Keeping A Holdfast
Real Estate Investment Trust (REIT), BWP Trust (ASX:BWP) recently disclosed its long-awaited Fiscal Year 2018 results. The REIT has faced some headwinds as one of its largest lessees continues to close down some locations, the bigger picture though shows that the REIT still maintains a high occupancy rate with a strong position. Thus, we maintain our HOLD rating.
What’s New?
In our last coverage of the REIT last February (FAT-AUS-859), we focussed on the interim (1H18) progress where the REIT delivered gains in several key metrics as well as made some progress on positioning its portfolio in the wake of the Bunnings Warehouse exit.
Since then, the most salient and sole update since then being the REIT’s release of its Full Year (FY18) results which also includes updates on the Bunnings exit as well as its positioning for the coming year. That said, we now focus on the FY18 results.
FY18 Results – Currency in Australian Dollars unless otherwise noted
For FY18, BWP Trust’s operating performance highlights the defensive nature of the trust despite ongoing headwinds as various key performance metrics show improvements compared to the previous corresponding period (pcp).
As we’ve noted in our prior coverages the REIT has consistently generated growth in distributable profit as driven by the sequential increase in rental income through acquisitions and organic growth, prudent debt management, well-controlled management expense, occupancy and gearing ratios. Ultimately, this lends towards a gradual improvement in profit margins while its defensive nature ensures stability, a must for REITs.
The graphic below provides a summary of all the key metrics:
Source: 01 August 2018 BWP Trust (ASX:BWP) Presentation
As reflected in the graphic above, BWP Trust was able to slightly increased its distributable profit year-on-year by around $700,000 to $113.2 million on the back of an uptick in rental income. Note that this excludes revaluations though the REIT did make some divestments adding in $1.2 million of capital profits released to unitholders making the total distributable profit grow by 1.7% year-on-year. Consequently, distribution per unit increased at a similar pace (1.7% yoy) to A17.81 cents.
BWP Trust’s total revenue growth was slower at 0.6% in FY18 to $153.4 million and reflecting the rental growth year-on-year from a mix of annual fixed increases and market rent reviews.
As summarised in the following graphic, for the year ending 30 June 2018 (i.e. the current financial year), a larger portion, some 58% (rounded up) of the REIT’s rent was subject to annual increases in line with growth in the consumer price index (CPI) and with inflation only up a paltry 2%, a majority of the portfolio consequently saw only marginal growth.
Source: 01 August 2018 BWP Trust (ASX:BWP) Presentation
On the other hand, 40% of rents received a fixed annual increase and this time above the CPI. Another positive, though the impact is subdued, with some 2% of rent seeing a market related increase of 5.5% bringing the overall like-for-like rental growth to 2.5% and above CPI.
Going forward, for every 5 years each property receives a market rent review to ensure that rents are in line with other similar properties. As such, the key drivers of rental growth will once again be (i) the rate of CPI, and (ii) property specific factors as they relate to market review properties. The REIT has announced for FY19 that only 47% of the rent will be linked to CPI while 12% will be at the market rate and the remainder (41%) a fixed increase of between 3% and 4%.
The trust’s property portfolio, on the other hand, increased in net fair value (revaluations) by $69.9 million to $2,352.7 million with 14 properties substantially rising in valuation, offsetting the slight declines in 8 properties. 57 properties reported no change in valuation.
Source: 01 August 2018 BWP Trust (ASX:BWP) Presentation
Some key updates on the REIT’s portfolio were 5 divestments for the year. The first one was a Bunnings occupied property in Dandenong, Victoria sold for $15.9 million last November which we covered in our 1H18 results review note.
That aside, as at February 2018 the REIT announced an agreement to sell other sites which were soon to be or already vacated by Bunnings. 2 properties are expected to be settled in September 2018 and are located in Altona, Victoria (~$14.4mln) and Burleigh Heads, Queensland (~$19.7mln).
The last 2 properties are expected to settle by February 2019 with both located in Victoria, with the Oakleigh South property expected to sell for $21.4 million and the Epping property to sell for $16.2 million. The 4 properties are expected to net a gain of $9.8 million in profit.
One key driver of the trust’s sustained growth in its net tangible assets is the solid control of capitalisation rates. Referencing the portfolio chart above, it is fairly evident that management has continued to reduce the weighted average capitalisation rate, bringing it down to an average 6.48 % from last year’s 6. 59%.
Since reporting a net tangible assets per share of $1.85 in FY12, BWP Trust has been able to deliver successive year-on-year increases, with the 4.0% increase in FY18 taking the net asset backing to $2.85 per share.
Another positive was the trust reducing the average borrowings by 2.9% to $457.6 million, supplemented by a lower weighted average cost of debt – down by 4 basis points to 4.46%.
Source: 01 August 2018 BWP (ASX:BWP) Trust Presentation
Other key metrics as at 30 June 2018 comprising (i) a stronger interest coverage of 6.5 times (previously 6.3x), and (ii) a weighted average maturity profile of 2.2 years (FY17: 2.8 years) after retiring some of the debt.
Outlook
Going forward, with Bunnings expected to make a few more closures, BWP Trust management has provided some guidance noting that circa 9 properties will be transitioned into alternative uses which we expect to result in flattish distribution growth in FY19, as some of the properties will go offline.
Nevertheless, management has noted that they will maintain the distribution payouts in the event of lower rents from vacated warehouses via using “capital profits” or gains from the sale of divestments while also announcing plans to deploy circa $200 million in Capital Expenditures for the portfolio repositioning.
Our view is that these headwinds would impact financial performance in the near-term however the repositioning, if successful (and management has a long track record), will have a substantially better long-term impact.
Summary
BWP Trust (ASX:BWP) ended the fiscal year on a decent, though uninspired, ending as the REIT continues to deal with the Bunnings Warehouse exit. That said, the REIT nevertheless is setting up for the long term with plans to deploy a sizable $200 million into new income generating properties.
On the valuation front, the stock is trading at around 16.6 times FY19 earnings, 1.1 times book value and offering a dividend yield of 6.2%.
We continued to view BWP Trust in a positive light given it remains well-managed, has a strong capital position with the lowest gearing in the sector.
However, in light of the near-term headwinds, BWP Trust (ASX:BWP) will remain firmly held in the Fat Prophets Portfolio.
Disclosure: BWP Trust (ASX:BWP) is held within the Fat Prophets Australian Share Income and Australian Small & Mid Cap Models.
