Real estate investment trust (REIT) BWP Trust (ASX: BWP) today reported its results for 2016. BWP owns many of the properties of Bunnings Warehouse, the home improvements retailer that is owned by Wesfarmers Ltd (ASX: WES).
Revenue rose 3.7% to $150.2 million and profit before gains on investment properties was up 6.2% to $107.9 million. Properties revalued during the period added a further $202.6 million to profit and net tangible assets per security rose 14.3% to $2.56.
The market's response to the results was muted with shares trading at $3.73 down 0.5% earlier this morning. Total distributions for the year rose 6% to 16.8 cents placing the stock on a dividend yield of 4.5%.
Debt
Gearing, defined as debt divided by total assets, was 21.5% as at 30 June 2016 down from 24.1% in 2015. This is at the low end of the board's preferred range of 20% to 30% and so there is significant room to further leverage the balance sheet should attractive opportunities arise.
BWP's weighted average cost of debt was 5% for the year down from 5.5% in the prior year and charges should continue to fall in line with interest rates. Despite this, BWP hedges its interest rate risk and at 30 June 2016, 79.4% of debt was hedged either with fixed rate bonds or using interest rate swaps.
Revaluations
All properties were revalued twice during the year including 36 valuations done by independent parties. Total revaluation gains of $202.6 million benefited from rental increases and a fall in capitalisation rates to 6.77% at 30 June 2016, down from 7.33% a year earlier.
Capitalisation rates are defined as net operating income divided by the current market value of the property. Falling interest rates and a brighter global economic outlook have been partly responsible for the recent fall in BWP's capitalisation rates.
The other key ingredient has been strong demand from investors for Bunnings Warehouse properties. This is no surprise given Bunnings is a large and extremely creditworthy tenant that holds a dominant market position.
Growth
Growth comes from rent reviews, store expansions and new developments. On a like-for-like basis rental income increased by 2.3% during the year, with fixed or CPI based rent rises applied to 99 leases.
62% of rental income is subject to CPI increases with the remainder increased by a fixed 3% to 4% each year. Therefore, low inflation significantly harms revenue growth and last year the average CPI increase was just 1.6%. In addition, every five years all properties are subject to a rental review based on market prices.
A number of store expansions were completed during the year which will flow through into increased rental income in 2017. The board has a disciplined approach to acquisitions and so the trust is unlikely to be active in the property market until prices fall.
Foolish takeaway
BWP expects distributions to rise by 3% per unit next year and so an investment in BWP certainly looks better than buying a term deposit. Not only does BWP offer a superior starting yield of 4.5% versus around 3% for a term deposit, but its distributions are partly tax advantaged and are likely to steadily climb over future years unlike interest rates which seem destined to move in the other direction.
