Bunnings warehouse prices don't stack up: BWP
The prices being paid by private investors for Bunnings stores don’t stack up for the country’s biggest owner of the DIY warehouses, ASX-listed BWP Trust, according to its chief executive Michael Wedgwood.
Presenting the $2.35 billion Bunnings owner’s interim results, where its full-year distribution guidance was upgraded, Mr Wedgwood said BWP had the “capital structure” to make acquisitions, but was worried about the metrics upon which the latest deals were being struck.
“In recent times, we have not been able to see value created over time based on some of the rates Bunnings have sold on. Other investors have rightly taken their own view,” he said.
The trust, which is set to divest five of its large format retail stores, valued at $80 million, due to Wesfarmers-owned Bunnings not renewing its lease or moving to bigger former Masters sites, has not made an acquisition since November 2014, when it bought a site in Australind, near Bunbury in Western Australia.
Other similar structured trusts, like ASX-listed pub owner ALE Property Group, has not bought a pub in a decade and has taken a similar view that the prices paid by private investors don’t stack up for A-REITS.
“We continue to look at all available investment opportunities, with a focus on properties with good opportunities for capital growth and rental growth and that are in good locations,” Mr Wedgwood said.
But he said: “We do worry when looking at making acquisitions at what those metrics look like.”
Recent sales of Bunnings have been struck on yields ranging from five to six per cent where as the BWP portfolio of 79 properties trades on a cap rate of 6.5 per cent.
In the latest deal private developer RCL Group sold a yet-to-be-built Bunnings in Melbourne’s northern suburbs for about $25 million to a private investor on a yield of 5.1 per cent.
Prior to that deal, CBRE Global Investor acquired four Bunnings properties in Sydney, Adelaide and New Zealand for more than $180 million on a yield of just under five per cent.
Going back to 2011, BWP has previously acquired Bunnings on yields of seven to eight per cent, but the flood of money into Wesfarmers and Woolworths retail assets like Bunnings, Dan Murphy’s liquor outlets and supermarkets has pushed yield to record lows.
In June 2016, a small format 1736-square-metre Bunnings warehouse in Osborne Park, Perth sold to a local Perth private investor for $7.05 million on a 4.65 per cent yield.
Mr Wedgwood said the trust’s preference was to release or redevelop properties where Bunnings is vacating, and would only sell if divestment provided the best outcome.
These preferential divestment outcomes includes the $16.4 millon sale of its vacant Dandenong Bunnings site to German grocer Kaufland, which BWP Trust originally bought as land to develop for $4 million in 2002.
Over the six months to December the trust grew its distributable profit by a modest 1.7 per cent to $56.4 million compared with 4.1 per cent over the same period last year.
Like-for-like rental growth was unchanged at 2.4 per cent, but with the trust selling properties and not acquiring new ones its income base has shrunk.
BWP Trust lifted its interim distribution by 1.7 per cent to 8.78¢ and forecast to maintain this growth over the full year. This was upward revision from its full-year 2017 guidance to “at least maintain distributions” in FY18 equivalent to those paid in FY17.
Analyst Peter Zuk of Shaw and Partners said the results were in line with expectations and also provided greater clarity over leasing risk from known Bunnings departures.
“Bigger picture, BWP is well capitalised and if asset values fall it could acquire turnkey assets on the open market – or, importantly, fund redevelopment capital expenditure without putting its balance sheet under stress,” he said.
