BWP Trust (BWP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the BWP Trust Half Year Results Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Wedgwood, Managing Director. Please go ahead.

Good morning, everybody, and thank you for dialing into our half year results webcast. Firstly, I'd like to acknowledge that this meeting is being held on the traditional lands of the Whadjuk people of the Noongar nation. I'd like to pay my respects to elders past, present and emerging. BWP Trust acknowledges the traditional owners of country throughout Australia. We've released to the ASX this morning our half year results announcement, our half year report and the presentation slides, which we'll go through now before taking questions. Andrew Ross, our Head of Property; and David Hawkins, our Head of Finance, are also on the call and will be available to answer any specific questions at the end of the presentation. I'll now turn to Slide 6, which summarizes the half year outcomes. Total income for the half year ended 31st of December '22 was AUD 78.6 million, about 4% ahead of the prior comparable period. Portfolio rental growth represented the significant majority of the increase with the income from completed developments and loss of income from vacancies are largely offsetting each other. The distributable profit for the half year was about AUD 60 million, and that was the same as the prior corresponding period. It included approximately AUD 600,000 in capital profits, and that was compared to AUD 1.5 million for that previous corresponding period. As we have discussed previously, on the basis that we pay out 100% of our distributable profit, we are utilizing realized capital profits to maintain the distribution while we are repositioning some expanding properties. The half year distribution -- or the half year distribution is a bit over AUD 0.09 per unit, and that's in line with the prior corresponding period. NTA increased a bit over 5% from the previous corresponding period, but only about 2% in the last 6 months with any more recent changes in property valuations, mainly linked to increases in rent. The Trust property portfolio generated 3.9% like-for-like rental growth on an annualized basis and that's reflecting the increased quarterly CPI over the 12-month period. The portfolio capitalization rate was 5.05% at 31st of December, and that was similar to what we reported in June '22 at 5.04%. There were no publicly disclosed sales of Bunnings Warehouse properties during the last half. As such, there's been no market evidence to support any material changes in valuations for Bunnings warehouse properties. The portfolio WALE at 31st of December '22, was 3.6 years. And that, as we've discussed previously, reflects that a number of properties in the portfolio are in the back half of an initial term or Bunnings has exercised a 5- or 6-year option. And as we've said previously, it doesn't itself really reflects the underlying risk of vacancies in the portfolio given the nature of a Bunnings lease and the nature of how Bunnings determines where it wants to be located. 8 market rent reviews were completed during the period and 7 of those were Bunnings Warehouse properties. Options on 7 Bunnings Warehouse properties were also exercised during the period. At 31st of December, there were 73 properties in the portfolio with 97.5% occupancy. Gearing was about 15% and cost of debt, 3.7% at the 31st of December. At the end of the period, our hedge cover was about 53%. 12 months or so ago, our hedging dropped to about the current level as a result of the maturity of a fixed rate bond issue. At that time, we were concerned about putting in place more hedging because of the steepness of the yield curve. We have been back and reviewed that decision. And I guess we've confirmed to ourselves at least that there would have been no benefit from putting in place additional hedging at that time. With a flatter yield curve now, there may be better opportunities for hedging than in the recent past. And I guess, we continue to watch that and watch what's going on in the broader market. Turning now to Slide 8, we just provide the 6 months summary of key numbers and can take any questions on that. I'll now turn to Slide 10, and we show on that slide, the outcomes of the 7 Bunnings market rent reviews, which were finalized. The overall outcome was flat. The Hawthorn, Coburg and Pakenham market rent reviews were determined by an independent valuer, and you can see there was some variation in those outcomes. In terms of Hawthorn, we're pretty happy with that outcome because that is the highest rent per square meter in our portfolio. So obviously, it's not straightforward in terms of maintaining that market rent given how our market rent reviews occur on Bunnings properties. The other reviews on the slide were all negotiated and were based on available market [ evidence ]. I mean, as we've said before, we don't look at individual property outcomes as an indicator of the rent for the whole portfolio as there's always a number of variations at a local level based on the evidence that's available, and you can see that on the slide. We do, however, remain of the view that the overall portfolio rent is broadly at market. And this has been consistent for the last few reporting periods and we're sort of maintaining or internally, we're maintaining that, that view that's appropriate. Turning to Slide 11, we've shown the graph that we normally show with the cap rate trends for the sale of Bunnings stores for a number of years and as shown in the past that it's shown a fairly consistent tightening of cap rates certainly over the time frame of the chart. As I've mentioned previously, there has been no recent publicly announced transaction, the last being a small Bunnings property at Mount Isa, which sold on a cap rate of 4.29%. We're not exactly sure what's going to happen to cap rates of Bunnings properties moving forward and I guess, we're seeing different things occurring across different property sectors. In the case of Bunnings, we do expect it to take some time to adjust if it's going to end, it will require some transaction activity for there to be any material adjustment. We are hearing that there's still fairly strong interest from private investors in Bunnings Warehouse properties in the event that any do come to market. Turning now to Slide 12, we showed the -- or a summary of the portfolio revaluation for the half year. As mentioned in the highlights, the portfolio cap rate hasn't really moved, although it remains lower than it was at December '21 when the cap rate -- the portfolio cap rate was 5.1%. There were 16 independent valuations during the 6 months period and 57 internal valuations. Cap rates on 3 properties tightened, 61 remain the same and 9 -- on cap rates on 9 properties increased. Of the 9 properties where cap rates increased, 6 properties are in the process of being repositioned or Bunnings has indicated that it's moving out at some stage. Rocklea in Brisbane was independently valued and had a 25 basis point adjustment. Townsville North and Noarlunga in South Australia, those cap rates were also adjusted by 25 basis points on the basis of independent valuations. 3 properties for cap rates tightened were all independent valuations and that was Pakenham in Melbourne, Smithfield in Cairns and Harrisdale in Perth. On Slide 13, we've shown the results of those independent valuations by store. And I won't go through that, but we can take questions if necessary. On Slide 15, we've just shown, I guess, a summary of what we call our core portfolio, and there's 65 properties in that core portfolio and that just excludes any stores that are currently being repositioned or Bunnings has indicated that they're moving on from. So turning now to Slide 16, that shows the weighted average lease expiry profile for the core portfolio as we normally show. And the next period when a number of properties where we're getting to the end of the current lease term is 2026. And as we've said before, those spikes in expiries are due to historical portfolio acquisitions. And look, as we've mentioned previously, in our view, the end of an option period for Bunnings property is not a good indicator that Bunnings intends leaving its site. And one of the factors is it's not straightforward for Bunnings finding alternative locations, it takes a fair bit of time to build stores. We normally know fairly well in advance what's going on. And also, you note the nature of a Bunnings lease is they will always be going into option periods the longer they're staying in a property. On Slides 17 and 18, we've shown all properties, which will have lease expiries in the next 3 years. I mean I won't go through all of those properties, but we're certainly happy to take questions on any particular ones. But we're not aware at this point of any properties on that list or Bunnings hasn't made us aware of any properties on that list that it intends vacating from. So, I guess that's what we know 3 years out at the moment. On Slide 19, we show the details of a proposed upgrade of the Dubbo Bunnings Warehouse store. The terms of this upgrade were conditionally agreed early last year and Bunnings needed to get DA approval before the upgrade work could begin, which they now have. But in thinking about when those terms were set, obviously, that was a slightly different environment to what we're in now. That being said, I would say, particularly in the case of Dubbo, we, obviously undertook quite a bit of analysis before we agreed the terms of that upgrade. And we looked at the alternative uses for the site in the event that Bunnings instead vacated the property. Given its regional location, in our view, what we've agreed to in terms of Bunnings staying at the property long term is certainly the best outcome for that -- or it's the best outcome for Bunnings and best outcome for BWP. And there was vacant land next door, which we've acquired some of that in order for the store to be extended, but that makes the whole process of upgrading and extending the store simpler and it also allows Bunnings to continue operating from the existing store without interruption while the extension is being built. So overall, it's -- I think it's a good outcome for Bunnings and BWP. We'll turn now to Slide 21. And we've just summarized on that slide the store or the properties that are currently being repositioned or will be in due course. Port Kennedy, we've talked about before and we have a leasing campaign underway. You might notice that at the last reporting period, we had indicated that we were a bit over 80% pre-committed in terms of leasing. That's actually, for the moment, drop back to 50%, although we are talking to several parties in terms of taking up that additional space. And we had a tenant in place, which required going to council to get some, I guess, amendments made from a zoning perspective to allow that customer to operate from our property and the council have turned that down. We've since gone back to council, and we have a DA in place for more standard large-format retail and that's what we're progressing to have in place. But we are fairly comfortable where that's at the moment and we're getting good inquiry from large-format retail in terms of taking up that space. Belmont North, I think we've indicated previously that property, we've had rezoned to be able to accommodate a supermarket and other retail. We are continuing discussions on that property. I would say for the moment, construction costs are quite high. So, we are looking at an alternative in terms of how we undertake the repositioning of that property, which we hope will lower the construction costs materially, but we're working through that one at a moment. Harvey Bay, we've got development approval in place for large-format retail. We've had very, very strong interest from some key national large-format retailers for that site and we're in pretty good shape. We're currently just finalizing design and the construction cost of that property and we expect to have all that in place next month. So, that property is in good shape. Wollongong. Wollongong is new to this list. Bunnings has 3 other properties in the sort of Wollongong catchment area. And this property is located right in the center of Wollongong just behind the CBD. Bunnings has opted to close this location. And I guess, rely on their customers going to the other properties in Wollongong. So, they will be moved out and stop paying rent at the end of March. We're currently -- I mean, in terms of that particular property, it's very well located in the center of Wollongong. It's close to railway stations, it's got quite flexible zoning. So, we're doing quite a bit of work at the moment in terms of the best outcome for that property to be repositioned. Obviously, the large-format retail, there's certainly very, very good potential for a large-format retail outcome but we're also looking at other outcomes to see if there's any other value we can create from that site going forward. But we're pretty comfortable at the moment in terms of what we can do with that property and we should be able to move forward fairly quickly. Albany, there's been no change on that one since we last reported. At the moment, Bunnings has a Tool Kit Depot operating from the site, and we're still deciding what to do with that site longer term. Fountain Gate in Melbourne is leased to Bunnings until February 25. And we are aware that Bunnings has access to another site nearby. They haven't started construction. So, we're not quite sure exactly what's going to happen with that property over the next couple of years. Obviously, given there's a fairly high risk that they are going to move, we're doing quite a lot of work in terms of the future use of that site. That precinct is a very, very strong commercial precinct. There's a Westfield shopping center across the road. There's also a lot of commercial behind our property and our property is very well located with good access and good visibility here. So again, we're doing quite a bit of work to work out what is the best longer-term outcome from that side. Northland, there's nothing new to report on that either. Bunnings is there until August '25. Again, on that property, we're looking at medium and long-term uses. I mean that area is undergoing quite a bit of change. The council, I think, still working out how they want things to look over the longer term. So, we continue to talk to the council in terms of zoning and what we may do with that property in the longer term. And the last one on that list is Wagga and Bunnings is there until March '26. They do have another property, which they haven't started construction on. In terms of that property, it's located in a very strong commercial precinct in Wagga. So, we're fairly comfortable we can get a good outcome on that property as well. So, we're just working through that. So, turning now to Slide 23, which just summarizes our debt facilities. I won't go through that. Slide 24, just I guess, shows graphically our debt maturity profile as we've shown in the past. Last slide on 26, in terms of the outlook. From our perspective, operationally, we're still pretty comfortable where we are. I mean, we're -- 99% of our rental income is either from Bunnings or other large-format retailers and most, if not all of those retailers are still performing quite strongly. I guess, none of us know exactly what's going to transpire over the next year or so, but I think most of our tenants remain in pretty good shape. But in terms of Bunnings Warehouse properties, I guess, transaction activity has dropped off as I've indicated. We think there's certainly a level of resilience in the ongoing valuation of Bunnings properties and ongoing demand for Bunnings properties, if any come to market. But I guess all those things are at the moment, a function of other things that we don't necessarily control. We show on the slide a summary of the rent reviews that are coming up in the second half and the proportion of those sort of CPI-linked. Our primary focus for the remainder of the year is principally on our existing properties. And obviously, we're very focused on any actual or pending vacancies in the portfolio, store upgrades, extending leases and any remaining market rent reviews we've got outstanding. That being said, we're very, I guess, focused on, particularly if there's any disruption in the market if there's any opportunities for us to grow the portfolio. And look, finally, and I guess this is on the assumption or subject to there being no major disruption in the Australian economy, we would expect the distribution for the full year to be similar to that paid for the year-ended 30th of June, 2022. And as I've mentioned earlier, if we need to will use capital profits to support that distribution. And as I said before, the reason why we would be doing that. That is if there's any gaps in rental income due to the repositioning of properties or the timing around repositioning properties. So on that note, I'll hand back to the conference organizer Ashley, and we'll take any questions that you have.

[Operator Instructions] Your first question comes from Lourens Pirenc with Jarden.

Yes, we can start with cap rates. I'm a bit surprised you haven't really moved your cap rates up more. You've traditionally been quite conservative and haven't really been acquiring when cap rates were really low. Your cost of capital has gone up quite significantly. So, I'm just curious to see why you guys moved.

Yes. Thanks, Lou, for the question. I mean I'll answer it and if Andrew has got anything to add, he can say it as well. Look, whether the rates are coming down or going up, I mean, we've over a long period of time, sort of maintained the same basis on which we assess those things. And most of it is on the back of independent valuations and then applying the same methodology across our portfolio. So I guess, certainly, as rates have come down, we've never necessarily been at the sharp end. We've been being fairly conservative. But when you get to this point in the cycle and there's no transaction activity for valuers to change their view, we don't necessarily have a basis to change our view. So, I think we've -- will we take the view that we will remain consistent in our assessment of those valuations, whether they're going up or down and we just happen to be at that point in the cycle. Andrew, do you want to add anything to that?

The only extra thing that I'd like to add is if you have a look at the independent valuations, they're consistently stable as well. So, 10 of those valuations by independent valuers were at the same cap rate as we've held in the books previously and they've moved some tighter and some just slightly above just for site-specific reasons.

If I can just follow up on that. When you kind of look at -- you continue to look for opportunities to acquire assets, has your, I don't know, benchmark or your hurdle changed in the last 6 months in terms of what kind of yields or returns you would need to see?

Andrew, do you want to talk to that?

Yes. Look -- well, in terms of the hurdle rates, I guess the cost of debt for us has gone up, and we would be cognizant of that in terms of what sort of cap rate that we would be prepared to pay for an asset. Something 5% was accretive to earnings 12 months ago, but not necessarily accretive to earnings now. So, it has impacted our view on cap rates that we would look to purchase property for.

And then one more, if I may. Just specifically, you mentioned in the press release, Lismore increasing the commitments in terms of expanding Lismore. What's the timing of this? And what returns do you expect from that on the AUD 12.5 million CapEx?

Well, the construction has just begun. So, it looks like it's either going to be November of this year, 2023 or into the early part of 2024.

And in terms of yield on cost on that?

It remained the same at the previously agreed 4%.

Lou, I'll just add to that. I mean Lismore is a bit like Dubbo, I guess, a regional location. And as I mentioned in the presentation the thinking about Dubbo very similar at Lismore and that, I guess, we look at it in an overall sense of saying, well, in terms of the property, is it better to have Bunnings there over the longer term? Or is there some other use and some other potential to create more value? Or alternatively, what would we do with the property in the event that Bunnings chooses not to stay there. So, all of that factors into our thinking and Lismore was a bit like Dubbo. The terms were agreed some time ago. I think before Dubbo, weren't they. Yes, quite a bit before Dubbo. So, that was obviously a different point in the market, but it's taken this amount of time for Bunnings to start construction.

Your next question comes from Richard Jones with JPMorgan.

Michael, just following on from those questions. Do you post completing those upgrades, if you considered selling both Dubbo and Lismore, given the limited kind of alternate use of Morley?

Yes, thanks for your question, Richard. Look, yes, yes. I mean we -- I suppose we -- whether it's specifically those 2 properties or not, I mean we will always think about the portfolio in terms of what value can -- or what is the most value-creating outcome for the Trust and for some, if it's selling well maybe that's the case. So I mean, obviously, we also consider what impact these things have on the portfolio in terms of income. So there's a number of considerations. But yes, it is certainly something we think about.

Just a couple more quick ones. Sorry, Michael. Can you remind us what proportion of income is uncapped -- is linked to uncapped CPI?

Almost all of it. There's only one lease and I think it's the Hawthorn lease that's got a 7% cap on the CPI.

And Richard, you are not talking about the split between fixed and CPI, you're just talking about uncapped CPI, aren't you?

Yes. I mean, so there's been a number of leases I thought that you've got a 2.5% capped CPI?

No. Look, the 2 upgrades of Lismore and Dubbo, when they're in place, they will have it. But no, other than what Andrew mentioned, there's nothing else in the portfolio that has capped CPI.

And then just in terms of Morley, it's no longer listed in the alternate use?

Yes, look, in terms of Morley we have entered into a 3-year lease on that property. And we're just -- we're assigning the list today, we hope. So, I just can't provide exact details on that. But essentially, the expected use of that property is still to reposition it. But what we have done is taken a 3-year lease, and we're effectively getting the same rent that when Bunnings was there. And it just gives us a little bit more time to come out with the right outcome on that property. And because it is -- it will require quite a bit of construction cost. And again, we're just sort of working through that. So, from our perspective, it's a very good outcome because it's -- we're generating good income from the site and we're just giving ourselves a bit more time to make sure we get the -- what's required in place for a good longer-term development.

And just finally, just can you give us the rough CapEx and potential returns on the CapEx plan at Port Kennedy, Belmont North and Hervey Bay?

Well, Richard, we don't have a construction cost there at the moment. We're going through a design development stage at this stage and we've just got a builder on board on the basis of an early contractor engagement. So, at this point in time, we don't know exactly what the cost is going to be, but we'll know come June.

And I mean we -- in terms of sort of, I guess, working through the higher construction costs, we certainly have sort of adjusted our approach to have the design and designers and builders working a lot closer together to actually take cost out of the construction. So I mean, what we're seeing so far, we're quite comfortable that we're getting good outcomes with that approach. And obviously, we're having to make that work a bit harder given -- I don't -- even if construction costs stabilize, they're probably not going to go down. So, you've got to find a way to make these things work on a higher construction environment, cost environment.

So Andrew, sorry, was your answer in relation to Port Kennedy, Belmont or Hervey Bay, sorry?

Port Kennedy, that's what you asked.

Sorry. All 3, sorry.

Oh, sorry, okay. So Hervey Bay, we're expecting some tender pricing this week. So, we've had a builder on board there for 3 months now with our design team and we're expecting to get that this week. So, I can't tell you what that is at this point in time. And in relation to Belmont, those numbers that were given were significantly more than what we had anticipated and it was on the basis of demolishing the improvements and creating a brand new development. So, what we've done now -- and because it's so much more, it's not even close to what would be feasible, we're now looking at repurposing the building to incorporate tenants in there, like what we're doing at Hervey Bay and Port Kennedy.