbers to flow through into that like-for-like growth number. If we now turn to Slide 10. We've shown on this slide cap rate trends for the sale of Bunnings stores since 2017, and as you can see from that slide, there's a fairly consistent tightening of cap rates over that time frame. We have shown separately the -- or the publicly announced property sales that have occurred in the last 6 months. Munno Para West and Delacombe were third-party owned properties; and Kempsey, which is a small regional property in Hervey Bay, larger regional store, are under construction and being developed by Bunnings. But as you can see, all was sold on fairly tight cap rates. We now turn to Slide 11, which provides some information on the portfolio revaluation at December 2021. As mentioned in the highlights, the average cap rate of the portfolio was 5.1%, and that tightened from 5.65% at 30th of June. There were 10 independent valuations during the period and 63 internal valuations. Cap rates for 67 properties tightened, reflecting the, I guess, the external market. Four remained the same, and the cap rates on 2 properties increased. The 2 properties where cap rates increased were Albany and Hervey Bay. Both properties are still leased to Bunnings or unlikely to be renewed at the end of the current term, as we've previously disclosed. The valuations of the 2 properties are being adjusted to represent vacant possession value plus the present value of remaining rent. The valuations will be revisited when the future use of those properties is determined. On Slide 12, we've shown the results of the independent valuations in the last 6 months period. As you can see, cap rates for Tuggeranong, Belmont North, Maitland, Port Macquarie, Cannon Hill, Townsville North, West Ipswich, Croydon, Scoresby and Midland all tightened to reflect current market conditions. Port Macquarie and Midland are ex-Bunnings properties that have been repositioned, and Belmont North has been rezoned and is in the process of being repositioned. The other properties are generally all well located in strongly performing Bunnings Warehouse stores. Turning now to Slide 14, and this just provides a summary of the characteristics of our core portfolio of property. The 65 properties currently in what we call the core portfolio, and that excludes any properties that are currently being repositioned. Turning now to Slide 15, and we normally show this slide, it reflects the weighted average lease expiry profile for the core portfolio. And you can see from that slide the next period when there is a large number of lease expiries is in 2026. And as we've said previously, those periods of higher lease expiries reflect in history when we've made portfolio acquisitions. So therefore, you get a number -- a lot more properties that are coming up for options at the same time, and that's where we get that spike. On Slide 16, we show the core portfolio of properties that are reaching the end of the current lease period in the next 3 years and also on that slide, properties for which options were exercised during the period. As previously mentioned, Bunnings has commenced construction on the new store joining the existing property at Hervey Bay. The lease on our property expires in December this year. We have a leasing campaign underway for large-format retail development on the site, and that's progressing quite well at the moment. Regarding other properties listed on the slide, we're not aware of any other likely vacancies at this point in time. And I note also that in the last couple or last few days, a 5-year option has been exercised at Scoresby. And the only other property on that slide is Browns Plains, which is in Brisbane. That happens to be a property where there's no more options left on it. We have previously had some discussions with Bunnings in relation to that property. We're not aware of their intention to leave, and so we expect at some stage, that we would like to think at some stage, we can come to some agreement in terms of the future of that property. It's a very well-located property in a very strong retail precinct. So one way or the other, we are comfortable in terms of the future of that property. If we turn now to the Slide 17, and that just provides a bit more information on an upgrade of the Bunnings property at Lismore. The upgrade includes the purchase of land adjacent to the existing property, and that will enable the retail trading area of the existing property to be expanded by approximately 3,000 square meters. So this will make this property -- it will be a good property for Bunnings, provide a good trading area to provide a good offer in that area. We expect work to be completed by mid next year, and at that point in time, Bunnings has agreed to enter into a new 10-year lease with six 5-year options in favor of Bunnings. The funding rate for the upgrade is 4%, which will increase rent initially by about $530,000 per annum. We turn now to Slide 19, and on that slide, we've summarized the current status of the other alternative use of properties in the portfolio. Starting with Morley. I mean we have a short-term use on that property. It's been rented to the Australian Electoral Commission, and -- but in the longer term, we do have a leasing campaign underway to reposition the property for lifestyle/leisure. But at the same time, we are exploring other options for that site. I mean we've talked about that site before. It's very well located across the road from the Galleria Shopping Centre, and it has very good zoning on it. So it's just a matter of finding the most appropriate and best use for that property. Belmont North. We have an arrangement in place with New South Wales government to use that property as a COVID vaccination center, and that's up until June 2023, if required. The property has been recently been redesigned to allow for use for a supermarket and -- or effectively, a neighborhood shopping center and for other uses. We do have leasing discussions underway at the moment, and we are expecting to be able to put in a development application on that property during the 6-month period. Port Kennedy. We've got a leasing campaign underway to reposition Port Kennedy for large-format retail, and we're making good progress on that property. We've got commitments in place for about 70% of the retail space. So we're continuing to progress with that. Hervey Bay. As I mentioned earlier, this is a pretty good property. It will have a big Bunnings behind it. It's across the road from the Stockland Shopping Centre in Hervey Bay. It's on the high side of the road. It's got good access, so it's fairly attractive for large-format retail. And we're well underway with our discussions on -- in terms of getting some lease commitments to a point when we can progress the repositioning of that property. Obviously, Bunnings is still building the new store. So we wouldn't expect the property to be available until the end of the lease in December. Albany is leased to Bunnings until October 2024. We're still working through what the best use of that property is. So we'll continue to work on that. Fountain Gate is new on this list and Fountain Gate in Melbourne. It's leased to Bunnings until 2025. We are aware that Bunnings has access to another site next -- or nearby. We're not sure at this stage of the timing of the Bunnings move, but we're assuming that at some stage that will occur. The Fountain Gate property is one of our original properties and is one of the better properties in our portfolio, at least from a location perspective. It's opposite the Fountain Gate Shopping Centre in -- sorry, the Westfield shopping center in Fountain Gate, and it's an activity zone site, which allows for mixed-use development. There is a lot of development on that side of the road. Some of it is large-format retail. Some of it is office. And I think there's also medical or some medical there as well. So that area has evolved a lot or has certainly evolved a lot over the period that the trust has owned the property but certainly in the last 5 to 10 years. So we've commenced master planning potential alternative uses for the property, and that's on the assumption that Bunnings will move out at some point in the future. But we obviously really like this property and feel that it will have good future potential use for Bunnings and for BWP as well. Northland is leased to Bunnings until August 2025. We're looking at a range of longer-term uses for this property. As previously mentioned, Bunnings has commenced construction on another store or another property down the road. Our property is located next to a Northland shopping center, and we're investigating all possible uses, which may include rezoning as well. The last property on the list is Wagga, which is leased to Bunnings till March 2026. We are aware Bunnings is looking to finalize the DA on another site in Wagga, and we've spoken about that before. Our property is located in a strong commercial precinct in Wagga. We're currently reviewing all the potential longer-term uses of that property in the event that it does become vacant at the end of the current lease term, and we're confident that we will ultimately get a good outcome on that property. I'll turn now to Slide 21, which is -- just summarizes our debt facilities. In May, we have a bond which is maturing, and we have in place -- or we already have in place a delayed start 5-year bank facility with SMBC to replace that bond. So that should be a fairly seamless transition from one to the other. On Slide 22, as we normally do, we saw that debt maturity profile graphically, and we've shown that chart, what it looks like, with the SMBC facility drawn down and the bond repaid. If I turn now to Slide 24, and that's our last slide in terms of the outlook for the remainder of the year. The trust remains well positioned operationally, and as I said at the start, the majority of our income is from Bunnings and other large-format retailers. And I mean we can't see anything on the horizon at the moment to have a view other than that we would expect most of those retailers to continue to trade fairly well. At this point in time, we're not expecting any significant changes in demand for Bunnings Warehouse properties. The Bunnings covenant is continuing to attract very strong investor support, and there still seems to be a lot of funds out there, which are looking to participate in this part of the property market. Our primary focus for the remainder of this financial year is on our existing properties in terms of continuing to reposition any properties where we have vacancies. We'll progress upgrades that we've previously committed to and also ones that we're in discussion on. We'll hopefully continue to exercise for more options with Bunnings, and we also will hopefully in the 6 months progressive number of market rent reviews. That being said, we continue to be fairly active looking for longer-term investment opportunities that we think will create value for the trust. And I guess in this environment, they don't -- they're not coming up that often, and there is a very strong demand for any property that comes to the market. And finally, subject to there being nothing else that -- unexpected that happens in relation to COVID or any other major disruption in the Australian economy, the trust could expect the distribution for the 2022 financial year to be similar to the ordinary distribution for the year ended 20th -- or 30th of June 2021, and we will use some capital profit to support that outcome if necessary. So that's the end of the slide. So hand back to the operator to -- and we can take any questions that you have.

[Operator Instructions] Your first question comes from Adrian Dark from Citi.

Michael, you just made some comments about the outlook for asset values and demand for properties. I know that there's been a comment previously included on the outlook slide about either low or falling interest rates being supportive of demand. So I was hoping you could elaborate on what your expectations are for what higher interest rates could mean for demand for assets in time, please.

Yes. Look -- and I'll also let Andrew comment on this as well, Adrian, but thanks for the question. Look, yes, I mean, I suppose, historically, cycles have -- we can only go on, I guess, the way cycles have operated historically. I mean what we don't know, and I guess what we're not trying to predict at the moment is what interest rates are actually going to do from here. I think we are in a different kind of construct than maybe we have been in historically in terms of what central banks have done in order to support economies, and it is very difficult to work out exactly what interest rates are going to do from here. To me, it's more of a liquidity thing in terms of what actions are taken from here and the impact on liquidity, and I think it's the liquidity that will -- if it's going to change anything. But I guess we're not necessarily trying to predict that outcome. From BWP's perspective, we feel we're fairly well positioned whatever transpires. And I think, historically, there's generally a lag -- if there is a change in interest rates, there's a lag before, affects cap rates, I would assume in that regard to probably continue to see that sort of effect unless there's a major change in liquidity. But Andrew, do you want to add to that or contradict me if I'm -- if you have a different view? Not sure what's happened to Andrew.

That's okay. The next question I had was sort of a follow-on, and maybe Andrew can potentially add on this. But the trust obviously hasn't been particularly active on acquisitions for a number of years now. Are you thinking about what's happening in relation to interest rates and liquidity as potentially creating better opportunities to acquire on a medium-term view? And perhaps something Andrew could add on is are you seeing any signs of easing of competition? Or do you anticipate that more assets will come to market?

Yes. Look, I think, obviously, if you do get a change of environment, that potentially does create more opportunity, although I suppose there's a lot more interested parties in BWP -- sorry, Bunnings properties now than there was historically. That was when BWP typically made its acquisitions when others weren't buying. So it's unclear how that will transpire. But I think we tend to -- for the BWP structure, we tend to sort of look at things in terms of their cash flow generation over time as a basis for what will ultimately create value now. That cash flow generation can come from land value appreciation or it can come from, I guess, extended tenure but [ a lot are tied ] to the cap rate. Typically, the longer that tenure needs to be in real terms, not in terms of -- in term of the lease terms in order to better generate any sort of return. So I think if you do get a change of environment and change in cap rates, obviously, you can start to look at things slightly differently. So does that answer your question, Adrian?

It does. And just one final question, if I may. I think you mentioned a management fee waiver that had been in place previously and that, that won't be extended. Could you just confirm the details of that, please, and perhaps touch on how those decisions are made, please?

Yes. Yes. Look, I mean our management fee is a flat 0.585% on gross assets. So we don't have other sorts of fees that sometimes are being paid for their acquisition fees, divestment fees or leasing fees or whatever. That's it. And so -- and it's built into the constitution. So every year that -- it's as simple as that. That's what you have to pay. So it's -- obviously, when your portfolio is going up in value, you pay a higher management fee. The -- what the Board has done historically and sometimes at the time of acquisitions when it was going to have some impact because of a big uplift in asset value, they have agreed to waive management fees sometimes. And also when we've had shifts in valuations, there have been periods when the Board has agreed to waive a certain amount of management fee for a period of time. I mean the view from the Board has always been that the management fee has to return to its original requirement, if you like. So in this case, that's exactly what's happened. It needed to return to its original full management fee. So that expired at the -- or ended at the end of December.

Your next question comes from Lou Pirenc from Jarden.

Quick one on -- a follow-up on the management fee. What was the extent against the waiver last year?

It's $75 million of assets.

Yes, yes, yes. That's helpful.

And it's...

And then -- sorry. Go ahead.

And it was 0.585%.

Yes. So that's the normal fee on that. Yes. Yes. so given the swing in no longer having the waiver plus a much higher asset base, do you expect in the second half, based on your guidance, for that to be all offset by higher income? Or do you expect that to be covered by more distribution being paid out of capital profit...

It will be a bit of both. But yes, it will require both in the short term.

Okay. And then just on your -- I mean your gearing clearly keeps coming down, and it sounds like you expect further cap rate compression based on transactional evidence. So gearing may come down even further in the absence of acquisitions. If you -- if this has nothing to do with the capital, would you, at some point, consider using your balance sheet to retain -- return capital to unitholders?

Look, I mean we -- I guess we look at all those options all the time. So I'm not going to be able to say we will or we won't. We -- in terms of our capital structure, we're looking at those sort of things all the time. I mean what I will say is at this point in time, we're not unhappy to be -- to have lower gearing actually. And I mean, I guess, we're like everybody else, probably don't exactly know what's going to transpire over the next 6, 12 months. But we probably are of the view there's likely to be more volatility than less volatility, and if there's more volatility, it's probably better to be at the lower end than the higher end.

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

Just to Lou's question. Can you just discuss capital deployment? You've obviously got the development that you called out at Lismore. Is there anything else likely to come through in the second half? And have you -- can you maybe discuss how close you've come on acquisitions? And do you think there is likely to be more deployment in the second half to offset what seems to be a reasonable headwind on earnings with that rising management fee?

Yes. Thanks, Richard. Yes, look, with deployment, capital deployment in the second half, they probably won't -- well, putting aside, I'll come back to acquisitions and things in a minute, but in terms of upgrades and things, there won't be a lot. In terms of repositioning, in terms of where we're at, at the moment, that probably won't flow through into this second half either or probably some of it will be either at the back end of that or beyond it. So yes, in this next half of the year, we won't see a major amount of new capital expenditure. In terms of acquisitions, look, in the last 6 months, well, in terms of Bunnings properties, there's only 4 that we're aware of. And in terms of other things that we look at in this [ most recent ] 6 months, there really hasn't been that much. I mean we -- when we spoke in August, we talked about a few acquisitions that we've bid on and we've missed out on and which were large-format centers, and we haven't seen anything more of that caliber, if you like, in this most recent time. So I mean we obviously continue to look, and if we see anything that we think we can create some value from over a longer-term basis, we are bidding on it and bidding aggressively on it. But we're doing it on the assets where we think we can actually create some value from and are not just dependent on the current cycle.

Okay. And then just a second question, just on the outstanding market rent reviews. There's 12, I think, you called out for the last 18 months, plus another 4 coming in the second half. Just your expectations of those. And I know tenant performance hasn't -- doesn't typically come into the discussion, but occupancy costs must be looking pretty favorable for your major tenant. Just is there any way that you can monetize that to strengthen their performance?

No. No, not in terms of market rent reviews. It's only really based on other comparable market evidence, and that is the reason why, I mean, we -- and we typically say the same thing every time, is you are going to get some positives and negatives and it is linked to -- it can be linked to local factors, which don't necessarily represent the whole portfolio. So I mean in terms of what's coming, we expect a bit the same. We'll probably get some positives and get some negatives. I mean we don't sort of -- we don't see any reason why there needs to -- there should be a step change or certainly a negative step change in value of the whole portfolio. And in terms of the positive side, I mean it's really based on the evidence -- available evidence. So I mean, I guess, on balance, we still think the portfolio is probably about right, but you're going to -- you will continue to get some positives, some negatives.

There are no further questions at this time. I'll now hand back to Mr. Wedgwood for closing remarks.

Well, thanks, everyone, for participating in the call. And if you do have any follow-up questions, feel free to get in touch, and we'll -- we can discuss anything further that you have. And good luck with the rest of the reporting season. So we'll end the call there, and thanks again for participating.

That does conclude our conference for today. Thank you for participating. You may now disconnect.