BWP Trust ((BWP)) needs to actively manage its assets, given the large number of Bunnings ((WES)) leases up for renewal over the next few years and the increased interest in industrial sites stemming from e-commerce storage requirements.
That’s the view of several brokers as the trust’s weighted average lease expiry (WALE) is just 4.3 years. FY21 distribution guidance remains similar to FY20 at 18.29c per unit, and capital profits are being used to support the distribution.
While many assets should benefit from the re-rating of industrial assets, Ord Minnett assesses this is largely reflected in the BWP Trust implied 4.7% capitalisation rate (the ratio between income from the asset and the original cost).
The re-purposing of Port Macquarie had been completed and this site is now fully leased with an 8.3 year WALE. Ord Minnett believes the portfolio should continue to benefit from industrial re-pricing, supported by capital market conditions and user demand for e-commerce.
Moelis notes the valuation uplift for BWP Trust over the first half was largely the result of cap rate compression and, given the bulk of direct market valuations are being struck between 4.0-5.5% and investor interest in Bunnings sites is strong, further compression is likely for BWP Trust.
The largest income decline after the latest round of rent reviews was at Albany, where the rent struck was -13% lower. Despite strong tenants, the company has no mechanism to capture any of the benefit in leases or market rent reviews.
This puts pressure on like-for-like growth. Re-leasing spreads dropped -1.4% in the first half across eight market rent reviews. This continues the deterioration for re-leasing spreads that has occurred over the past three years.
Morgan Stanley notes this is the first time this metric has been negative, and the first half update was slightly below expectations largely because of the amount of rent relief offered.
Rental abatements of $400m were provided, mainly for the Victorian gym operators given the prolonged lockdown in that state. Comparable net operating income declined to 2.0%, the lowest in the company’s history.
Progress has been made in the divestment strategy, with a contract to sell the vacant Underwood asset for $16m at slightly below book value. As the portfolio is in decline Morgan Stanley envisages limited upside to the current share price.
Bunnings traded well through the pandemic but this is unlikely to drive higher rents, and Citi notes BWP Trust management has pointed to a shift in the Bunnings propensity to renew leases. (Note that the REIT was formerly known as Bunnings Warehouse Trust before reverting to BWP — its stock code.)
Ord Minnett agrees it is unfortunate the trust has been unable to leverage the very strong trading performance of Bunnings, in the form of higher rents. There are 15 expiries due over the next three years and the broker expects Bunnings will exercise options on the bulk of its properties. Bunnings exercised nine options in the first half, which increased the WALE to 4.3 years.
A major negative was Port Kennedy, which declined -39% in valuation as Bunnings surprisingly vacated the site, which highlights the risks. BWP Trust was given little warning at Port Kennedy where the valuation went down to $10.0m from $27.4m.
UBS notes around two thirds of leases are expiring over 2021-25 of which 17% are assets which Bunnings has occupied for more than 12 years. One-in-six leases are not expected to be renewed, and the broker points to 12 months of downtime as a result, which leads to limited growth over the short term.
UBS values the stock on a 5.0% yield, reflecting the diversified portfolio, where occupancy was 97.4% and marginally lower compared with June 2020. Yet BWP Trust is trading on implied metrics that reflect a very defensive asset that has a much longer WALE than is currently the case. Moreover, the current cost of capital makes accretive acquisitions difficult, in the broker’s assessment.
Moelis was underwhelmed by the flat distributable earnings of $57.9m, asserting the potential for Bunnings to vacate sites and the lack of clarity on how the asset can be re-positioned are headwinds that will linger over the medium term.
Moelis, not one of the seven stockbrokers monitored daily on the FNArena database, considers the premium at which BWP Trust trades to net tangible assets is unjustifiably high and retains a Sell rating with a $3.34 target.
The database has three Sell ratings and one Hold (Ord Minnett). The consensus target is $3.65, signalling -10.5% downside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.4% and 4.5%, respectively.