Company Reports

For over 20 years, BWP Trust has consistently applied a strategy of generating rental income from long duration leases over warehouse properties predominantly tenanted by home improvement retail business, Bunnings. Although BWP Trust is proposing to transition some Bunnings Warehouse stores to alternative uses, strategy is to have 80%-90% of rental income from Bunnings. Wide-moat Wesfarmers owns 100% of Bunnings and 23% of BWP Trust, and is the trust's responsible entity.

BWP Trust’s fiscal 2024 result was broadly in line with expectations. Adjusted net profit increased 5% to AUD 119 million, or AUD 18.1 cents per unit, underpinned by robust like-for-like rent growth of 4%. Distributions were kept flat at AUD 18.29 cents per unit, marginally exceeding underlying earnings. The trust has maintained a healthy balance sheet following the Newmark acquisition, with gearing of 22% at end-June 2024, near the lower end of the 20%-30% target range.

For over 20 years, BWP Trust has consistently applied a strategy of generating rental income from long duration leases over warehouse properties predominantly tenanted by home improvement retail business, Bunnings. Although BWP Trust is proposing to transition some Bunnings Warehouse stores to alternative uses, strategy is to have 80%-90% of rental income from Bunnings. Wide-moat Wesfarmers owns 100% of Bunnings and 25% of BWP Trust, and is the trust's responsible entity.

We downgrade BWP Trust’s moat rating to none from narrow. The narrow moat rating leaned heavily on the relationship with key tenant Bunnings and its parent Wesfarmers, which also owns 23% of BWP and is its external manager. We thought BWP could share in the value created by the highly successful tenant, and that may have been true historically. But, more recently, the evidence suggests BWP is treated just like any other landlord. Given its properties lack any intrinsic competitive advantages, we now consider a no-moat rating to be appropriate.

Narrow-moat-rated BWP Trust has secured 93% of Newmark Property REIT and moved to compulsorily acquire the remaining shares. We make no change to our forecasts as we had already factored in the successful acquisition, given that the offer was attractive from the highly geared Newmark’s perspective. We maintain our AUD 3.60 fair value estimate for BWP and consider the stock fairly valued at current prices. BWP is a small but defensive REIT with conservative gearing, offering a 5% distribution yield. We forecast distributions to remain relatively flat for the medium term as solid rental growth is offset by a rising average cost of debt. But growth should improve over the longer term as debt costs stabilize.

For over 20 years, BWP Trust has consistently applied a strategy of generating rental income from long duration leases over warehouse properties predominantly tenanted by home improvement retail business, Bunnings. Although BWP Trust is proposing to transition some Bunnings Warehouse stores to alternative uses, strategy is to have 80%-90% of rental income from Bunnings. Wide-moat Wesfarmers owns 100% of Bunnings and 25% of BWP Trust, and is the trust's responsible entity.

We maintain our AUD 3.60 per unit fair value estimate for narrow-moat BWP Trust. First-half fiscal 2024 distributable income of AUD 57.9 million was flat on the previous corresponding period with rent increases, mainly from the Consumer Price Index indexation, offset by higher interest costs. Market rent reviews over the half were favorable, with five reviewed properties recording an average rent increase of 4.2%. However, we think outcomes like this are unlikely to persist—around 80% of the trust’s leases will expire in the next five years, and as key tenant Bunnings moves to bigger sites, we expect rising vacancies will dampen rent growth.

After conserving balance sheet strength and patiently waiting through the property boom years, BWP Trust has now pounced on a small, sold-down AREIT called Newmark Property REIT. The all-scrip off-market takeover offer is expected to close in mid-March, and we think is likely to succeed given the reasonable price, Newmark’s weak financial health, and unanimous support from directors. We incorporate the completion of the acquisition into our forecasts.

For over 20 years, BWP Trust has consistently applied a strategy of generating rental income from long duration leases over warehouse properties predominantly tenanted by home improvement retail business, Bunnings. Although BWP Trust is proposing to transition some Bunnings Warehouse stores to alternative uses, strategy is to have 80%-90% of rental income from Bunnings. Wide-moat Wesfarmers owns 100% of Bunnings and 25% of BWP Trust, and is the trust's responsible entity.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

After a selloff in recent months caused by rising bond yields, most AREITs look cheap. Two such trusts are Waypoint REIT and Hotel Property Investments, which are 4-star-rated and trade at 17% discounts to their unchanged fair value estimates of AUD 2.80 and AUD 3.30, respectively. The narrow-moat-rated and conservatively geared BWP Trust also appeals though it is less undervalued, trading at just a 6% discount to its AUD 3.60 fair value estimate. All offer solid forecast distribution yields of between 5.3% and 7.3%, albeit with limited distribution growth potential in the medium term as higher debt costs offset rental growth. No-moat-rated Centuria Industrial REIT's security price is down 30% from the late 2021 peak and the trust is well-placed to benefit from strong leasing conditions in industrial markets, but we have some reservations about its financial health and consider it fairly valued.

Narrow-moat BWP Trust's fiscal 2021 adjusted net profit fell 3% to AUD 114 million, or AUD 17.8 cents per unit. But distributions were kept flat at AUD 18.3 cpu, supported by a small amount of debt. The main issue continues to be Bunnings vacating older stores when leases expire, which offsets rental growth elsewhere in the portfolio. Disappointingly, distribution guidance is for AUD 18.3 cpu again in fiscal 2022. But distribution growth should improve in the medium term as higher CPI-linked rent growth starts to offset Bunnings vacancies. The fiscal 2021 result and 2022 guidance were marginally below our prior expectations. We downgrade our 2022 profit and distribution forecasts by about 3% but our longer-term forecasts and AUD 3.60 fair value estimate are unchanged. The stock screens as slightly overvalued at present.

For over 20 years, BWP Trust has consistently applied a strategy of generating rental income from long duration leases over warehouse properties predominantly tenanted by one home improvement retail business: Bunnings. Although BWP is proposing to transition some Bunnings Warehouse stores to alternative uses, strategy is to have 80% to 90% of rental income from Bunnings. Wide-moat Wesfarmers owns 100% of Bunnings and 25% of BWP, and is the trust's responsible entity.