BWP Trust (BWP) recorded robust FY18 results despite adverse impacts of Bunnings (Wesfarmers Ltd, ASX: WES) vacating various locations.

Total revenue of $153.4m was up +0.6% on the previous corresponding period (pcp) and distributable profit increased to $114.4m driven by rental growth from the existing property portfolio.

On uplift of its NTA to $2.85, BWP currently trades at a premium of +15.4%. Despite BWP being well placed with:
1. Stable demand for their core portfolio of Bunnings assets; and
2. Balance sheet strength and flexibility,

We maintain our Neutral stance given:

1. Uncertainty regarding few vacated sites;
2. Potential rate hikes which may affect bond-proxy stocks and their yield and debt books; and
3. BWP trades on a premium to NTA but offset by attractive dividend yield of ~5.5%. Neutral.

• Stable growth highlighted in FY18 results, despite headwinds. BWP reported distributable profit of $114.4m, up +1.7% from pcp, with distributions increasing +1.7% to 17.81 cpu, driven by strong rental growth in the property portfolio.
• FY19 outlook – maintain distribution growth. Management has reiterated that it expects to maintain distribution growth at +1.7% despite transition and divestment in its core Bunnings portfolio. Whilst management has noted that there may be some impact on overall rental income as stores are transitioned to alternative uses, capital profits are expected to be used to support distributions as required.
• Rental growth remains stable and lease expiry terms increase. BWP saw like for like rental growth of +2.5%, contrary to the four market rent reviews finalised during the period which saw weighted average +4.1% increase in annual rent. Weighted average lease expiry increased to 5.0 years.
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• Revaluations of property portfolio increase NTA value. BWP’s entire portfolio was revalued and saw an uplift of ~$70m to $2,352.7m. The uplift was driven by rental income growth and average cap rate compression across the portfolio. BWP’s NTA increased +4.0% to $2.85, from FY17. One divestment was carried out by BWP in 1H18 in the Dangenong site, sold for $16.4m and four properties have been identified and scheduled for settlement (Altona, Burleigh Heads, Epping & Oakleigh South).
• Reasonable gearing + Debt levels. BWP announced a new $100m forward start 5-year term debt facility with Sumitomo Mitsui Banking Corporation, which will commence in May 2019. Further, existing bank facilities have been negotiated to be extended an extra year. Gearing on a debt to total assets basis fell to 19.3% (relatively stable from 20.4% in FY17). Interest cover ratio (EBIT/interest expense) was strong at 6.5x, improving from 6.3x in FY17.
• Four properties underway for divestment. Management has released information regarding the vacant properties which arose following Bunnings’ decision to move to ex-Masters locations. Out of the four, three properties (Altona, Burleigh Heads and Oakleigh South) are under unconditional contracts, with settlement scheduled during FY19. The Epping property is now under a conditional contract to sell in February 2019.