BWP Trust (BWP) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the BWP Trust Half Year Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, to Mr. Michael Wedgwood. Thank you. Please go ahead.

Good morning, everyone, and thank you for dialing in to our teleconference this morning. We've released to the ASX this morning our half year results announcement, our 2021 half year report and the presentation slides, which I'll go through now. And as just said then that we'll take questions at the end. Andrew Ross, our Head of Property; and David Hawkins, our Finance Manager, are also on the call and will be available to answer any specific questions at the end of the presentation. If we go to -- or if we start off on Slide 5, which summarizes the outcomes for the half year. COVID-19-related shutdowns, trading restrictions and border closures continued to impact various sectors in the Australian economy in the first half of the financial year. The trust was pretty well positioned during this time, with the significant majority of our rental income exposure to Bunnings and other national large format retailers. These retailers generally traded strongly during the period, even taking into account the extended shutdown in Melbourne. The trust collected 99% of its rent for the 6 months after accounting for approximately $400,000 of rent abatements provided to some code of conduct tenants, most of which were gym operators in Melbourne and particularly during that shutdown period in Melbourne. Total revenue for the half was similar to the previous corresponding period. There was portfolio rental growth during the period from scheduled annual increases and also additional rent from completed developments. This offset some loss of rents due to a few store repositionings underway, the rent abatements that I've already mentioned and also the reducing noncash impact of the straight-lining of rent on a comparative basis. And if you will remember, we adopted that accounting standard a year or so -- a year or more ago. The distributable profit for the half year was about $58 million, and that was the same as the prior corresponding period. This half included approximately $1 million in capital profits, and that was compared to about $700,000 previously. Half year distribution is $0.0902 per unit, and that's in line with the prior corresponding period. NTA increased about 5% in the 6 months period mainly due to increases in the value of a number of properties in the portfolio, and I'll talk more about that in a moment. The trust property portfolio generated 2% like-for-like rental growth on an annualized basis, and that took into account the average inflation of the CPI-linked leases in the portfolio which was 0.8% during the period. The like-for-like rental growth of the portfolio was similar to that reported for the previous corresponding period. The portfolio cap rate reduced to 5.84% at 31st of December, and that was from 6.08% at the 30th of June. And that was as a result of a portfolio revaluation uplift of $87 million for the period. There are a number of banks where we have property transactions in the first half of the year, most of which was certainly of the new stores, so traded on cap rates below 5%. And that provided strong market support for valuations during the period. The portfolio WALE at 31st of December was 4.3 years, and that was slightly higher than what was last reported at the 30th of June. Bunnings exercised 9 options on properties during the period, and a further option was exercised in January. At the 31st of December, there's 75 properties in the portfolio with 97% occupancy. Gearing at the period end was about 18%, and the cost of debt was a little over 3%. If we turn to Slide 7, that shows key aspects or summarizes key aspects of the trust financial performance for the half year compared to the prior comparative period. You will note that the management expense ratio increased slightly to 0.64% on an annualized basis. And the reason for that is, in the first half of the prior comparative year, there was a management fee waiver in place, which wasn't there for the second half of the year, but that reflected in that slightly lower management fee in that prior period. While not impacting the period just completed the Board of BWP has agreed to a new management fee waiver on $75 million worth of assets being the majority of the valuation uplift for the period ended 31st of December. That waiver is currently in place for a period of 6 months and will be reviewed half year, every half year thereafter as appropriate. If we go to Slide 9, we show the outcomes of 8 Bunnings market rent reviews that were finalized during the period. The overall outcome of that list of properties was slightly negative. And that took into account a 13% reduction in rent at Albany in Western Australia, which was arrived at by third-party determination. Albany is a regional store, the most recent comparable market evidence was at the low rent, and that evidence was used by the determining valuer in assessing the rent for our property. A number of other market rent reviews during the period resulted in no change in rents. We remain of the view that the overall -- that the overall portfolio rent is still broadly in line with market. We are continuing to work through a number of other market rent reviews which are in various stages of finalization at the moment. If we go to Slide 10, as we normally do, we show the cap rate trends for the sale of Bunnings properties and that graph goes back to 2010. As mentioned at the start of this presentation is there have been 12 Bunnings warehouse transactions in the last 6 months that we're aware of, and they are for both new and secondhand properties. Of the 12 recent sales, 9 stores traded on cap rates between 4.2% and 4.75%. But 3 older properties traded on cap rates between 5.1% and 5.4%, and they were all properties with much shorter remaining terms certain. Although what was interesting about those 3 transactions is, given the relatively short term certain remaining, they traded on very tight cap rates, and that has provided at values with more market evidence, particularly for some of the older properties in the portfolio. If we turn to Slide 11, and that provided some information on the revaluations for the period ended 31st of December. As mentioned in the highlights, the average cap rate of the portfolio is 5.84%, and that comes a little tightened since the 30th of June. There were 11 independent valuations during the period and 64 directors' valuations. Cap rates on 44 properties tightened, 21 remained the same. And cap rates on 5 properties increased. On Slide 12, we've shown the results of the independent valuations during the period. As you can see, cap rates for Greenacre, Belrose, Artarmon, Browns Plains, Mt Gravatt, Hawthorn, Nunawading and Rockingham were all tightened, reflecting current market conditions. Cap rates for Cairns, Northland and Port Kennedy were increased to reflect either a vacancy or the likelihood of Bunnings vacating the property in the future. Bunnings recently decided not to renew its lease at Port Kennedy, which -- and that lease expires in May this year. As such, the movement of valuation of that property was more significant than what might have otherwise been the case. We weren't previously aware of Bunnings' intention to this property as they are not replacing the store in the same catchment area. Bunnings has nearby stores in Baldivis, in Rockingham and in Mandurah and decided to service the Port Kennedy area from those stores. The Baldivis and Mandurah stores were opened a couple of years ago. And the Rockingham store, which is owned by BWP, has been expanded in recent years. So from our perspective, that's, I guess, a one-off impact. And yes, it wasn't one that we were previously aware of. On Slide 14, we just provide a summary of the characteristics of the core portfolio of that properties. The 64 properties that we currently include in our core portfolio exclude any stores that are currently being repositioned or are in the process of being divested. On Slide 15, we show the lease expiry profile, which we normally do. And you can -- and what we've done there is, as we normally do, is sort of split the bars between newer stores and older stores, just sort of give some indication of, I guess, the likelihood of renewal. On Slide 16, we've provided transparency of properties where leases are coming to the end of the existing term over the next 3 years. And at the top, we've shown the options that were exercised either during the period or immediately after. So 5-year options were exercised for Belmont, Caroline Springs, Cockburn Fairfield Waters, Mt Gravatt, Pakenham, Smithfield and Wagga. A 10-year option was exercised for the Broadmeadows property in Melbourne. And since the end of the period, a 5-year option has been exercised at Dubbo. As you can see on that slide, we have been made aware that Bunnings has obtained development approval for a new store which adjoins the existing property at Hervey Bay. The lease on our property expires in December 2022. We've commenced work on determining the best future use of our property in the event that Bunnings is in a position to move from the property at the end of the lease. On Slide 18, we've just provided a bit of information on our Underwood property. You may recall that we previously -- I mean that property has been vacant for a little while as Bunnings moved out to a new property nearby. We've had entered into a previous divestment transactions of that property, which didn't go through, but we did retain the deposit on that. And we've since run a campaign, another sale campaign. And we've had entered into a contract to sell that property to a private owner occupier. And that property is being sold at a price of about $16 million and will settle in the next couple of months or next 2 or 3 months. So we've -- I mean we looked at all the options on that property and in the end thought that divestment was probably the best outcome for us. On Slide 19, we've just provided a bit of information on the repositioning of Port Macquarie store which is now complete. It's 100% leased to Amart, Sydney Tools and the Body Fit Gym. And we've just included the information or the financial metrics of the period when it was occupied by Bunnings and also what the metrics looks like now that the repositioning has been completed. On Slide 20, we've provided a bit of information on the Morley store where the Bunnings lease expired in July 2020. As we've talked about previously, this is a pretty well-located property. It's generated very strong returns to date, and it does have attractive zoning, very flexible zoning, and it's across the road from the Galleria Shopping Centre. We're currently going through a process and looking at a range of repurposing opportunities for this property, and we'll provide more information on that as it's -- or a bit less as one of those opportunities starts to become more concrete. On Slide 21, we've provided similar information on Midland. That property is still leased to Bunnings. Bunnings moved to a new property nearby in December, and the lease expires in 2021. We -- again, we are in discussions with a few different operators looking to lease that property at the expiry of Bunnings' lease. So at this stage, we're fairly confident that we'll get a good outcome on that property. It's in a fairly -- it's located in a strong commercial precinct, and it is attracting good interest at this point in time. On Slide 22, we've just summarized other properties, which are either close to lease expiry or -- and some are a bit further out, but they're sort of pending expiries in the next few years. With Cairns, so I think we've mentioned previously, we do have a short term lease in place with the Queensland government for that to be a center for playing netball and basketball. So pre-Christmas, the women's netball league played a number of games there. I think at that stage because of COVID the whole league had moved to Queensland. So there were quite a few netball games played there. And since Christmas, the Cairns Taipans have been playing their basketball games there. And if you go back to Slide 17, we've just included a photograph there of the game that was played at the site from the 23rd of January. So it's actually come up pretty well as a basketball and netball center for the moment, but we are still looking for a longer-term solution for that property. And we think the best use of it is as a multi-tenant industrial development. So we are continuing discussions with a number of potential tenants for that once that property becomes available again. Belmont North is leased to Bunnings until March. We're currently in the process of rezoning that property, and we expect to get an outcome on that in -- over the next few months, and that will then sort of, I guess, direct us in terms of what we do with that property next. Port Kennedy, which I already spoken about, that lease expires in May. So we're currently looking at redevelopment options for that property. At this stage, it's probably -- large format retail is probably the most likely outcome there. Mindarie is leased to Bunnings until September. And you might recall, we did go through a rezoning of that property and we received a positive outcome on that a year-or-so ago. We have -- on the back of that, we have entered into a conditional contract to sell the property, and that will settle in July if the remaining condition is satisfied. And we won't know the outcome of that probably until about June, and we'll talk more about that then. Albany is leased to Bunnings until October 2024. And we are continuing to sort of work on longer-term redevelopment divestment options for that property. And that's similar to Northland. That's leased to Bunnings until August 2025. And there's a range of, given its location right next to the Northland Shopping Centre and in a pretty strong precinct in Preston, we are looking at a range of options for that property, and that may also include rezoning. If we go to Slide 24, we just summarized our current debt facilities, which currently include 3 bank facilities and 2 bond issues. As I mentioned earlier, the cost of debt at the moment is just a bit over 3%. Since the end of the period, Westpac has extended its -- that facility by a further year. So the next facility that comes up for us for refinancing is a bond issue in May next year, so we'll be working on that well ahead of time in terms of how best to refinance it. Slide 25 just shows our current debt maturity profile. And Slide 26 shows our current hedge profile. So if we go to Slide 28, the last slide, just in terms of outlook for the rest -- or for the remainder of this year. Look, we feel we remain fairly well positioned as of the moment, particularly in this sort of COVID environment. And that's on the back of what I said earlier in terms of where we get our income from. And the significant majority of it is from Bunnings and other large format retailers. And as far as we're aware, they're all continuing to trade well. There has been a couple of update, market updates in the last week or so, which has continued to confirm that. So we would expect that to continue to be the case unless there's some significant change at a sort of macro level. At this point in time, we don't expect much change in demand for Bunnings warehouse properties. I mean as you could see from the earlier valuations and earlier transaction outcomes, the market has continued to be quite strong. And there's certainly -- at the moment, there's no real reason to think that, that will change significantly in the short term. Our primary focus for the remainder of the financial year is on our existing properties, and that is in terms of filling any vacancies in the portfolio, progressing store upgrades, which we do have a few underway at the moment; continuing to extend leases with Bunnings and also completing outstanding market rent reviews. That being said, we are always on the lookout for other longer-term investment opportunities, which we think can add value to BWP and that process doesn't stop. Finally, for the full year, we've -- as we indicated at the start of this financial year, we expect our full year distribution to be similar to that paid for the year ended 30th of June 2020. And to the extent that we need to, some capital profits will be used to support the distribution. And I mean, that being said, I guess, in saying that we're assuming the environment that we're currently in stays the same for the balance of the year. If, for some reason, there's some significant change in that environment, particularly due to COVID, we would need to reconsider that. But as things stand at the moment, that's our expectation. So that's all I'd like to say at this stage. So I'll hand back to the conference organizer, and we can answer any questions that you have.

[Operator Instructions] Our first question in queue is from Adrian Dark from Citi.

Just in relation to the core portfolio, if I could, please. I think it's gone from 68 properties 6 months ago to 64 today. Could you just confirm for me which properties have come out of that, please? And if you haven't already given an update on those 4, if you could give us a bit of color, please.

Andrew, do you want to talk to that?

Yes, sure. Adrian, I'm just a -- just to look at -- to see exactly what those properties are. Maybe you could ask your second question, and I'll come back to this one.

Michael, I think you mentioned a management fee waiver, fairly modest in scale, but it would be good to understand that a little better, if we could, please?

Yes, sure. Look, the Board -- I guess, our management fee, as you know, is [ 0.55% ]. And it's a straight fee, there aren't any other incentives or anything with it. The Board from time to time does waive components of it. And in this particular situation because there'd been an uplift in the portfolio, largely driven by market conditions, the Board thought it was appropriate that the management fee didn't necessarily go up because of that, and that it should sort of remain stable given the driver or the otherwise driver of the management fee increase. And we have done that from time to time before, when we felt that the management fee was increasing through factors that weren't necessarily in our control.

Okay. So is it right to think of that as primarily a cap rate rather an income move and that's the distinction?

Yes.

Yes. Okay. That's helpful. And then perhaps a slightly high-level question. We've obviously had a little bit of a time out to digest the likely impact of COVID. Can you talk about your perception of its impact on Bunnings Group's space requirement, the propensity to renew at BWP's properties and potentially the shift in the likely alternate use at those properties, please?

Yes, sure. Adrian, I don't think it's changed in relation to what drives Bunnings to move from stores. I don't think COVID has -- as far as I know, it hasn't changed their view. I mean, certainly, the -- most parts of Australia, they have continued to trade through COVID. And as far as I know in Perth this week, Bunnings is still open and it's because it's considered an essential service in WA. So -- and while there has been an uplift in online for Bunnings, it still represents a small percentage of sales. And I mean, certainly, in Melbourne, when the bigger shutdown happened, Bunnings was able to continue to service trade store -- trade customers at stores, but not retail customers, and it was drive and collect. But what we heard during that period was that sales were still quite strong. So I think it still comes back to the way Bunnings looks at things. I mean it looks at the catchment area and how best to serve that catchment area, and it is different, in different parts of Australia or have a different view in newer housing areas that are being developed to what it will have in an in-city area. And it does sort of change and evolve. And I suppose, Port Kennedy is sort of an example of that, where they originally had stores spaced out. So there was sort of Rockingham, Port Kennedy and then Mandurah. And obviously, it keeps going after that. But -- and then they built a new Bunnings store, and they also moved into one in Baldivis. So it sort of changed how they've serviced the broader catchment and that's sort of resulting in that change. And so that one did come as a bit of a surprise to us. But other than that, I'm not sure anything significantly has changed. It's very much catchment area-specific and it's also land availability-specific as it's always been.

Okay. And any change in the event that they were to vacate more likely with alternate use as you said?

You mean how we repurpose them. Look, I think that's evolving for sure. I mean we're with -- and I think we might have mentioned this last time, but we're increasingly starting to see interest from medical in some of the properties. And I guess 2 or 3 years ago that wasn't so much of the case. I mean other things like entertainment -- I mean, there -- we still get inquiry for last-mile DCs, and we're obviously interested in things like that, but we do find some of those things, they either fit the purpose or they don't. It's very specific. So you can't sort of necessarily rely on any one of those outcomes. But I think overall, we're seeing the alternative uses evolve. And we still -- we remain -- getting fairly strong inquiry from large format retail. And all through the last 12 months, I mean, I guess, at times, we're probably a little bit surprised by some of the inquiry. But I guess, as they should, retailers are taking a long-term view. Andrew, can you answer that first question?

Yes. Adrian, I've got 3 additional properties, not 4. The 3 I've got is Port Kennedy, Wagga Wagga and Hervey Bay.

Our next telephone question is from Richard Jones from JPMorgan.

A couple of questions. So I know how the lease structures work in terms of market rent reviews being based off comparable rents. Just wondering how the strength in Bunnings trading is reflected in market rents. I mean I understand it largely isn't. But given how well that retail is trading, the market rent reviews has obviously not been moving in line with the growth in sales that they've been generating. So just interested in your thoughts on that.

Andrew, do you want to talk to that?

Yes. I mean, Richard, one of the leases that Bunnings has is related to turnover. So there's no percentage rent, and there's no requirement for them to provide sales figures to any landlords. I haven't seen one lease in Australia that they have to provide sales figures for. I guess when doing these market rent reviews, you'll notice that the great majority of the market rent reviews that have been resolved actually predate COVID. There's only actually one that's post-COVID. So for all of these ones, other than Northland, the valuer has got to disregard the fact that COVID has existed or ever existed.

So you...

If you have a look at all the market rent reviews on Slide 9, you'll see all but one are pre-2020 days.

Yes. Sorry. My question just is, is there ability for you guys to leverage the fact that your tenor is [ trading its head off in your run ]?

It will be difficult to do that given the leases talk about disregarding the goodwill of the business and the fact that there's no sales figures are provided on an individual basis for market rent reviews.

Okay. Yes. Okay. Now just a further question, sorry. In relation to just, I guess, in light of what happened with Port Kennedy and the unexpected departure and significant devaluation, so just wondering if you could walk through the valuation assumptions on the alternate use of properties around what they are assuming around Bunnings renewing or exiting? And perhaps you could throw Hervey Bay into that discussion as well.

Andrew, you may also talk to that one as well.

Yes, sure. So -- and it's going to be very site-specific, and it's going to be based on whether or not it's in the metropolitan area or a regional area, what the underlying zoning allows you to do at a specific property. And that's the main basis of the valuers forming a view on their rental and cap rates. So if we have a look at Hervey Bays as an example, the highest and best alternate use for the Hervey Bay property is for large-format retail. So the valuer will look at it from that perspective. They will do an analysis of what net rental that they think you can get from doing that. They'll allow for capital costs in repositioning the building. And they'll also provide for letting up time period, letting up fees and the like to actually get to the fully completed repurpose building. So yes, Hervey Bay is an example of a large-format conversion. In other parts, it can be different. In relation to Port Kennedy, it's in a peripheral metropolitan area. It's a very secondary location, I would call like a service commercial sort of area. And the alternate highest and best use, albeit it's large-format retail, it's the lower end of large-format retail that doesn't pay as much rental as say you would get at Hervey Bay. And it's hard to kind of rationalize that given Hervey Bay's original location and Port Kennedy is in a metropolitan location, but the Port Kennedy location is far an inferior one, I would say, in terms of our portfolio of assets.

But the valuation assumptions of all those alternate use properties the base case is that Bunnings will depart on expiries. Is that correct?

No. Only if the valuer is aware that -- and if BWP is aware that Bunnings has lodged a DA on a site around the corner, up the road and the tenancy may be at risk of Bunnings not exercising the option at the next lease expiry day. So -- and it's the -- every valuer takes a view based on all the information that they can gain for each particular valuation that they do. So one, you might need to evaluate and look at the same property and take a different view or they may have -- they may apply a different probability that Bunnings may leave.