BWP Trust reported solid fiscal 2013 results, with distributable profit up 7% to AUD 75.8 million on acquisitions, developments and modest like-for-like rental growth of 2.1%. Earnings and distributions per unit increased 5% to AUD 14.24 cents and AUD 14.14 cents, respectively. BWP also announced an equity raising at AUD 2.30 per unit to help fund the acquisition of 11 properties and three redevelopments.
The acquisitions and upgrades increase portfolio value by 24%. Management expects the transactions to be earningsper- unit neutral in 2014 and guided to distributions of AUD 14.6 cents per unit, in line with our prior expectations. The transactions should be at least 2% accretive in 2015.
Rental growth in 2013 was held back by a high proportion of CPI (consumer price index)-linked rent reviews and soft CPI. Soft inflation is likely to continue constraining rent growth in the near term and, while there is a higher than normal proportion of market rent reviews in 2014 and 2015, soft retailing conditions and other factors suggest growth from market rent reviews will be below the 7.2% recorded in 2013.
Increased tenant demand for Bunnings-type properties caused by competitor Masters’ aggressive expansion should aid market reviews in the longer term. Lease expiries are minimal in the medium term with just 23% of the portfolio expiring in the next five years. The acquisitions and upgrades will cost AUD 332 million plus AUD 17 million in transaction costs. Three of the acquisitions are operating while eight are developments which will complete during the next year. The three upgrades will also complete by mid-2014. Funding is from AUD 149 million of debt and an underwritten 1 for 6.18 nonrenounceable entitlement offer raising AUD 200 million. The issue price of AUD 2.30 per unit represents a 5% discount to where the units were trading prior to the announcement. The retail offer closes 30 August 2013.
The transactions are attractive in the current low interest rate environment, providing an initial yield of 7.1% on total cost, with rents growing at 3% per annum. Income is highly secure due to long leases and a strong tenant. For the acquisitions, the initial term is 12 years and the tenant has a further five optional terms of six years, at the tenant’s election. Rents are subject to market rent reviews at the end of the initial term and each optional term, but the market reviews are capped at 10%. We view the 10% caps as highly favourable to the tenant as they keep a lid on rents for 42 years, but this is only an issue over the very long term if market rent growth is strong. Despite these caps, we believe the acquisitions are preferable to other acquisition options considered such as high-yielding bulky goods stores which have much greater earnings risk.
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