BWP Trust: Interim Result 2016

During the BWP Trust first half earnings call, at times it felt we were listening to a value-focused fund manager complaining about the difficulty in finding cheap stocks. BWP's MD Michael Wedgewood repeatedly mentioned how hard it is currently to find attractively priced properties to add to the trust's portfolio.

As we've mentioned before (see BWP Trust: Result 2015), low-interest rates have increased the competition for assets rented on long-term leases to financially strong companies such as Bunnings (a subsidiary of Wesfarmers). This is why BWP's average capitalisation rate has continued to fall, to 6.81% from 7.33% six months ago. Considering the last three transactions for Bunnings properties were priced at capitalisation rates slightly above 5 per cent, this trend will likely continue whilst interest rates remain at current lows.

Nine properties were subject to market rent reviews during the half and resulted in an average 5.4% increase in rents, helping like-for-like rent rise 2.5%. Due to limited market rent reviews in coming years and annual rent increasing by either CPI or at a fixed rate of around 3%, growth is likely to remain limited.

As such, with new properties hard to find and existing properties seeing minimal rental growth, management is looking to expand existing stores to boost rents. Eight properties are currently being reviewed for expansion.

BWP is closely watching Woolworths' exit from the Masters debacle and will take a look at any properties that become available. Wesfarmers' recent entry into the British hardware market through its acquisition of Homebase won't benefit BWP because the trust can only own Australian assets.

BWP has fallen 1% since BWP upgraded on 22 Jan 16 (Hold —$3.04). Selling at a 20% premium to net tangible assets and with future growth likely to remain limited, we continue to recommend you HOLD.