In what could be a significant trend for REITs this reporting season, BWP Trust (ASX:BWP), the landlord of 65 Bunnings warehouses, has disclosed asset write-downs across its substantial $3 billion large-format retail portfolio. As the first A-REIT to release its full-year 2023 results, BWP Trust unveiled a 2.2% or $64.6 million net fall in property portfolio value, primarily due to capitalisation rate increases of 33 basis points to 5.38% over the final six months of the financial year.
The market has closely watched valuations during this reporting season, with veteran investment manager Winston Sammut from Sequoia Financial highlighting the potential downward adjustments to listed REITs’ valuations. He stated, “I do expect the listed REITs to adjust their valuations downwards.”
“BWP, given the strength of the Bunnings lease and the fact the assets are sought-after by investors, a 2 per cent write-down seemed about right,” Mr. Sammut said.
Andrew Parsons, the chief investment officer at Resolution Capital, noted that valuations would be a point of contention, as limited transaction evidence provided a challenge for valuers to benchmark against. However, he said, “While we are not seeing transactional guidance for valuers, directors can form their own opinions [about values].”
Outgoing BWP managing director Michael Wedgwood reassured investors that the decline in valuations did not signify any structural issues in their sector, unlike the office and shopping centre markets. He attributed the valuation adjustments to the increased cost of funding and valuers’ awareness of potential transactions in the market.
Despite the property value write-downs, BWP Trust showcased resilience, cushioned by a 5% like-for-like rental growth over the financial year, driven by inflation-indexed annual rent renewals for more than half of its portfolio. Additionally, the trust’s low gearing levels mitigated the impact of a 21% rise in finance costs.
As the company continues the redevelopment and repurposing of retail warehouses previously occupied by Bunnings, BWP Trust’s net profit, excluding property valuation changes, decreased by 1% to $113.6 million. The trust retained capital profits to ensure it delivered $117.5 million of distributable profit and met its distribution guidance of 18.29¢ per unit.
Investors remain watchful as market uncertainty persists, with BWP Trust units closing down over 3% at $3.55 by the end of the day. The ongoing reporting season will reveal how other REITs navigate the challenging landscape of shifting property values and interest rates.