BWP Trust (ASX: BWP) has continually outperformed the benchmark Australian REIT index during the past 10 years with most outperformance achieved during the global financial crisis. BWP has a conservative strategy and focus on Bunnings, which I expect will continue to deliver solid investor returns.
In two recent announcements, BWP Trust sold a multi-tenanted industrial property in Blackburn and entered into an option agreement to sell a property at Altona, both in Victoria. Blackburn sold for AUD 17.5 million, 3% above the written-down book value. The Altona property is for sale because Bunnings has already moved to a bigger, better property next door, which will be reflected in the sale price. With about 80 properties and a weighted-average lease expiry of 6.8 years; this is not a major risk, but may impact earnings growth over the medium term.
BWP has a good portfolio with a clear strategy of targeting well-located retail warehouse properties for acquisition or pre-committed development. Here are four reasons to consider buying BWP today.
1. Strong relationship with Bunnings
BWP is not an exclusive provider of property to Bunnings which seeks the best deal when selling or developing assets. However, Bunnings clearly has a preference for working with BWP Trust.
2. Secure and growing earnings
BWP is defensive. It boasts secure and growing earnings underpinned by long leases with mostly consumer price index linked increases and conservative gearing.
3. Geographical diversity
BWP offers a geographically diversified property portfolio with financial capacity for growth through acquisitions and developments.
4. Above average income yields
Warehouse retail properties have low maintenance capital expenditure requirements, allowing a high distribution payout ratio. BWP offers an above-average income yield with steady growth.
This all looks good, but…
When considering any stock investment, it's important to look at the company's cash flow statement.
If we take a look at the 2014 cashflow statement for BWP, we can see that the company generated over $92 million in its 'cashflow from operations'.
However, its 'cashflow from investing' was $379 million.
This leaves BWP with negative 'cashflow after investing' of $287 million.
The company then paid just over $59 million in dividends and $4 million in other financing cashflows, which resulted in a funding gap of negative $351 million.
In order to fund this gap the company raised new equity of $200 million and increased debt by $151 million.
At the end of 2014 the company had $448 million in total debt and just $12 million in cash on its balance sheet.
So, while there are a number of good reasons to buy BWP, it's always important to take a look at the cash flow statement.
Valuation
BWP is currently priced at $3.31 which is near the top of its 52-week range. Its price has grown by nearly 30% in the past 12 months, compared to the S&P/ASX 200 (Index: ^AXJO)(ASX: XJO), which has risen just 2.64%. For me, the share price seems a little expensive but, as I've highlighted above there are lots of good reasons to buy BWP today.
