Bunnings landlord BWP Trust to ride higher inflation wave as portfolio jumps to $3bn

Bunnings landlord, BWP Trust, has flagged that the value of the much-loved hardware stores will keep on rising as the property group delivered solid annual results with its portfolio rising to $3bn.

Investors have chased Bunnings properties as their performance has held up even as other retailers have come under pressure and the trust has defied the interest rates led sector sell-off.

The trust said on Wednesday the strong investor demand for Bunnings assets was driven by the still low interest rate environment and the search by investors for running yields higher than interest rates, the retailer’s strong covenant, and the low risk nature of the properties.

About 55 per cent of the trust’s rental income is subject to CPI annual adjustment and 45 per cent is subject to fixed annual adjustment, other than in when market rent reviews apply. These metrics could play in its favour as inflation jumps.

The trust said its main focus this financial year was on filling any vacancies, progressing store upgrades, extending existing leases with Bunnings and rolling out energy efficiency improvements.

It will continue for opportunities to grow the portfolio that will create value, but the trust has not bought in the current hot market, and the distribution for this financial year expected to be similar to last year.

The landlord said Bunnings had exercised fresh options at sites across the country and it will also upgrade some properties, while it was also re-leasing properties in Hervey Bay and Port Kennedy, where Bunnings had departed. It is also looking at alternative uses for properties in Belmont North and Morley.

Morgan Stanley said the trust’s net profit of $114.7m was a slight beat of market forecasts due to stronger than expected like-for-like rental growth, which came in at 3.3 per cent for the year, assisted by inflation tailwinds. “This theme should continue in fiscal 2023 with about 55 per cent of leases subject to CPI adjustment,” the bank’s property analysts said.

The company has guided to a distribution per security “to be similar” to fiscal 2022, which was 18.29c. But the analyst noted that BWP would again have less than full cash coverage of this as Belmont North and Morley will be vacated in this month and about 45 per cent of the trust’s $450m drawn debt is exposed to floating rates.

Citi said that BWP’s dividend per share was in line with guidance and consensus, however growth in net tangible assets and rental growth momentum likely beat consensus expectations.

Citi analysts Howard Penny and Suraj Nebhani said a key positive was the 17.6 per cent increase in net tangible asset per share to $3.87 with cap rates of 5.04 per cent, a tightening from 5.11 per cent last December.

“The most recent regional store traded at a cap rate of 4.29 per cen, indicating room for further potential compression,” they said.

Like for like rental growth continued with positive momentum to 3.3 per cent fuelled by CPI-linked leases. Gearing remains prudent at 15.1 per cent and Citi said the trust is relatively well positioned in the current rate environment.

“We expect the market to view the results as positive with strong rental growth momentum, prudent interest rate hedging and surprisingly strong NTA growth. However, market debates around relatively high valuation levels will limit significant share price upside in our view,” Mr Penny and Mr Nebhani said.

BWP securities added 6c to $4.29 in a lower market just after early afternoon trading.

This story was first published on www.theaustralian.com.au.