Thank you for standing by. Welcome to the BWP Trust half-year results investor briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Michael Wedgwood, Managing Director. Please go ahead.
Good morning, everybody, thank you for dialing into our half year results webcast. Firstly, I'd like to acknowledge that this meeting is being held on the traditional lands of the Whadjuk people of the Noongar nation. I'd like to pay my respects to elders past, present, and emerging. BWP Trust acknowledges the traditional owners of country throughout Australia. We've released to the ASX this morning our half year results announcement, our half year report, and the presentation slides, which we'll go through now before taking questions. Andrew Ross, our Head of Property, and David Hawkins, our Head of Finance, are also on the call and will be available to answer any specific questions at the end of the presentation. I'll now turn to slide 6, which summarizes the half year outcomes.
Total income for the half year ended 31st of December 2022 was AUD 78.6 million, about 4% ahead of the prior comparable period. Portfolio rental growth represented the significant majority of the increase, with the income from completed developments and loss of income from vacancies largely offsetting each other. The distributable profit for the half year was about AUD 60 million, and that was the same as the prior corresponding period. It included approximately AUD 600,000 in capital profits, and that was compared to AUD 1.5 million for that previous corresponding period. As we've discussed previously, on the basis that we pay out 100% of our distributable profit, we are utilizing realized capital profits to maintain the distribution, you know, while we are repositioning some ex-Bunnings properties.
The half year distribution is a bit over AUD 0.09 per unit, and that's in line with the prior corresponding period. NTA increased a bit over 5% from the previous corresponding period, but only about 2% in the last six months with any more recent changes in property valuations mainly linked to increases in rent. The trust property portfolio generated 3.9% like-for-like rental growth on an annualized basis, and that's reflecting the increased quarterly CPI over the 12-month period. The portfolio capitalization rate was 5.05% at December 31, and that was similar to what we reported in June 2022 at 5.04%. There were no publicly disclosed sales of Bunnings Warehouse properties during the last half.
As such, there's been no market evidence to support any material changes in valuations for Bunnings Warehouse properties. The portfolio WALE at 31st of December 2022 was 3.6 years, and that, as we've discussed previously, reflects that a number of properties in the portfolio are in the back half of an initial term or Bunnings has exercised a 5 or 6-year option. As we've said previously, it doesn't itself really reflect the underlying risk of vacancies in the portfolio, given the nature of a Bunnings lease and the nature of how Bunnings determines where it wants to be located. 8 market rent reviews were completed during the period, and 7 of those were Bunnings Warehouse properties. Options on 7 Bunnings Warehouse properties were also exercised during the period.
At 31st of December, there were 73 properties in the portfolio with 97.5% occupancy. Gearing was about 15% and cost of debt 3.7% at the 31st of December. At the end of the period, our hedge cover was about 53%. Twelve months or so ago, our hedging dropped to about the current level as a result of the maturity of a fixed rate bond issue. At that time, we were concerned about putting in place more hedging because of the steepness of the yield curve. We have been back and reviewed that decision and, I guess we've confirmed to ourselves at least that there would have been no benefit from putting in place additional hedging at that time.
With a flatter yield curve now, there may be better opportunities for hedging than in the recent past and I guess we continue to watch that and watch what's going on in the broader market. Turning now to slide eight, we just provide the six months summary of key numbers and can take any questions on that. I'll now turn to slide 10. We show on that slide the outcomes of the seven Bunnings market rent reviews, which were finalized. The overall outcome was flat. The Hawthorn, Coburg, and Pakenham market rent reviews were determined by an independent valuer. You can see there was some variation in those outcomes. In terms of Hawthorn, we were pretty happy with that outcome because that is the highest rent per square meter in our portfolio.
Obviously, it's not straightforward in terms of maintaining that market rent, given how our market rent reviews occur on Bunnings properties. The other reviews on the slide were all negotiated and were based on available market evidence. I mean, as we've said before, we don't look at individual property outcomes as an indicator of the rent for the whole portfolio, as there's always a number of variations at a local level, based on the evidence that's available, and you can see that on the slide. We do, however, remain of the view that the overall portfolio rent is broadly at market. This has been consistent for the last few reporting periods, and we're sort of maintaining or internally, we're maintaining that view that that's appropriate.
Turning to slide 11, we've shown the graph that we normally show with cap rate trends for the sale of Bunnings stores for a number of years. As has shown in the past, that it's shown a fairly consistent tightening of cap rates, certainly over the timeframe of the chart. As I've mentioned previously, there has been no recent publicly announced transaction, the last being a smaller Bunnings property at Mount Isa, which sold on a cap rate of 4.29%. We're not exactly sure what's gonna happen to cap rates of Bunnings properties moving forward. You know, I guess we're seeing different things occurring across different property sectors.
In the case of Bunnings, we do expect it to take some time to adjust if it's going to. You know, it will require some transaction activity for there to be any material adjustment. We are hearing that there's still fairly strong interest from private investors in Bunnings Warehouse properties in the event that any do come to market. Turning now to slide 12, we show or a summary of the portfolio revaluation for the half year. As mentioned in the highlights, the portfolio cap rate hasn't really moved, although it remains lower than it was at December 2021 when the portfolio cap rate was 5.1%. There were 16 independent valuations during the 6 months period and 57 internal valuations.
Cap rates on 3 properties tightened, 61 remained the same, and on cap rates on 9 properties increased. Of the 9 properties where cap rates increased, 6 properties are in the process of being repositioned, or Bunnings has indicated that it's moving out at some stage. Rocklea in Brisbane was independently valued and had a 25 basis point adjustment. Townsville North and Noarlunga in South Australia, those cap rates were also adjusted by 25 basis points on the basis of independent valuations. 3 properties, the cap rates tightened were all independent valuations and that was Pakenham in Melbourne, Smithfield in Cairns, and Harrisdale in Perth. On slide 13, we've shown the results of those independent valuations by store.
I won't go through that on, but we can take questions if necessary. On slide 15, we've just shown, you know, what the I guess a summary of what we call our core portfolio. There's 65 properties in that core portfolio, and that just excludes any stores that are currently being repositioned or Bunnings has indicated that they're moving on from. Turning now to slide 16, that shows the weighted average lease expiry profile for the core portfolio, as we normally show. The next period when a number of properties will be getting to the end of their current lease terms is 2026. As we've said before, those spikes in expiries are due to, you know, historical portfolio acquisitions.
Look, as we've mentioned previously, in our view, the end of an option period for a Bunnings property is not a good indicator that Bunnings intends leaving a site. you know, one of the factors is it's not straightforward for Bunnings finding alternative locations. It takes a fair bit of time to build stores, we normally fairly well in advance, what's going on. Also, you know, the nature of a Bunnings lease is they will always be going into option periods, the longer they stay in a property. On slide 17 and 18, we've shown all the properties which will have lease expiries in the next three years.
I mean, I won't go through all of those properties, but we're certainly happy to take questions on any particular ones. We're not aware at this point of any properties on that list, or Bunnings hasn't made us aware of any properties on that list that it intends vacating from. You know, I guess that's what we know three years out at the moment. On slide 19, we show the details of a proposed upgrade of the Dubbo Bunnings Warehouse store. The terms of this upgrade were conditionally agreed early last year, Bunnings needed to get DA approval before the upgrade work could begin, which they now have. In thinking about, you know, when those terms were set, obviously that was a slightly different environment to what we're in now.
That being said, I would say, particularly in the case of Dubbo, we, you know, obviously undertook quite a bit of analysis before we agreed the terms of that upgrade. We looked at the alternative uses for the site in the event that Bunnings instead vacated the property. Given its regional location, in our view, what we've agreed to in terms of Bunnings staying at the property long term is certainly the best outcome for that. Or it's the best outcome for Bunnings and best outcome for BWP. There was vacant land next door, which, you know, we've acquired some of that in order for the store to be extended.
That makes the whole process of upgrading and extending the store simpler, and it also allows Bunnings to continue operating from the existing store without interruption while the extension is being built. Overall, it's, I think it's a good outcome for Bunnings and BWP. We'll turn now to slide 21. And we've just summarized on that slide the store or the properties that are currently being repositioned or will be in due course. Port Kennedy, we've talked about before, and we have a leasing campaign underway. You might notice that at the last reporting period, we had indicated that we were a bit over 80% pre-committed in terms of leasing.
That's actually for the moment dropped back to 50, although we are talking to several parties in terms of taking up that additional space. We had a tenant in place which required going to Council to get some I guess, amendments made from a zoning perspective to allow that customer to operate from our property, and the Council has turned that down. We've since gone back to Council. We have a DA in place for more standard large format retail. You know, that's what we're progressing to to have in place. It, you know, we are fairly comfortable where that's at at the moment and we're getting good inquiry from large format retail in terms of taking up that space.
Belmont North, I think we've indicated previously that property we've had rezoned for to be able to accommodate a supermarket and other retail. We are continuing discussions on that property. I would say for the moment, construction costs are quite high, so we are looking at an alternative in terms of how we undertake the repositioning of that property, which we hope will lower the construction costs materially. We're working through that one at the moment. Hervey Bay, we've got development approval in place for large format retail. We've had very strong interest from some key national large format retailers for that site. You know, we're in pretty good shape.
We're currently just finalizing design and the construction cost of that property, and we expect to have all that in place next month. That property's in good shape. Wollongong's new to this list. Bunnings has three other properties in the sort of Wollongong catchment area. This property is located right in the center of Wollongong, just behind the CBD. Bunnings has opted to close this location, and I guess, rely on their customers going to the other properties in Wollongong. They'll be moved out and stop paying rent at the end of March. I mean, in terms of that particular property, it's very well located in the center of Wollongong.
It's close to railway stations. It's got quite flexible zoning. We're doing quite a bit of work at the moment in terms of the best outcome for that property to be repositioned. Obviously, you know, the large format retail, there's certainly very, very good potential for a large format retail outcome. We're also looking at other outcomes to see if there's any other value we can create from that site going forward. We're pretty comfortable at the moment in terms of what we can do with that property, and we should be able to move forward fairly quickly. Albany, there's been no change on that one since we last reported.
At the moment, Bunnings has a Tool Kit Depot operating from the site and we're still deciding what to do with that site longer term. Fountain Gate in Melbourne is leased to Bunnings until February 2025. We are aware that Bunnings has access to another site nearby. They haven't started construction, we're not quite sure, you know, exactly what's going to happen with that property over the next couple of years. Obviously, given there's a fairly high risk that they are going to move, you know, we're doing quite a lot of work in terms of the future use of that site. That precinct is a very, very strong commercial precinct. There's a Westfield shopping center across the road. There's also a lot of commercial behind our property.
Our property is very well located, you know, with good access and good visibility. Again, we're doing quite a bit of work to work out what is the best longer term outcome from that site. Northland, there's nothing new to report on that either. Bunnings is there until August 2025. Again, you know, on that property, we're looking at medium and longer term uses. I mean, that area is undergoing quite a bit of change. The council's, I think still working out how they want things to look over the long term. We continue to talk to the council in terms of zoning and, you know, what we may do with that property in the longer term.
The last one on that list is Wagga, and Bunnings is there until March 26th. They do have another property, which they haven't started construction on. In terms of our property, it's located in a very strong commercial precinct in Wagga. You know, we're fairly comfortable we can get a good outcome on that property as well. You know, we're just working through that. Turning now to slide 23, which just summarizes our debt facilities. I won't go through that. Slide 24 just, I guess, shows graphically our debt maturity profile, as we've shown in the past. Last slide, on 26. In terms of the outlook, from our perspective, operationally, you know, we're still pretty comfortable where we are.
I mean, we're 99% of our rental income is either from Bunnings or other large format retailers. Most, if not all of those retailers are still performing quite strongly. I mean, I guess none of us know exactly what's gonna transpire over the next year or so. I think most of our tenants remain in pretty good shape. When in terms of Bunnings Warehouse properties, you know, I guess transaction activity has dropped off, as I've indicated. You know, we think there's certainly a level of resilience, you know, in the ongoing valuations of Bunnings properties and ongoing demand for Bunnings properties if any come to market.
You know, I guess all those things are at the moment, a function of other things that we don't necessarily control. We show on the slide a summary of the rent reviews that are coming up in the second half and the proportion of those that are CPI linked. Our primary focus for the remainder of the year is principally on our existing properties. Obviously we're very focused on any actual or pending vacancies in the portfolio, store upgrades, extending leases, and any remaining market rent reviews that we've got outstanding. That being said, you know, we're very, I guess, focused on particularly if there's any disruption in the market, if there's any opportunities for us to grow the portfolio.
Look finally, I guess this is on the assumption or subject to there being no major disruption in the Australian economy, we would expect the distribution for the full year to be similar to that paid for the year ended June 30, 2022. As I mentioned earlier, we will if we need to, we'll use capital profits to support that distribution. You know, as I said before, the reason why we would be doing that is if there's any gaps in rental income due to the repositioning of properties or the timing around repositioning properties. On that note, I'll hand back to the conference organizer, Ashley, and we'll take any questions that you have.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Lou Pirenc with Jarden. Please go ahead.
Thank you. Good morning. We can start with cap rates. I'm a bit surprised you haven't really moved your cap rates up more. You've traditionally been quite conservative and haven't really been acquiring when cap rates were really low. Your cost of capital has gone up quite significantly, so I'm just curious to see why you guys haven't moved.
Yeah. Thanks, Lou Pirenc, for the question. I mean, I'll answer and if Andrew's got anything to add, he can say it as well. Look, you know, whether the rates are coming down or going up, I mean, we've over a long period of time sort of maintained the same basis on which we assess those things. You know, most of it is on the back of independent valuations and then applying the same methodology across our portfolio. I guess certainly as rates have come down, we've never necessarily been at the sharp end. We've been happy being fairly conservative. When you get to this point in the cycle, and there's no transaction activity for valuers to change their view, we don't necessarily have a basis to change our view.
I think Well, we take the view that we will remain consistent in our assessment of those valuations, you know, whether they're going up or down. We just happen to be at that point in the cycle. Andrew, do you wanna add anything to that?
The only extra thing that I'd like to add is if you have a look at the independent valuations, they're consistently stable as well. You know, 10 of those valuations by independent valuers were at the same cap rate as we've held in the books previously. They've moved some tighter and some just slightly above just for site-specific reasons.
Great. If I can just follow up on that. When you kind of look at, you know, you continue to look for opportunities to acquire assets, has your, I don't know, benchmark or your, you know, hurdle changed in the last, you know, 6 months in terms of what kind of yield or returns you would need to see to make this stack up?
Andrew, do you wanna talk to that?
Yeah. Look, well, in terms of the hurdle rates, I guess the cost of debt for us has gone up and we would be cognizant of that in terms of what sort of cap rate that we would be prepared to pay for an asset. You know, something, you know, at 5% was accretive to earnings 12 months ago, but not necessarily accretive to earnings now. It has impacted our view on cap rates that we would look to purchase property for.
Great. Then one more, if I may. Just specifically, you mentioned in the press release Lismore, you know, increasing the commitments in terms of expanding Lismore. What's the timing of this and what returns do you expect on that on the AUD 12.5 million CapEx?
The construction has just begun, it looks like it's either going to be November of this year, 2023, or into the early part of 2024.
In terms of yield on costs on that?
It remained the same at the previously agreed 4%.
Thank you.
Lou, I mean, Lismore is a bit like Dubbo, I guess, a regional location. As I mentioned in the presentation about the thinking about Dubbo, very similar at Lismore in that, I guess we look at it in an overall sense of saying, well, in terms of the property, is it better to have Bunnings there over the longer term, or is there some other use and some other potential to create more value? Alternatively, what would we do with the property in the event that Bunnings chooses not to stay there? All of that factors into our thinking, and Lismore was a bit like Dubbo was, the terms were agreed some time ago. I think they were before Dubbo, weren't they?
Oh, yeah.
Yeah, quite a bit before Dubbo. You know, that was obviously a different point in the market, but it's taken this amount of time for Bunnings to start construction.
Great. Thank you. I'll leave the telephone.
Your next question comes from Richard Jones with JP Morgan. Please go ahead.
Good morning, Michael. Just following on from Lou's question. Do you post completing those upgrades, do you consider selling both Dubbo and Lismore, given the limited kind of alternate use on aspiring?
Yeah, thanks for your question, Richard. Look, yeah. Yes. I mean, I suppose we, whether it's specifically those two properties or not, I mean, we will always think about the portfolio in terms of, you know, what value can or what, you know, what is the most value creating outcome for the trust? You know, for some, if it's selling, well, maybe that's the case. I mean, obviously we also consider what impact these things have on the portfolio in terms of income. You know, there's a number of considerations. Yeah, you know, it is certainly something we think about.
Okay. Just a couple more quick ones. Sorry, Michael. Can you remind us what proportion of income is uncapped, is linked to uncapped CPI?
Almost all of it. There's only one lease, I think it's the Hawthorn lease that's got a 7% cap on the CPI.
Richard, you're not talking about the split between fixed and CPI. You're just talking about uncapped CPI, aren't you?
Yeah. I mean, there's been a number of leases I saw that you've got a 2.5% capped CPI.
Oh, no. Look, the two upgrades of Lismore and Dubbo, when they're, you know, when they're in place, they will have it. No, no, well, other than what Andrew mentioned there's nothing else in the portfolio that has capped CPI.
Okay. Just in terms of Morley, it's no longer listed in the alternate use.
Yeah. Look, with Morley we have entered into a three-year lease on that property. We're signing the lease today, we hope so. I just can't provide exact details on that. Essentially the expected use of that property is still, you know, to reposition it. What we have done is taken a three-year lease and we're effectively getting the same rent that when Bunnings was there. It just gives us a little bit more time to come up with the right outcome on that property. Because it is it will require quite a bit of construction cost. Again, you know, we're just sort of working through that.
From our perspective, it's a very good outcome because we're generating good income from the site and we're just giving ourselves a bit more time to make sure we, you know, get the what's required in place for a good longer term development.
Okay. just finally, can you give us a rough CapEx and potential returns on the CapEx plan at Port Kennedy, Belmont North and Hervey Bay?
Do you?
Richard, we don't have a construction cost there, at the moment. We're going through a design development stage at this stage, and we've just got a builder on board on the basis of an early contractor involvement. At this point in time, we don't know exactly what the cost is going to be, but we'll know come June.
I mean, we in terms of sort of, I guess working through the higher construction costs, we certainly have sort of adjusted our approach to have the designers and builders working a lot closer together to actually take cost out of the construction. I mean, what we're seeing so far, we're quite comfortable, you know, that we're getting, you know, good outcomes with that approach. Obviously, we're having to make that work a bit harder given, you know, I don't... Even if construction costs stabilize, they're probably not gonna go down. You've got to find a way to make these things work on a, you know, in a higher construction environment, cost environment.
Andrew, sorry, was your answer in relation to Port Kennedy, Belmont, or Hervey Bay? Sorry.
Port Kennedy, that's what you asked.
Oh.
Oh, I asked that. Sorry. All three. Sorry.
Oh, sorry. Okay. Hervey Bay, we're expecting some tender pricing this week. We've had a builder on board there for three months now with our design team. We're expecting to get that this week. I can't tell you what that is at this point in time. In relation to Belmont, those numbers that we were given were significantly more than what we'd anticipated, and it was on the basis of demolishing the improvements and creating a brand new development. What we've done now, and because it's so much more, it's not even close to what would be feasible. We're now looking at repurposing the building, to incorporate tenants in there, like what we're doing at Hervey Bay and Port Kennedy.
Okay, thank you.
Your next question comes from Lauren Berry with Morgan Stanley. Please go ahead.
Morning, guys. Thanks for the presentation. Just to follow on a couple of those questions about CapEx. Belmont, could you just give us a sense of the % difference between what you originally thought the CapEx was gonna be and then what the quotes kind of came in at?
Andrew, do you wanna-
Sure. It's, I'm just doing the math in my head now. We're talking about 50% more.
Mm-hmm. Okay. Yeah. That's a big increase. Yeah.
Yeah. Lauren, I suppose the, I mean, the other, apart from the actual, you know, cost of the inputs, I suppose depending on locations, you're getting very different outcomes on construction costs because of, I guess, builders' access to subbies and all sorts of things. There's a lot of moving parts in it at the moment. I'm, you know, I'm not sure what other property owners are saying, but it that's been our experience. You know, you just have to work fairly hard to, you know, make sure you get good outcomes in this environment. It just takes a bit more time to work through it.
Yeah, sure. Just thinking forward over the next like six, 12, 18 months, how should we think about how much CapEx you're gonna be spending per half? Because you've obviously got Lismore and Dubbo, and then if some of those bigger, the large format retail repositioning comes in, maybe next year or the year after. How do we think about the progression of CapEx, please?
I would say, Lauren, that's a really hard question to answer. It's because, you know, for instance, Belmont North, that development may be delayed a few years because we haven't been able to get the pricing at the appropriate level to make it feasible for us to proceed with the development.
Okay. For now, really we should only be thinking about Lismore and Dubbo.
Yeah. Yeah, I think that's right.
Okay.
Yeah.
About AUD 25 million between the two, is that correct?
Yes. Yes.
Yeah. Okay. Cool. Just last one from me. You, you talked about the fact that there's really no supply on the market in terms of Bunnings tenanted properties being sold. Are you getting any approaches off market from private buyers or anyone looking to acquire Bunnings sites from you? Like, is there any demand there?
Not at the moment. I mean, over time, you do. I mean, not specifically right at the moment, no. I mean, that's probably partly because, you know, we've never necessarily been a seller of existing properties. I guess we're not an, you know, an automatic go-to in that regard.
Cool. Got it. Thanks, guys.
Your next question comes from Adrian Atkins with Morningstar. Please go ahead.
Michael, just on the Dubbo development, I just wanted to clarify first off, you said that the terms were agreed late last year, but did you mean late 2021 or late 2022?
Yeah, early 2022, Adrian. Yeah, sorry if I said late. Yeah, it was early 2022.
Okay, maybe I heard wrong. Anyway, I guess, you know, obviously higher inflation, interest rates, the deal now doesn't look so great. I'm just kinda trying to think going forward. Should we expect, future developments with Bunnings to be on significantly better terms? Or is it more just that BWP is in a, kinda a weak bargaining position, particularly in those regional areas?
look, it's a good question. I mean, certainly we, you know, we evaluate these things on the basis, you know, taking into account whatever the return and interest rate environment is. that's certainly our preference I mean, as I said earlier on these, in these two situations and, you know, particularly as regional properties, you know, you have to look at it, I guess as a whole of property outcome as opposed to, you know, the specific terms at the time. Certainly in both of those cases, you know, we're absolutely comfortable this is the right outcome.
you know, I think generally, and there's, I mean, there's plenty of other discussions going on on other properties where, you know, we would expect a very different return profile.
Okay, thanks.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Ed Day with MA Financial. Please go ahead.
Good morning, Michael. Just on the top 4 properties listed in the alternative use slide, I'm just wondering, have you got a feel for when these might become income producing again? Is it a, you know, 12-24 month prospect?
Uh-
looking slightly longer dated?
Yeah. I mean, Andrew, do you just wanna run through those at the moment?
Yeah. Look, Port Kennedy, I would say mid 2024. Belmont North, is more likely to be 2025. Hervey Bay, mid 2024. Wollongong depends on, which sort of development scheme we go with. I'd say, probably 2025.
the rest.
Thank you. Just the... Yeah. Yeah. Sorry, just on the market rent reviews. For those slightly older dated reviews, I think the Portland one was October 20, and Coburg was November. Is there a catch-up payment made this half? How does that work in terms of, you know, the period that has passed?
Yes, there is. I mean, we accrue, you know, in the period, while the market rent review's being negotiated, you know, I guess what we believe the outcome would be. Then, after the rent review's completed, yes, the, there is an actual adjustment, made by Bunnings and, you know.
Backdated.
Yeah.
to the market rent review date.
Yeah. Yeah. Yeah. If we get a better outcome or I guess in some cases a worse outcome than what we've been budgeting, that gets adjusted.
Yeah. Thank you.
There are no further questions at this time. I'll now hand the conference back to Mr. Wedgwood for closing remarks.
Okay. Well, thanks everybody for participating in this call. If you have any further questions or comments, happy to either get in touch or by email or call, and we'll address any further questions that you have. I'll end the call there. Thanks very much for participating.
That does conclude our conference for today. Thank you for participating. You may now disconnect.