The prospect that distributions from
-Investor sentiment likely to be impacted by a lack of distribution growth
-Repositioning assets as Bunnings vacates likely to overhang the stock
-Acquisitions are key to a return to growth for
Earnings growth remains elusive for
The weighted average lease expiry (WALE) is 4.2 years with 11% expiring in FY22. This highlights a portfolio that is more asset-management intensive than traditionally the case,
The broker continues to believe the core Bunnings assets are conservatively valued relative to transaction data and many will benefit from the re-rating of infill industrial assets, although this is largely reflected in the implied 4.8% capitalisation rate.
Around 99.6% of rent was collected in FY21 and the distribution was flat at 18.29c per security in FY21, and a similar outcome is expected in FY22. Furthermore, distributable profit of
This pushes the business to become more assertive in obtaining income. While funding distributions from capital profits is not of great concern in itself, as the balance sheet is solid, Moelis suspects the fact earnings and distributions are unlikely to grow will affect investor sentiment.
Morgan Stanley estimates there may be no growth in distributions until FY24 when underlying earnings can fully support payments to shareholders. Even then there are downside risks relating to the lease expiries.
Like-for-like rental growth was1.6% in FY21, the lowest level since FY12. Market rent reviews totalled 13 during the year and resulted in a -20 basis points reduction in rent across these assets. There are two reviews still outstanding from FY20 and a further 11 from FY21 that are unresolved and subject to negotiation.
Bunnings
The impact of Bunnings vacating stores and whether
An increase in the CPI might then contribute to stronger like-for-like growth and there will be fewer Bunnings stores subject to transformation.
Yet if the CPI remains low and the outlook for interest rates softens then there will be little growth and an ever-decreasing WALE, consequently increasing the risk profile. Occupancy is 97.8% and is expected to remain under pressure, as lease expiries average 10% for the next five years.
Where the land value is high and development makes sense, Bunnings is more likely to stay because of a lack of suitable alternatives,
Acquisitions
Moelis notes the transformation is ongoing and it appears large format retail maybe come an increasingly bigger component of the portfolio, yet while on the acquisition trail management has found the current environment hard to execute within.
Over the short term, Jarden expects cost inflation and a normalisation of the pay-out will largely offset any acceleration in income growth. The ability to deploy capital at attractive returns is also limited, given the tight transaction market for Bunnings assets.
Citi agrees acquisitions are key to offsetting the earnings impact of the re-positioning of the Bunnings portfolio and estimates debt-funded acquisition capacity would be around
Moelis, not one of the seven stockbrokers monitored daily on the FNArena database, assesses the stock is trading at an elevated 22% premium to net tangible assets and at current levels the risk is to the downside, maintaining a Sell rating and
The database has three Sell ratings and one Hold (
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