I would now like to hand the conference over to Mr. Mark Scatena, Managing Director. Please go ahead.
Good morning, everyone, and thanks very much for joining us. My name is Mark Scatena. I'm the Managing Director of BWP Management Limited, and I'm joining you from Perth. With me today are Andrew Ross, our Head of Property, and David Hawkins, our Head of Finance. Today we've announced a transaction to internalize the management of BWP, to materially extend and reset BWP's leases with Bunnings, and for BWP and Bunnings to make capital investments into BWP's assets. I'll provide more detail on each aspect of the proposed transaction shortly. Since listing on the ASX in September 1998, BWP has remained committed to its original investment proposition, focusing on owning well-located properties leased to the highest quality tenants. For 27 years, BWP investors have enjoyed a secure, growing income stream and capital growth, underpinned by Bunnings as BWP's largest tenant.
Today's announcement marks a milestone moment in the history of BWP and seeks to build on this very strong foundation. BWP has released a number of documents to the ASX this morning, including an announcement outlining the proposed transaction, a meeting booklet which includes a prospectus, a notice of meeting, and an explanatory memorandum, an announcement relating to the unaudited June 30th , 2025 valuations, and an investor presentation, which I'll now step through. Following this presentation, we'll have time for questions. Now turning to slide three. To start 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, present, and emerging. Turning to slide four.
This morning, we announced that BWP Management Limited has entered into an implementation deed with Wesfarmers to enable a proposal to put to BWP unit holders comprising three components, collectively the proposed transaction. Firstly, internalisation. The internalisation will create an independent platform. It will allow BWP unit holders to enjoy a reduced cost of capital, enhance the opportunity for growth whilst being immediately accretive to distributions. Secondly, lease reset and extension. Bunnings has made a long-term commitment to occupy BWP's properties. This represents strong alignment with BWP's largest tenant, Bunnings. With this long-term commitment, providing investors with certainty of income and security of tenant covenant through materially longer weighted average lease expiries, or WAEL. Thirdly, capital expenditure commitments. BWP and Bunnings are both committing capital to BWP's assets, including capital to fund store expansions and network upgrades, which will increase income and enhance asset life.
The proposed transaction is compelling, and we're excited about the opportunity it creates for BWP unit holders now and over time. The proposed transaction offers a number of key benefits for BWP unit holders, which I'll talk to as we move through each of the following slides. Importantly, the non-executive directors of BWP have unanimously recommended the proposed transaction, and the independent expert has concluded that the proposed transaction is fair and reasonable and in the best interests of investors not associated with Wesfarmers. Turning to slide five, internalisation. As part of the proposed transaction, BWP will pay Wesfarmers the price of AUD 142.6 million to internalise the management functions of BWP Management Limited, reflecting a multiple of 10.6 times BWP Management Limited's forecast FY26 EBIT of AUD 13.4 million.
The price comprises AUD 100 million in cash funded via the drawdown of existing debt facilities, being the cash consideration, and AUD 42.6 million of BWP's staple securities issued to Wesfarmers at AUD 3.92, being BWP's NTA as at 31 December 2004 and reflecting a 9.2% premium to yesterday's closing price yesterday of AUD 3.59. The proposed transaction is forecast to be immediately accretive to distributions relative to if the transaction were not to proceed, with 2% accretion forecast in FY 26 or 2.3% accretion on a full-year basis. Pleasingly, BWP and Wesfarmers have entered into a cooperation and services agreement, which we've named the CASA, to govern the transitional relationship between BWP and Wesfarmers for a maximum period of five years following implementation of the proposed transaction.
Wesfarmers will remain a supportive partner of BWP, and as a result of the proposed transaction, Wesfarmers' holding in BWP will increase to 23.5%, up from 22.3% today. Turning to slide six. As part of the proposed transaction, 62 Bunnings leases are to be reset and extended, with option tenure reset to have between four and eight option periods of six years each. Market rent reviews will occur at the exercise of the first option and every second option thereafter, with a 10% cap and collar to be applied. This material WAEL extension secures the Bunnings tenant covenant, with BWP's total portfolio WAEL increasing from 4.4 years- 8.0 years, and the WAEL for BWP's Bunnings portfolio increasing from 4.6 years to 9.5 years. The lease reset and extension, and in particular the longer-term certainty, will drive a valuation uplift to property valuations.
We have estimated the uplift to be approximately AUD 49.9 million, reflecting an eight-basis point compression in BWP's weighted average capitalisation rate to 5.35%. Management's assessment has been validated by the independent opinion of JLL. Turning to slide seven, capital expenditure commitments. As part of the proposed transaction, BWP and Wesfarmers have agreed to commit to capital expenditures, which secures future growth and improves quality within the portfolio. Store expansion capital expenditure refers to AUD 56 million of store upgrades to be undertaken at five Bunnings sites. These works are expected to commence within three years of implementation and will be funded at a rate equal to the five-year swap rate plus 200 basis points. Network upgrade capital expenditure relates to a commitment from BWP and Bunnings to fund AUD 15 million each, or AUD 30 million in total, of network upgrade capital expenditure to deliver asset enhancements across several of BWP's assets.
These upgrades are expected to be completed within five years of implementation and will focus on aging Bunnings properties to extend useful life. Turning to slide eight. BWP has demonstrated a prudent and disciplined approach to acquisitions and developments, with a track record of generating superior returns for investors since listing in 1998. BWP was established as a platform for income and capital growth and has sought to sustainably deliver this objective during its 27 years post-listing. The proposed transaction represents a significant development and reflects the disciplined approach to capital allocation and also the attractiveness of the opportunity. The proposed transaction will further enhance BWP's platform for future income and capital growth, consistent with BWP's objective of providing unit holders a secure and growing income stream and long-term capital growth. We'll talk through some of the key benefits on the following slides. Turning to slide nine.
The proposed transaction secures a very strong national retailer in Bunnings for additional lease term, ensuring continued covenant strength and income certainty for BWP. The portfolio WAEL increases to 8 years, and the Bunnings WAEL more than doubles to 9.5 years. Also, and very importantly, the proposed transaction removes all medium-term Bunnings vacancy and income risk. Turning to slide 10. This slide further emphasizes the significant extension of lease terms achieved in the proposed transaction. Should implementation be achieved, the first Bunnings expiry will not occur until 2030. Given the average rental increase achieved from market rent reviews in recent periods, which reflects our portfolio being largely at market rent, rental growth is not expected to be negatively impacted. Additionally, removing the frequency of market rent reviews removes friction and time allocated between Bunnings and BWP in administering rent review processes. Turning to slide 11.
Internalising the management of BWP eliminates the management fee payable to Wesfarmers and is expected to reduce BWP's cost of doing business by around AUD 5 million in FY 26. This lowers BWP's cost of capital and enhances BWP's ability to bid competitively on potential investments, with new acquisitions not expected to require a material increase in internal management costs. Turning to slide twelve. The proposed transaction is an important enabler for growth, increasing the addressable market and affording increased optionality regarding growth platforms. BWP will align with the market standard for REIT management structures, which is expected to enhance corporate governance. I'm pleased to confirm the continuity of senior management post-implementation of the transaction, with remuneration incentives further aligned to the objectives of BWP. Internalising also provides future optionality for BWP to diversify income streams through third-party asset and funds management mandates. Turning to slide thirteen.
Here you can see the five Bunnings sites where capital expenditure will be allocated, with material upgrades at Maitland, Belconnen, and Smithfield all planned. This BWP spend totals AUD 56 million and will be rentalised at a five-year swap rate plus a margin of 300 basis points. In addition, BWP and Bunnings have each agreed to fund AUD 15 million of network upgrade expenditure to deliver asset enhancements and upgrades across several of BWP's older assets. These works are to upgrade aging Bunnings sites to extend their useful life, with such upgrades to be completed within five years of implementation of the proposed transaction. Turning to slide fourteen. The proposed transaction is forecast to be accretive to FY 26 distributions. Excluding the proposed transaction, BWP's FY 26 distribution is forecast to be 19.03 cents, including capital profits released of AUD 5.6 million, reflecting 2% growth on FY 25.
Following implementation of the proposed transaction, BWP's distribution forecast for FY 26 is AUD 19.41 cents, including capital profits released of AUD 5.6 million. This reflects 2% accretion to FY 26 distribution pre-implementation and 2.3% accretion on a pro forma full-year basis. Finally, BWP's distribution forecast of AUD 19.41 cents represents a 4.1% increase on the FY 25 distribution of AUD 18.65 cents. As mentioned, the distribution forecast for FY26 includes AUD 5.6 million of capital profits released, reflecting a peak in the cumulative effect of Bunnings lease exits, impacting rental income and also requiring significant repositioning capital expenditure, with redevelopment capital expenditure in FY 26 focused on a number of repurposing projects, including Midland, Noarlunga, Fountain Gate, and Rocklea. Turning to slide fifteen. This slide affords a summary of the key financial outcomes of the proposed transaction.
Whilst many of these outcomes have been referred to already, specific to the pro forma balance sheet, should the proposed transaction proceed, pro forma gearing will increase to 23% and NTA will reduce to AUD 3.79 at 31 December 2024, reflecting the acquisition of the management rights being largely recognized as an intangible asset. Turning to slide sixteen, which provides the key dates for the transaction. Important dates include the general meeting of BWP Trust unit holders scheduled for Monday, the 28th of July 2025, with the implementation of the proposed transaction expected to occur on 1 August, 2025, subject to the outcome of the general meeting. Turning to slide seventeen. To that end, and in connection with the proposed transaction, at the general meeting, BWP will ask unit holders to consider three resolutions.
The resolutions are broadly to approve the proposed transaction and certain future-related party dealings between BWP and Bunnings. Also, the adoption of the employee incentive plan and the issuance of securities under the employee incentive plan, and amendments to the existing BWP Trust Constitution. Turning to slide eighteen. In summary, the proposed transaction is expected to result in increased income certainty through the long-term retention of a secure and high-quality covenant in Bunnings, continued scale, growth through tenant expansion and upgrade commitments, immediate distribution accretion, and increased alignment and attractiveness to investors given the structure simplification. After careful consideration, the BWP board assessed that the proposed transaction provides a compelling opportunity to create a unique, aligned, and cost-efficient internally managed real estate investment group with significant lease tenure, which will aim to continue generating attractive and predictable distributions for investors.
The independent expert has concluded that the proposed transaction and the future-related party dealings are fair and reasonable and in the best interest of investors not associated with Wesfarmers. The non-executive directors also unanimously recommend that the unit holders vote in favor of all resolutions. Finally, the proposed transaction builds on BWP's objective of providing investors a secure and growing income stream and capital growth over time, enabled through the extension of lease terms with Bunnings, the reduction of operating costs through the internalisation, a reduced cost of capital to potentially increase BWP's competitiveness in bidding on new investments and distribution accretion. Management views this to be a compelling opportunity for unit holders. I'll conclude my prepared remarks. We'll now hand back to the moderators to facilitate any questions where myself, Andrew Ross, and David Hawkins are available. Thank you. 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 Adam West from JP Morgan. Please go ahead.
Oh, hi there. I'm just wondering, does the lease reset involve a reset of any of the rents, or are these existing rents going to be maintained?
Thanks. In terms of the mechanics of the leases, the lease adjustment mechanisms or the inflators, they will remain as is. As part of the transaction, we have made two adjustments. One has been to Hawthorn, and we have reset that rent 5% lower than the prevailing rent.
That is in view of an upcoming market rent review and Hawthorn being essentially the highest rent in market. There was some pressure on holding that rent for Hawthorn. The other has been a reduction of 10% to enter a five-year term with Chadstone. That is in view of us wanting to secure Bunnings as a covenant at Chadstone for that five-year term.
Yep, yep. Could you just remind us of the mix of Bunnings leases which had cap and collars on the market rent reviews and those that did not previous to the transaction?
Yeah, look, the great majority of Bunnings leases at the moment already have a 10% cap and collar, and we have introduced caps and collars on approximately 17 existing Bunnings leases in the portfolio that did not have a cap and collar.
Yep. I guess just final one from me.
Is there any escrow on the Wesfarmers estate in BWP?
No.
Thanks for that.
Thank you. Once again, if you wish to ask a question, please" press star one" on your telephone. Your next question comes from Tom Bodor from UBS. Please go ahead.
Morning, Mark and team. Just be interested in the market rent reviews. Do they all reset to be six years from today? As in, there's no market rent reviews now until FY31?
Hey, Tom, the way it works is over the next 12 months, where there was an existing scheduled market rent review other than for Hawthorn and Chadstone, we've agreed that the new lease will be, and we've agreed different lease tenures like seven years, eight years, nine years, and ten years. There's four cohorts. And so from the next anniversary date, that's when the lease starts.
If we've agreed seven years on a particular property, it'll be seven years from the anniversary date that falls in the next 12 months. At the end of that period, so the first option period, there will be a market rent review. Every 12 years thereafter, on the assumption that Bunnings exercises all those options. In every other year, it will be what the existing lease escalator is. For instance, we've got a number that are CPI, we've got a number that are fixed 3%, and we've got a small number that are CPI capped at 2.5%.
Yep, that's clear. Just on the, I think it's slide 22, you talk about right to purchase. I'd be interested in how many of the 62 assets that right exists over.
You're on. Of the prevailing Bunnings portfolio, just under 20 have a right to purchase.
That is not changing as a result of this transaction.
Correct.
Okay. Maybe just a final one from me. I mean, obviously, you sort of state upfront part of this is around having a better cost of capital. How do you think about the growth of the Trust going forwards? Where do you sort of see the next opportunities to grow and expand, I guess, following this transaction?
I mean, Tom, I think it is a continuing philosophy on trying to optimize our cost of capital and make us as competitive as we can be when we are in a competitive scenario for an asset. We are confident that the internalisation clearly will lower the cost of capital and will provide us with a bit more capacity to bid competitively into opportunities that are out there.
We're really, you absolutely know, Tom, we're not dissimilar to how we've assessed MPR and other opportunities out there. Making sure that we deploy our cost of capital really effectively is something that we've done very prudently. We hope this is another step that just creates over time more opportunity for us to the extent that it allows us to perhaps look at some other things without the cost impost of the management fee that may over time, and we've alluded to that in some way, open up perhaps some other growth aspects that, again, have been a little more challenged in the past, just given that cost of capital premium that we've had to apply to investment opportunities.
Yep, that's clear. Thanks.
Thank you. Once again, if you wish to ask a question, please "press star one" on your telephone and wait for your name to be announced. We'll now pause a moment to allow for any final questions to register. Your next question comes from Angus Tighe from Realm. Please go ahead.
Pardon me, sorry, we seem to be having technical difficulties. Please hold. Pardon me, Angus, please go ahead.
Hey, guys, how's it going? Just in terms of the cost savings, I just wanted to clarify. So you're stating in the report you're only going to save AUD 5 million, but I'm looking at the management fee from last year, it's about AUD 18 million. Am I missing something there?
No, it's just that we have a cost structure to fund, in essence. So that management fee was a gross fee. Then obviously, the fund had costs that it incurred. So those management costs, many of those costs, the team member costs, for example. Of course, we still incur those costs.
Therefore, the incremental outcome is, in essence, the management fee as a reduction. Then, of course, we have the underlying cost structure. It will be the net effect of removing the fee and then applying the cost structure going forward.
Okay, cool. In terms of what you will be drawing down to fund the acquisition as well as the CapEx, are you going to be drawing the AUD 71 million of total CapEx as well, or is that going to be more over the next five years, like staggered?
For the capital, that is going to be kind of staggered. Obviously, it is all subject to development approvals and board approvals and the process and that. That can take a couple of years.
We'll draw the funds down for the AUD 100 million cash payment from existing debt facilities, and then we'll raise capital or raise debt as required for future capital commitments as they proceed.
Yeah, those expansions, which are a really important part of the transaction. We have the expansions, which hopefully are really material format enhancing opportunities for Bunnings to really drive and improve proposition for that tenant. We have a commitment there that they will commence deploying that activity within three years, and then with our upgrades, which is a cumulative AUD 30 million spend, but AUD 15 million that we'll deploy and AUD 15 million that Wesfarmers will deploy on behalf of Bunnings. Those deployments will happen and be completed within five years of the implementation of the transaction.
Cool. Okay. Last one for me, just in terms of the ratings implications.
I initially had thought you'd be saving AUD 18 million a year, but I guess that's not the case. Do you have any indications of where your key metrics are going to finish up after all this is said and done?
We're still going through the discussions with the rating agencies. Obviously, our gearing and leverage goes up slightly from, I think, 20.6% - 23%. It depends on when the actual savings for the management process is through for the net debt to EBITDA.
Okay. But you're firmly committed to the rating, correct? Or is that now not the case? You think maybe you'd be happy to drift given you expanding a little bit more or at least improving your assets?
The idea of this transaction is to extend the income certainty for the Trust. We always wanted to have an investment-grade rating.
We'll keep trying to maintain what we have.
Thanks.
Thank you. There are no further questions at this time. I'll now hand the conference back to Mr. Scatena for closing remarks.
Thanks, everyone. In closing, I'd really like to reiterate my earlier comments that the proposed transaction is compelling, and we're very excited about the opportunity it affords BWP unit holders. In the coming days and weeks, we look forward to engaging with investors to discuss the proposed transaction further. We look forward to meeting many of our unit holders at our general meeting on the 28th of July. Thank you for joining the call, and have a great day.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.