No way to monetise Bunnings’ performance, says landlord BWP

The managing director of the country’s biggest Bunnings landlord, ASX-listed BWP Trust, said there was no way for it to “monetise” the stellar performance of its tenant after rents fell 2.3 per cent on average across five retail warehouses after the latest series of market rent reviews.

A further 12 market rent reviews are still being either negotiated by BWP and Bunnings or are being determined by an independent valuer. BWP managing director Michael Wedgwood said some rents would go up and some would go down.

 

Bunnings’ pre-tax profits rose 20 per cent last financial year, but rents are falling for some warehouses.

 

“There is no way to monetise [tenant] performance in terms of market rent reviews. They are only based on comparable [rental] market evidence,” Mr Wedgwood told analysts after operating profit fell 1 per cent to $56.5 million over the six months to December, forcing the trust to dip into its income reserves to maintain an interim distribution of 9.02¢,

Bunnings, a subsidiary of retail giant Wesfarmers, reported a 20 per cent rise in pre-tax earnings of $2.2 billion over the 2021 financial year, despite dealing with restrictions and store closures during the pandemic.

Retailers such as Solomon Lew’s Premier Investments have demanded that landlords base rents on a percentage of a tenant’s gross sales, but such proposals provide no way for landlords to earn more should the retailer outperform, including from booming online sales.

In the case of BWP, market rents were determined property by property, in relation to that specific local rental market, Mr Wedgwood explained.

Of the five market rent reviews completed over the December half-year, two Melbourne Bunnings, in Fountain Gate and Nunawading, had their rents increase marginally – by 0.6 per cent and 0.3 per cent respectively – while one warehouse in Belmont, Perth, had its annual rent slashed by 8.5 per cent. Two other Bunnings warehouses in Brisbane and Perth enjoyed annual rent reductions of 2.8 per cent.

These reductions partly offset the stronger rental income gains that came from more than half of the trust’s rent being indexed to rising inflation, resulting in like-for-like rental growth of 2.2 per cent, a point noted by analysts Lou Pirenc and Andy MacFarlane from Jarden.

On a more positive note, the Jarden analysts said there was further “upside potential” to the trust’s asset values “based on transaction activity” after BWP booked a $292 million valuation gain that lifted the total value of its portfolio of 73 properties to $2.9 billion, and boosted statutory net profit by 142 per cent to $348.3 million.

This was driven by cap rates tightening 54 basis points over the half year to 5.11 per cent.

“This reflects continued strong investor interest in Bunnings warehouse properties,” Mr Wedgwood said.

He noted that only four Bunnings had transacted over the six months to December, on yield of 4.25 per cent or lower.

The most recent sale, a new Bunnings under construction in Hervey Bay in southern Queensland, set a new yield benchmark of 4 per cent in November after being bought for $58.6 million by a New Zealand investor.

Article: Australian Financial Review, Larry Schlesinger (9 Feb 2022)