BWP Trust (ASX: BWP) has rebounded close to 10% since the beginning of 2025, outperforming the 5% increase in the S&P/ASX 200 index over the same period. Like other Australian REITs, BWP is benefiting from the moderating outlook for interest rates.

Why it matters: With easing inflation and the Reserve Bank of Australia’s increasingly dovish stance, BWP’s outlook is improving.

  • Declining government bond yields likely mean BWP’s average cost of debt won’t increase much further. We expect its average cost of debt to reach 5% within a few years as cheap debt matures, from 4.4% in the first half of 2025. This shouldn’t detract much from distribution growth.
  • Bunnings leaving some older sites remains a headwind, though we think most vacated properties can be sold or redeveloped without incurring major losses.

The bottom line: We retain our AUD 3.80 per share fair value estimate for no-moat BWP Trust. It trades at a 6% discount to our intrinsic assessment.

  • At the current price, BWP offers a healthy yield of 5.3%. We forecast distribution growth of 1.8% per year on average. We forecast relatively strong revenue growth of 7.0% per year for the five years to fiscal 2029, mainly on the Newmark acquisition.
  • With defensive revenue, a strong balance sheet, and solid yield, BWP is an appealing option for income-focused investors.

Solid outlook as rent growth to offset rising costs of debt and vacancies

For over 20 years, BWP Trust has consistently applied a strategy of generating rental income from long duration leases over warehouse properties predominantly tenanted by home improvement retail business, Bunnings. Although BWP Trust is proposing to transition some Bunnings Warehouse stores to alternative uses, strategy is to have 80%-90% of rental income from Bunnings. Wide-moat Wesfarmers owns 100% of Bunnings and 23% of BWP Trust, and is the trust’s responsible entity.

Concentration risk from having Bunnings as its primary tenant is less of a concern given the benefits from having a strong and growing tenant. Bunnings is well managed and dominates the industry in Australia. Also, home improvement retailing is typically resilient to the business cycle. We also like that Wesfarmers divested its Australian grocery business Coles and sold its home improvement business in the UK, making Bunnings its key growth business. Wesfarmers stated intention is to open 10 to 14 Bunnings stores per year into the foreseeable future and invest in upgrading its existing Bunnings properties, including those owned by the trust.

Rental income generally grows on a like-for-like basis a little over the Australian inflation rate as measured by the consumer price index, or CPI. Leases are typically for an initial period of 10 to 12 years, with multiple options to renew for a further five to six years. The lease terms provide for annual rental growth linked to CPI or for a fixed annual rate typically about 3%. They also provide for midlease market rent reviews, which usually have a cap-and-collar that limits the rent increase/decrease to 10%. Lease terms have been getting worse lately as Bunnings flexes its strong bargaining power over the trust.

BWP bull say

  • BWP’s core properties are key to Bunnings’ business, and provide the foundations for a defensive rental income stream that underpin growing distributions.
  • Wesfarmers’ focus on its Bunnings business has the potential to lead to upgrades and acquisition opportunities which could foster further incremental rental income.
  • BWP’s warehouse properties have low capital maintenance expenditures that allow the trust to maintain a high distribution payout ratio without the need to access capital markets.

BWP bears say

  • BWP’s external management and fee structure may incentivize future management to acquire overvalued properties that destroy securityholder value.
  • Bunnings continues to vacate some of BWP’s older, smaller properties, resulting in higher vacancies and a drag on earnings.
  • Higher interest rates also weigh on the distribution outlook