Low interest rates have allowed BWP Trust to reduce its borrowing expenses and drive up distributable profit, but they have made it hard to find new properties to buy.
The tough property market was a constant theme during BWP's 2016 results, with managing director Michael Wedgewood saying the trust just hadn't been able to justify paying the prices for Bunnings properties that other investors had been willing to pay.
|Twelve months to Jun 30||2016||2015|| /(–)
|Rental income ($m)||149||143||4|
|Borrowing expense ($m)||24||26||(6)|
|Distributable profit ($m)||108||102||6|
|Distribution per share (c)||16.8*||15.8||6|
|Gearing (%) (see Note)||21.0||22.8||(8)|
|NTA per share ($)||2.56||2.24||14|
|*8.50 cents interim distribution (unfranked), ex date already past|
|Note: Gearing = net debt / (total tangible assets - cash)|
Sitting on the sidelines and waiting for better prices is not necessarily a bad thing. However, with long-term bond rates indicating that interest rates are unlikely to rise any time soon, it could be a long wait. With a financially strong tenant and little ongoing capital expenditure for owners, demand for Bunnings properties is likely to remain strong.
A bigger worry is Bunnings' future intentions. The retailer has already vacated six BWP properties and BWP management thinks there may be more to come. Bunnings is still paying the rent on the vacated properties, but there isn't long left on the leases and new tenants will need to be found.
However, these are relatively minor concerns. BWP's properties are generally in good locations and, with tenants like Wesfarmers, there's little risk of the rent not being paid. BWP is also benefitting from improvements to existing buildings as Bunnings looks to expand its stores in some locations.
There are only five market rent reviews due in 2017, so the majority of rental growth will come from inflation. Distributions are therefore only likely to rise by about 3%. With a current share price of $3.74, the stock is trading on an (unfranked) forward yield of about 4.7%. SELL.