Stock: BWP Trust
Financial Year-end: 30 June
Latest price: $3.39
Market cap: $2.17 billion AUD
Date: 13 September 2018
Sector: Real Estate
Industry: Retail REIT
Investment Theme: Dividends & Growth
BWP Trust is a real estate investment trust (REIT) established in 1998 that invests in and manages commercial properties throughout Australia.
Wesfarmers Limited owns approximately 24.75% of the issued units in the Trust. The responsible entity for managing the Trust, BWP Management Limited, is a wholly-owned subsidiary of Wesfarmers.
BWP owns a portfolio of 79 stores in Australia. The majority of the properties are large format retail properties leased to Bunnings Group Limited, a subsidiary of Wesfarmers. Eight of the properties have adjacent retail showrooms, leased to other retailers and there is one stand-alone showroom property.
Over 92% of rental income is from Bunnings (Wesfarmers).
98.8% of the portfolio was leased, with two properties unoccupied, at 30 June 2018.
Of the 79 properties, 13 are expected to be vacated by Bunnings (in the process of relocating to a nearby site, including some ex-Masters sites), including the two currently vacant. Five of the 13 properties are being sold and 8 are being re-positioned.
Annual revenue continued to rise, with 2.5% like-for-like rental growth in FY18 while total rent received grew by 0.35%.
Long leases provide stability and growth. Weighted average lease expiry (WALE) is 4.5 years. Initial Bunnings leases are typically 10 to 15 years with further options of 5 or 6 years.
Approximately 59% of rental income are subject to annual CPI adjustment and 41% to fixed annual adjustments, typically reviewed to market every 5 years.
Rents are generally not linked to tenants’ turnover, but retailing conditions can impact on market rents. FY19 may bring some rent free periods and capital expenditure as 8 properties are re-positioned following Bunnings exit.
Earnings per share
Earnings include net unrealized gains in fair value of investment properties. Net increase in fair value of $67.4 million for FY18 is significantly lower than $111.3 million in FY17, accounting for the substantial drop in EPS.
Excluding unrealized gains, EPS shows an increase of 0.65% in FY18.
Distributions, excluding capital, were 17.62 cents per share for FY18, an increase of 0.65%.
Historical growth (CAGR) in distributions from 1999 to 2018 is 3.5% p.a.
Cash flow from operating activities and free cash flow both increased by 0.83% in FY18.
Net debt to equity of 25% is manageable.
BWP’s earnings are strongly linked to the ongoing success of Wesfarmers’ Bunnings business and their underlying markets: home improvement and outdoor living. While this business has a strong track record, declining housing prices are expected to weigh on performance.
Net tangible assets (NTA) at FY18 were $2.85 per share. Decline in the weighted average capitalization rate to 6.48% in FY18 (FY17: 6.59%) accounted for most of the 4.0% increase in NTA.
We project current distributions of 17.62 cents (excluding capital distributions) will grow at a long-term rate of 2.5% per year, giving an expected annual return of 7.7% using Gordon’s Growth Model, or 8.1% including tax benefits.
Momentum (50-week) has risen to a modest 12%, while Trend Index (50-week) only recently crossed above zero. BWP has appreciated at an average of 6.0% CAGR since 1998.
The shorter term Trend Index (21-day) formed a bullish trough near zero in late August/early September. Another trough at or above zero should provide a good entry point.
We consider BWP to be over-priced at present: $2.95 would offer a long-term projected investment return of 8.5%, or 8.95% including tax advantages. Hold and accumulate if price dips below $3.00 per unit.
Staff of The Patient Investor may directly or indirectly own shares in the above company.