Ladies and gentlemen, thank you for holding, and welcome to the BWP Trust Full Year Results Briefing. Your lines will be muted during the briefing, however, you will have an opportunity to ask questions immediately afterwards, and instructions will be provided on how to do this at that time. I would now like to hand the call over to Managing Director of BWP Trust, Mr. Mark Scatena. Please go ahead.
Thank you, and good morning, everyone, and thanks for joining us. My name's Mark Scatena, the Managing Director of BWP Management Limited, and I'm joining you from Perth. With me today is Andrew Ross, the Trust's Head of Property, and David Hawkins, the Trust's Head of Finance. Today, we're pleased to announce BWP Trust's full year results for the year ending 30 June 2024. The trust has released to the ASX this morning, its full year results announcement, annual report, and investor briefing presentation. This morning, I will go through the presentation before we take questions. Turning to slide three. To commence today, we acknowledge the traditional owners of country throughout Australia, and their continuing connection to lands and waterways upon which we depend. We pay our respects to their elders, past and present. Turning to slide six, and highlights of the year.
The year saw increased momentum across the portfolio, supported by acquisition, asset expansion and repurposing, and renewal activity. In optimizing the portfolio, the trust recorded strong like-for-like rental growth of 4.2%. Five Bunnings market rent reviews were completed, achieving a 4.2% average increase, and Bunnings exercised all lease options expiring during the year. It also completed the repurposing of Hervey Bay. In support of profitable growth, during the year, we completed the acquisition of Newmark Property REIT. two properties were acquired, adjoining existing BWP-owned Bunnings warehouses. Two Bunnings upgrades were completed, and we achieved agreement to extend the lease at Bunnings in Scoresby. Portfolio renewal saw the trust complete three divestments of non-core assets, the progression of the sale of a further non-core property, and the debt acquired in the NPR acquisition was successfully refinanced. Turning to slide seven, and key portfolio metrics.
Whilst I won't cover off on all the key metrics here, I'll touch on a couple of highlights, including total income increasing 10.3% to AUD 174.5 million, 10.3% above last year. Net Tangible Assets at the balance date of AUD 3.79 per unit, which compares to AUD 3.75 per unit at 30 June 2023. Portfolio leasing increasing to 99.1%, and the Weighted Average Lease Expiry, or WALE, increasing to 3.8 years. Turning to slides nine and 10 on financial performance. Whilst I won't spend time on slides nine and 10, they provide an overview of financial performance for the year, with key metrics focused on income, expenses, portfolio valuation, distributions, investments, and cash generation, and capital structure.
Two important callouts from Slide nine include: our net profit for the year of AUD 180.2 million, which included AUD 61 million in net unrealized gains in the fair value of investment properties and derivatives, comparing to a profit of AUD 36.7 million last year. A final distribution of AUD 9.27 per ordinary unit has been declared and will be made on 28th August 2024, with a final distribution, taking the total distributions for the year to AUD 18.29 per unit. Turning to Slide 12, the strategic framework that guides our areas of focus.
In delivering BWP's objectives of providing unit holders a secure and growing income stream and long-term capital growth, the group's key areas of focus align to three strategic pillars of portfolio optimization, profitable growth, and portfolio renewal. Portfolio optimization focuses on optimizing and leveraging the existing network while managing asset repurposing requirements. Profitable growth seeks to expand the core portfolio and assess adjacent growth segments and addressable markets where feasible. Portfolio renewal focuses on active value creation through capital recycling and reinvestment in growth initiatives to complement the core portfolio while maintaining a strong and flexible balance sheet. Importantly, our supporting principles of operating excellence, efficient capital structure, and effective asset management underpin these strategic pillars.
Our enablers of commercial discipline, capital allocation and access, sustainability, and active and effective collaboration, in addition to our values of being respectful, responsible, resourceful, and responsive, reflect the behaviors and ways of working that guide our business approach in the areas we invest, the drivers of returns, and how we create value. Turning to Slide 14. Excluding rental income from properties acquired, sold, upgraded, or vacated and released during or since the previous corresponding period, rental income increased by approximately 4.2% for the year. Looking forward, for the 2025 financial year, CPI reviews will apply to 35% of the base rents, with leases subject to a market rent review comprising 12%, and a balance of 53% reviewed to fixed increases of 2%-4%. Turning to market rent review outcomes on Slide 15.
Market rent reviews on five Bunnings warehouses were finalized during the year, with rents increasing on average 4.4%. While above the three-year average of 0.7%, we remain of the view that overall, the portfolio rent is broadly at market. For the 2025 financial year, eight market rent reviews are scheduled, which are in addition to six unresolved reviews carried forward. Getting to Slide 16, and lease covenants. The trust lease covenant mix remained strong during the year, with Wesfarmers Group covenant coverage at 82.3% and national retailer coverage at 97.9% of rental income, respectively.
Turning to Slide 17, and capitalization rates. As evidenced in the capitalization rate chart, the year to 30 June 2024 continues the recent trends characterized by low transaction volumes, reflecting divergent buyer and seller, and seller pricing expectations. Of note with our NPR transaction, completed at an implied cap rate above recent market transactions. Turning to slide 18, and valuation summary. During the six months to 30 June 2024, the Trust's total property portfolio was revalued, with revaluations performed by independent valuers for eight properties. Over the year, 28 independent valuations were completed, including the NPR portfolio, representing 34% of the portfolio.
The Trust's weighted average capitalization rate for the aggregate portfolio at 30 June 2024 was 5.54%, up 16 basis points from June 2023, and up 1 basis point compared to December 2023. Importantly, at 30 June 2024, the average cap rate for the Bunnings warehouses within the portfolio was 5.33%. Finally, the NPR portfolio cap rate increased to 5.57% from 5.37% at 31 December 2023, which compares the implied acquisition cap rate of 5.85%. Turning to Slide 19 and independent valuations.
Income growth supported the eight basis point capitalization rate compression recorded across the independent valuations completed during the second half, largely driven by the increase in Lismore valuation post the completion of the Bunnings expansion. Turning to Slide 20 and core portfolio. The core portfolio represents those properties with stable long-term leases in place and excludes any property sold for sale, currently being repositioned, or where Bunnings has notified its intention to vacate. Importantly, this page demonstrates the improvement in the core portfolio over the past five years, reflected in the higher proportion of core properties, continued individual asset scale, high metropolitan location ratio, and improved rental growth and capitalization rates. Turning to Slide 21 and the lease expiry profile.
In the 2024 financial year, Bunnings exercised all five options expiring in the year, which also comprised a number of third options being exercised, taking the effective age of those leases to beyond 25 years. When we assess the probability of Bunnings exercising any upcoming expiry, we expect Bunnings' network decisions to be influenced by store location, physical store format, and lease structure, with Bunnings' potential to vacate often linked to availability of an alternate site, which includes consideration of planning approval timeframes. Importantly, our near-term expiry peak reflects the cycle length for the initial terms of historic transfer portfolio acquisitions. With these upcoming expiries supported by an improved core portfolio and option exercising history. In addition, these near-term expiries are weighted towards existing or current Bunnings store formats and comprise largely first and second options.
When coupled with our assessment of those sites' respective locations, warehouse formats, and lease structures, and there being at most 2.3 years remaining to notify for the FY 2027 lease expiry cohort, these afford confidence that these upcoming expiries have a good probability of being exercised. Turning to Slide 22. This chart shows the Trust's near-term lease expiry and the status of these leases expiring in each financial year. Importantly, for our FY 2025 lease expiries, these options require three months' notice, with all options expiring by the end of this calendar year. For our leases expiring in FY 2026 and FY 2027, whose options require 6-12 months' notice, nine of 19 FY 2026 options, for which we are yet to be notified by Bunnings, expire before 30 June 2025.
Finally, and as we've mentioned previously, the end of an option period is not necessarily a good indicator that a tenant intends leaving a site, as finding alternative and suitable location takes time and diligent planning. As we can see on Slide 23, as it relates to our own experiences in completing major repurposing and developing projects, this process often takes beyond 2.5 years. Turning to Slides 23 and 24. We were pleased in June 2024 to complete the AUD 22.2 million repurposing of Hervey Bay, with the property fully tenanted by BCF, Rebel, Supercheap Auto, and Amart Furniture, with net annual income post-completion estimated to be AUD 2 million. Hervey Bay marks the fivith repurposing we've completed, where, over these projects, the Trust has developed a capability across feasibility assessment, planning approval, leasing, and construction.
As experienced at Hervey Bay, repurposing activities require diligent project and construction management, where from concept to closeout, the project duration can be upwards of 2.5 years. So whether it is BWP repurposing or redeveloping a vacated warehouse or a key tenant relocating to an alternate site, these timeframes can therefore be very long, with a current headwind of high construction costs affording another hurdle to repurposing or relocation. Turning to slides 26 and 27. We were delighted to successfully complete the NPR acquisition in late June. The NPR transaction comprised a highly complementary portfolio of assets with similar tenant profiles. The BWPM team, led by David and Andrew, has worked tirelessly since September last year to effect the transaction, concluding in the delisting of NPR, its compulsory acquisition, and the refinancing of the NPR debt.
This small team has demonstrated its ability to manage a significant, creative, and complex transaction in NPR and to also manage increased core portfolio activity. BWP's strong capital position has been maintained post-transaction, with pro forma gearing remaining at the lower end of BWP's target range, affording continued financial flexibility. Now turning to Slide 28 and value-adding acquisitions. As previously communicated, in September 2023, BWP acquired the Southport Showrooms in Queensland and the Broadmeadows Homemaker Centre in Victoria. Both properties adjoin BWP-owned Bunnings warehouses, and together represent a weighted average initial yield of 6.8%. These sites afford potential options for Bunnings' expansion over time, and also extend retail envelopes and gross lettable area to enable additional income generation. Importantly, development approval for large format retail and pad site development was secured in July 2024 for Broadmeadows.
Turning to slides 29 and 30 related to Bunnings upgrades. Both the Lismore and Coburg Bunnings Warehouse upgrades were completed in June 2024, with a completion of the Dubbo expansion expected late in financial year 2025. Also, in December 2023, the Trust reached an agreement with Bunnings to extend the lease at Scoresby, Victoria, with stay-in-business works expected to be completed late in financial year 2025. Turning to slide 31 and alternate use properties. The Trust continues to make progress in the reduced number of repurposing activities in stores vacated by Bunnings. Of note, are the current sales process for Port Kennedy, development application lodgements and leasing campaigns advanced for Noarlunga and Fountain Gate, and in Geraldton, where Bunnings has recently advised of its intention to relocate to a new site.
Turning to Slide 33 and portfolio renewal and divestments. In addition to the previously disclosed divestments of Wollongong and Albany, in May, BWP completed the sale for AUD 20.5 million of its Belmont North, New South Wales property, which had previously been occupied by Bunnings. The Trust pursued a number of development options with an ultimate sale to a third party for a full line supermarket development, yielding the best outcome for unit holders. These three divestments achieved an aggregate realized internal rate of return of 11.9%. Turning to Slide 35 on debt. The weighted average cost of debt for the year was 4.4%, compared to 3.6% for the previous year, reflecting the higher interest rate environment.
The average level of borrowings was 24.2% higher than the previous year, largely due to NPR debt acquired as part of the acquisition. As of 30 June 2024, the group's interest rate hedging cover was 56.3% of borrowings, with a weighted average term to maturity of hedging at 1.8 years. The group's gearing ratio at 30 June 2024 was 21.5%, which is at the lower end of the board's preferred range of 20%-30%. The lower gearing provides flexibility for the group to take advantage of investment opportunities to create long-term value when they arise.
Finally, BWP is committed to maintaining a strong investment grade rating for appropriate capital and balance sheet management, with current ratings comprising an A- stable rating by Standard & Poor's and an A3 negative rating from Moody's. Turning to Slide 36 and debt duration. Optimizing the funding of the group was a large focus during the year, where during the first half, BWP entered into a AUD 75 million, seven-year institutional term loan, maturing in November 2030, to further extend and diversify BWP's sources of funding. In addition, in June 2024, BWP successfully completed the refinancing of NPR's AUD 275 million of secured debt facilities, which included increase in new facilities with existing BWP lenders and also the introduction of a new four-year facility with Bank of China, maturing in June 2028.
It's important to call out that our bank facilities with CBA and Westpac can be extended a further year, each year, subject to agreement. Now turning to slides 38 and 39 on outlook. In delivering BWP's strategic agenda of portfolio optimization, profitable growth, and portfolio renewal, BWP's primary focus areas for the 2025 financial year include progressing the repurposing of ex-Bunnings properties, filling any vacancies, progressing and completing store upgrades, extending existing leases with Bunnings through the exercise of options, completing market rent reviews, and the continued rollout of energy efficiency improvements at group properties.
BWP will also be active in assessing and actioning opportunities to grow the portfolio that create value, with this activity focused on reinvesting in a core retail portfolio to support tenant optimization plans, acquiring accretively to grow the core portfolio and partnering with tenants to potentially, over time, participate in adjacent parts of the retail value chain. In renewing the portfolio, the group will recycle actively by divesting non-core assets and reinvesting in growth initiatives to complement its core portfolio while maintaining a strong to flexible balance sheet. The quality of the group's property investment portfolio, with its large prominently located sites with good accessibility and adjacency to other retail and community facilities, means that these are expected to continue to be preferred locations for retailing or provide potential longer term alternative uses.
In this context, BWP remains well-positioned with rental income comprising largely the Wesfarmers Group, other national large format retail, automotive, and self-storage businesses, and Commonwealth and Queensland governments. In addition, the demand for Bunnings warehouse properties is expected to remain stable in the near term, given the continued strength of the Bunnings business, with Bunnings' resilient operating model and leading customer value proposition across consumer and commercial customers continue to support its profitable growth through the cycle.
Finally, and subject to no major disruption of the Australian economy or material change in market conditions, BWP expects the distribution per unit for the year ending 30 June 2025 to be approximately 2% higher than the prior year. That concludes our prepared remarks, and I'll now hand back to the moderator to facilitate any questions. Where myself, Andrew Ross, the Trust Head of Property, and David Hawkins, the Trust Head of Finance, are available.
Thank you. We will now begin the question and answer session. 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. Your first question comes from Howard Penny with Citi. Please ask your question.
Thank you very much, and congratulations on a successful year. Just on the NPR transaction, now that the dust is settled on that, are there any positive or negative surprises you're seeing in the transaction, or even some potential repurposing upside that you could be working on over the next few years?
Thanks, Howard. Mark here. I'll just comment on perhaps the transaction quickly, and then Andrew might just touch on the portfolio. No, we haven't found any surprises. I think, to the credit of Newmark, and the REIT team, you know, the due diligence process was very comprehensive, so we were, you know, that process was really effective for us. And, most certainly as we've learned a little more about the underlying structures, I think they were consistent with what we saw in due diligence. So the trust structures, the additional area to sell, that were all as we had planned.
That's not to say it hasn't created some more work in the short term how it is to stick with an integration for David and Andrew and the teams, but we were delighted to do that work. Andrew, anything on the portfolio?
Yeah. Howard, there's some minor potential of expansion at one or two of the sites in the NPR portfolio that we identified during the DD process. But, it's not an immediate short-term thing, but it's definitely a medium to long-term option that we would need to engage with Bunnings .
Great. Thank you very much. And just in terms of activity, post a busy year with this transaction and others, can we expect the momentum on corporate activity and transactions to continue into this year?
Howard, I think you probably know the answer. We were quite overt in the outlook. You know, we're looking like we always have. I don't think that momentum's greater or less than what it's been historically. You know, the time of the cycle is important, but the team's very keen to continue to evaluate our portfolio, but most certainly evaluate other portfolios out there. So I don't think FY 2025 is necessarily important for the future at all in terms of an indicator. But, we most certainly continue to evaluate opportunities, as I said, and endeavor to deliver that strategic agenda, which is, you know, focused on optimizing what we've got and renewing and also growing where it makes sense to do so. So we're very keen to do that, but, of course, capital discipline and accretive economics are what's important, Howard.
Thank you very much. That's all from me, and congrats once again.
Thank you. Your next question comes from Lou Pirenc with Jarden. Please ask your question.
Hey, good morning, Mark and team. Quick one for me. In your guidance of the 2%, are you taking any assumptions around whether there's gonna be more or less income released from capital, like you've done in previous years?
Oh, thanks. Thanks, Lou. Yes. So that distribution, again, a number of variables that that go to any result and the composition of the distribution, but our expectation is that, you know, the capital profit release will be less than in 2024.
Great, thank you. Then, I mean, follow-up question: I mean, clearly you're starting to make good progress with asset recycling, selling non-core and buying good assets. What's the outlook there? Or how many transactions do you kind of see on a monthly or quarterly basis? Is that picking up? Is it similar to previously? Is it lower than in prior years?
Lou, that's a really hard question to answer, and it's really a function of what's coming to market. Look, over the last six months, there hasn't been much in our sort of wheelhouse other than the NPR portfolio that we've seen come to market. There are two large format retail centers on the market at the moment, or just about to be coming to market that we'll have a look at. And so, yeah, it's a function of what comes to market, really.
Great. Thank you.
Thank you. Your next question comes from Lauren Berry with Morgan Stanley. Please ask your question.
Thanks. Morning, guys. Just looking at the big number of expiries coming through in FY 2026 and 2027, have there been any, I guess, discussions around doing any kind of portfolio deal to smooth out that expiry profile a little bit more or, you know, bring some lease deals forward?
Hi, Lauren. Thanks for the question. No, no, I mean, I think hopefully in the pack we've given a little bit more color on the composition of that forward lease expiry profile. The nature of those options, I think we've guided to, and also some commentary as to how we expect Bunnings to make decisions on its portfolio moving forward and some of the relevant timeframes that relate to that. So I think we've given a little bit more context. No, we haven't had any tranche transactions or tranche discussions of late. We're of course in active dialogue with Bunnings all the time in regards to lease expiries, but not in that regard.
Great. Thank you. And the Scoresby update, upgrade, can you give us some color on the CapEx and funding rates for that project, please?
Yeah. So, Lauren, Andrew here. That CapEx is all about the car park works. And we've had some underlying structural problems in that car park, like clay, clay kind of soils, and it's really moved the car park and, you know, impacted it such that there's health and safety issues there that we've identified, and so we're gonna fix up those. There is no funding rate. We consider that to be staying business capital expenditure. We're not touching the building, expanding the building footprint, or spending any further money on the inside of the building.
Got it. In terms of any potential starts on upgrades for this year, you know, the previous starts you've been doing at a funding rate of 4%, which doesn't quite cover the current cost of debt in this environment. How are you thinking about pricing these expansions going forward?
Thanks, Lauren. Essentially, that funding rate is guided by the underlying lease, which typically has a view on our cost of capital and a suitable premium to that. So I think that's how I would guide you in regards to what that funding rate is. Of course, when we discuss an expansion, other items in the lease structure can also move. So clearly we're balancing a number of lease elements at the time of that negotiation. But we would expect that funding rate to be higher than the funding rate we've achieved. And I think Andrew, in the past, has talked to circumstances that are very different for each asset. The alternatives for those sites also are very different for some of those regional assets, which do also guide the funding rate.
Great. Thank you.
Thank you. Your next question comes from Richard Jones with JP Morgan. Please ask your question.
Oh, thanks. Just a follow-up to Lauren's two questions there. Just, is there any broader discussion you are having with Bunnings in relation to CapEx programs in individual assets or a bunch of assets?
Yes. So I think one thing we're endeavoring to do, and that is, and I think, you know, we called this out in our annual report, and that is to really focus on our lessee relationships. So by that, I think what we mean is sharing more information, more frequently, to the extent it's obviously in both of our commercial interests to do so. So yes, we are looking to have more discussions with Bunnings at a more frequent basis, to really support their network optimization plans. And, you know, we're very much of the view that Bunnings is a very talented retailer, will invest in its core, in its existing portfolio hard, and, you know, as they expand ranges and offers, we would really like to support them on that.
So, yes, you know, we will be having more discussions with them to the extent they convert into actual delivery on the ground. That's all, that's for the individual negotiation to conclude. But, yes, we most certainly want to partner more with Bunnings to support their expansion activity.
Okay, excellent. And the two adjacent acquisitions you made, are they in response to discussion with the tenant?
No, no, Richard. They, they were independent of any discussions with them. We just saw some kind of marriage value between in owning that real estate. You know, Southport Showrooms had a restrictive covenant over the entire car park, which prevented us from expanding the Bunnings Warehouse. And so now that we, we've purchased that site, it's, it's, you know, null and void for our purposes, and we don't need to get our own consent to do that. On the flip side, the Broadmeadows acquisition had restrictive covenants over the land that we bought, but it was to the favor of the Bunnings Warehouse site, and that's what we hold. So, similarly, we're able to do a development on that additional land without getting our own consent. If that makes sense.
Yes, it does. Thank you.
Andrew. Cheers.
Thank you. There are no further questions at this time. I'll now hand back to Mark Scatena for closing remarks.
Thanks, everyone, for attending today's results briefing. We really look forward to seeing and speaking to many of you over the next few days and the coming weeks. Thank you for taking the time to dial in today, and have a great day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.