BWP Group (ASX:BWP) (FY 2026) Earnings Call Highlights: FFO Up 4.5%, Gearing Drops to 18.5%

Negative Points

• FY27 distribution guidance of $0.20 per security implies a payout ratio of 104% of FFO, indicating FFO is not expected to grow in FY27.

• Elevated capital expenditure of $55-65 million in FY27 will continue, with a portion (recurrent spend) not generating direct returns.

• Borrowing costs increased 22% to $42.7 million, and the weighted average cost of debt is expected to rise to 5.0-5.3% in FY27.

• Interest cover declined to 4.2 times from 4.8 times in FY25, reflecting higher debt levels.

• Divestments, particularly Chadstone, will reduce rental income in FY27, creating a headwind to FFO growth.

• Bunnings market rent reviews averaged a negative 0.7% variance to passing rent, with one review (Mile End) still outstanding.

• Occupancy decreased to 98.4% due to assets under redevelopment, though non-development assets remain fully occupied.

Q & A Highlights

Q: Regarding FY27 guidance, dividend growth is 3% with the payout ratio moving from 100% to 104%, implying flat FFO. What are the main moving parts? A: Mark Scatena (Managing Director) explained that the primary headwind to FFO in FY27 is the lost income from recent divestments, with Chadstone being a very significant contributor. He noted that if you add back the lost income from divestments, you would broadly arrive at a normalized FFO in line with distributions. He expects unit FFO growth in FY28.

Q: The LFR leasing spreads of 23.6% were very strong. Are there any one-off factors inflating this number, and what is the WALE of the LFR portfolio? Can similar spreads be crystallized over the next year or two? A: Mark Scatena (Managing Director) noted that the 23% result reflects favorable elements within that specific cohort of 14 negotiations and shouldn't be assumed as a run rate. Andrew Ross (Head of Property) added that they are only 20%-25% through the program of negotiating LFR leases and that there has been a step change in market rentals across Australia for LFR due to higher development costs. He forecasts rent increases well above CPI across the existing portfolio, with the current LFR WALE at approximately 6.5 years and opportunities for good rent reversion in FY27 and FY28 at minimal incentives.

Q: On the acquisition front, you've been more active on the LFR side, buying at cap rates of 5.75% and 6%, which is broadly in line with recent Bunnings Warehouse deals. What differentiates these LFR acquisitions from buying traditional Bunnings assets? A: Mark Scatena (Managing Director) stated that LFR acquisitions like Morayfield and Sunbury offer stronger income growth prospects through curation and leasing spread opportunities compared to Bunnings assets with more predictable lease structures. He noted that standalone Bunnings assets rarely transact at comparable rates, with recent transactions closer to a 5% cap rate for desirable metropolitan Bunnings warehouses, maintaining a clear differential between LFR and Bunnings standalone cap rates.

Q: Post the capital raise, gearing is still very low at 18.5%. Can we expect a lot more activity and potentially bigger deals in the future? A: Mark Scatena (Managing Director) explained that after deploying the remaining $120 million of the capital commitments from the raising, gearing would sit at the low end of the target range. Any additional inorganic activity, such as the Sunbury acquisition, would push gearing higher into the range. He noted it's difficult to guide on inorganic activity, but post-deployment of capital, gearing would be at the low end all things being equal.

Q: On the Noarlunga development, pre-commitment is at 78%, unchanged from the half. Are conversations on track to fully let by completion? A: Andrew Ross (Head of Property) confirmed the project is on track, stating they are in very advanced negotiations for the last remaining tenancy. The remaining 22% represents only a single tenancy of about 2,000 square meters.

Q: With a payout ratio around 104% of FFO and recurring maintenance CapEx, what's the reluctance to reset the dividend lower, especially when the marginal debt cost is higher than the dividend yield? A: Mark Scatena (Managing Director) responded that the payout ratio range is intended to accommodate portfolio changes, including repurposing activity and divestment cycling. He stated there is no intent to reset the payout ratio, and over the medium term, they aim to ensure the dividend is covered with free funds, expecting FFO growth on a unit basis with repurposing contributions manifesting more fully through FY27 into FY28.

Q: What is your expectation for the weighted average cost of debt in FY27, and are there margin-saving opportunities given refinancings in '28 and '29? A: David Hawkins (Chief Financial Officer) forecasted the cost of debt for FY27 to be between 5% and 5.3%, based on the current swap rate of 4.8%. He noted that margins are already very tightly priced with little wiggle room, citing the October '25 five-year bond issuance at 105 basis points as an example of current market positioning.

Q: Looking at FY27, the 4% of leases exposed to market reviews is essentially the LFR component. What are your expectations there, and what does that number look like for FY28 and FY29? A: Andrew Ross (Head of Property) confirmed that the 4% exposure is almost entirely the LFR portfolio, given the Bunnings lease reset. He noted that FY28 will be fairly consistent with that 4% level, and over the next four years, it will remain at approximately 4% to 5% maximum each year, as the first Bunnings lease expiry (excluding Geraldton) is another four or five years away.

Q: The CapEx guidance for FY27 is $55 million to $65 million. Is that a good go-forward run rate, and what yield on cost should we expect? A: David Hawkins (CFO) indicated that FY27 CapEx is likely higher than the go-forward run rate, with staying-in-business CapEx (which doesn't generate a return) expected to range between $8 million and $13 million annually. Mark Scatena (Managing Director) added that for yield on incremental cost, the repurposing projects on slide 18 provide strong guidance, and Bunnings expansions are rentalized at five-year swap plus 200 basis points.

Q: With the strong development pipeline completing through FY27, how are you thinking about additional opportunities across the book into the medium term? Is there a run rate you'd like to hit? A: Mark Scatena (Managing Director) stated they don't have as many repurposing projects moving forward post the lease reset. Key opportunities include Broadmeadows (post adjacent land acquisition), Northland (currently vacant and going through planning processes as a more medium-term opportunity), and deploying capital into Bunnings expansions like Pakenham, Maitland, and Balcatta. He expressed hope that being a good capital provider for Bunnings will lead to more such projects over time.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .