BWP.AXBWP.AXASX
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Operator: Ladies and gentlemen, thank you for holding, and welcome to the BWP Half-Year Results Investor Briefing. [Operator Instructions] However, you will have an opportunity to ask questions immediately afterwards, and instructions will be provided on how to do this at that time. I would now like to hand the call over to the Managing Director of BWP, Mr. Mark Scatena.
Mark Scatena: Thank you, and good morning, everyone, and thanks for joining us. My name is Mark Scatena, Managing Director of BWP, and I'm joining you from Perth. With me today is Andrew Ross, Head of Property; and David Hawkins, our Chief Financial Officer. Today we're pleased to present BWP Group's results for the half-year ending 31 December 2025. BWP has released to the ASX this morning its half-year results announcement, half-year report incorporating the 4D, and investor briefing presentation. I'll now take you through the key aspects of the presentation before we take questions. Turning to Slide 3. To commence today, we acknowledge the traditional owners of country throughout Australia and their continuing connection to lands and waterways upon which we depend. We pay our respects to their elders, past and present. Turning to Slide 6 and portfolio highlights. The half-year result reflects continued progress across BWP's strategic pillars of portfolio optimization, profitable growth, and portfolio renewal. Portfolio optimization outcomes were underpinned by the completion of management internalization and progress on the Bunnings lease reset, resulting in an extension of the portfolio weighted average lease expiry to 7.5 years, an increase of 3.1 years on the prior corresponding period. Like-for-like rental growth for the 12 months to 31 December 2025 was 2.6%, supported by strong leasing outcomes in the large format retail portfolio, where leasing spreads increased by an average of 7.6%. The portfolio recorded a valuation uplift of $155.9 million, reflecting improved rental income and a firming of the weighted average cap rate of 13 basis points to 5.27%. Developments and repurposing activities, namely at Fountain Gate and Broadmeadows in Victoria and Noarlunga in South Australia, were advanced during the period. Supporting profitable growth, the group completed the acquisition of HomeCentre Morayfield in Queensland for $48 million at a market capitalization rate of 5.75%. The fully leased large format retail center was acquired off-market, funded from existing debt facilities, and was earnings accretive from settlement, further increasing BWP's exposure to large format retail. Reflecting the group's operating performance, an interim distribution of $0.0958 per security has been declared and will be paid on the 27th of February 2026 to security holders on BWP's register at 5:00 p.m. Western Standard Time on 31 December 2025. BWP today reaffirms full-year distribution guidance, subject to no major disruption of the Australian economy or material change in market conditions, expecting total distributions for the year ending 30 June 2026 of $0.1941 per security, representing a 4.1% increase on the prior year's distribution of $0.1865. Portfolio renewal and capital management activity also progressed during the half, including the divestment of a non-core asset at Morley in Western Australia. Post the balance date, the divestment of Port Kennedy in Western Australia was completed, and the group also entered into an unconditional contract for the sale of Chadstone in Victoria for $86 million, with settlement expected in June 2026. In October 2025, the group completed a successful debt refinancing, issuing a $300 million 5-year Australian medium-term note, which was strongly supported by both domestic and offshore investors, further diversifying our funding base and enhancing balance sheet flexibility. Moody's revision of our credit rating upwards to A3 stable further underscores the strength and resilience of the balance sheet, positioning the group well to support future growth opportunities. Turning to Slide 7 and key portfolio metrics. Statutory profit after fair value movements and income tax was $221.8 million, compared with $157.1 million in the prior period, an increase of 41.2%. Profit before fair value movements and tax of $66.4 million was largely in line with the prior corresponding period, with increased rental income offset by one-off transaction costs associated with the internalization and lease reset. The underlying net tangible asset backing of BWP's securities increased during the period to $4 per security at 31 December 2025, reflecting the unrealized gains on revaluation of investment properties and the increased number of securities on issue post the internalization. Turning to Slide 9 and financial performance. While I won't spend time on Slides 9 and 10, they do provide an overview of financial performance for the half, with key metrics focused on income, expenses, portfolio valuation, distributions, investments, and cash generation and our capital structure. Turning to Slide 11 and funds from operations. Funds from operations increased to $70.4 million, up 6% on the prior corresponding period, with a distribution reflecting 98.6% of FFO. Distributions for the half were fully supported by cash generation, despite increased repurposing activity providing a headwind to rental income. BWP continues to target a distribution payout ratio of 90% to 110% of FFO, providing flexibility to accommodate the impacts of activities such as development and repurposing. Turning to Slide 13 and portfolio evolution. This Slide summarizes the evolution of the BWP portfolio and reflects the contribution of site repurposing, Bunnings upgrades and expansions, and increasing participation in the large format retail or LFR sector to the composition of BWP's portfolio. Whilst investment in Bunnings Warehouses remains BWP's primary focus, large format retail has become an increasingly important component of our portfolio. Since 2020, BWP's LFR portfolio has grown to approximately $1.2 billion, driven by rental growth, acquisitions, and asset repurposing, placing BWP as Australia's fourth-largest owner of LFR assets. Importantly, leveraging the post-internalization reduction in the cost of capital provides BWP with increased capacity to continue growing all aspects of the portfolio, including LFR, and supported by a tenant-led expansion and site repurposing pipeline of approximately $100 million. Turning to Slide 14 and large format retail dynamics. Continued tenant strength, together with an undersupply of lettable area, is driving an attractive rental growth outlook for large format retail. And population growth, rising residential property values, and low unemployment have underpinned strong retailer performance, with listed large format retailers continuing to demonstrate resilient sales growth. Given this context, with cumulative lease expiries within the LFR portfolio to the end of financial year 2029 representing some 10% of annual portfolio income, opportunities exist to drive positive leasing spreads through effective portfolio optimization and tenant curation. Turning to Slide 15 and portfolio composition. The large format retail market is material in size, with an estimated value of $25 billion, and importantly exhibits strong ongoing transaction activity or asset churn that supports portfolio growth through asset recycling and acquisitions accretive to BWP's cost of capital. And whilst BWP's market share of the LFR market is significantly less than its share in Bunnings Warehouse ownership, the addressable market size and the higher rates of churn present an opportunity for BWP to grow its portfolio over time, leveraging the group's asset management and development capability, supported by its balance sheet strength and post-internalization cost of capital reduction. Turning to Slide 16 and an update on the transition to an internalized model. Upon completion of the internalization transaction on the 1st of August 2025, BWP has prioritized systems enablement, team employment arrangements and resourcing to support growth and improve the delivery of investor relations and sustainability initiatives. Collaboration with Wesfarmers to support the transition to an internalized model has been effective, with expansion planning and upgrade principle development advanced with Bunnings during the half. The internalized model remains a key enabler of BWP's strategy, supporting a lower cost of capital, improved alignment with security holder interests and greater operational flexibility to pursue value-accretive growth opportunities. Turning to Slide 18. Activity across the portfolio continued to be underpinned by strong tenant covenant quality, extended lease duration and disciplined asset management. The reset and extension of 62 Bunnings leases materially increased portfolio WALE to 7.5 years as at 31 December 2025, while leasing activity within the large format retail portfolio continued to support income growth. Occupancy of 96.7% reflects the impact of stores vacated for repurposing at sites including Fountain Gate in Victoria and Noarlunga in South Australia. And BWP's rental income continues to be supported by a high-quality covenant mix, with approximately 97% of income derived from Wesfarmers Group and other national retailers. And turning to Slide 19. Rental income growth for the portfolio reflects the benefits of a balanced lease structure and the increasing contribution from large format retail assets. For the 12 months to 31 December 2025, like-for-like rental growth was 2.6%. Growth was driven by fixed and CPI-linked rent reviews across the portfolio and strong leasing spreads in large format retail lease renewals, partially offset by market rent reviews on 2 Bunnings leases, being Chadstone and Hawthorn in Victoria. Turning to Slide 20. Leasing activity within the large format retail portfolio delivered positive outcomes, with leasing spreads across 8 large format retail tenancies averaging 7.6%, reflecting strong rental reversion. Also, incentives remain low during the half, reflecting both tenant demand and the quality of BWP's portfolio. These outcomes continue to support income growth, despite increased repurposing activity during the half. Moving to Slide 21 and cap rates and valuations. The entire portfolio was revalued during the period, resulting in a weighted average capitalization rate of 5.27%, representing compression of 13 basis points over the half. Net fair value gains for the period totaled $155.9 million, with this valuation uplift driven by both improved rental income and cap rate compression. Market transaction activity increased during the period, reflecting improved alignment of buyer and seller expectations and continued investor appetite for assets underpinned by strong covenant quality. Turning to Slide 22 and repurposing. During the half, BWP's repurposing activity gained momentum, with construction commenced at both Fountain Gate in Victoria and Noarlunga in South Australia, and progress also made on the Broadmeadows HomemakerCentre expansion in Victoria. These projects reflect BWP's capability to execute across feasibility, planning, construction and leasing, with a strong focus on preleasing outcomes and disciplined capital deployment. Repurposing activity remains a driver of future income growth and portfolio renewal, enabling the group to reposition assets to higher and better use while maintaining balance sheet flexibility. Moving to Slide 24 and tenant expansion activity. As a key driver of profitable growth, BWP continued to progress agreed tenant-led expansion projects comprising total commitments of $81 million across a number of sites. Key projects include the $14 million expansion at Bunnings Pakenham in Victoria and the $11 million Carco redevelopment and expansion at Midland in Western Australia, both expected to commence prior to 30 June 2026. These projects are characterized by long lease terms, attractive rentalization rates, and strong tenant alignment, and reflect BWP's strategy of deploying capital into lower-risk, income-accretive opportunities within the existing portfolio. Pleasingly, planning has advanced regarding the five Bunnings store expansion projects agreed as part of the internalization and Bunnings lease reset and capital investment transaction. Turning to Slide 25 and acquisition activity. During the half, the group acquired HomeCentre Morayfield in Queensland for $48 million at a 5.75% market cap rate from an unrelated third party. The fully leased retail center offers approximately 12,100 square meters of lettable area, with tenants such as Amart Furniture, Nick Scali, Super Cheap Auto, and Sydney Tools. The off-market acquisition was funded from existing debt facilities and was earnings accretive from settlement, further increasing BWP's exposure to the large format retail sector, which continues to benefit from favorable supply and demand dynamics. Turning to Slide 27 and portfolio renewal. Portfolio renewal activity during the half focused on actively recycling capital through the divestment of noncore assets and redeploying capital into opportunities and projects that enhance portfolio quality and growth. The sale of the ex-Bunnings Morley property in Western Australia for $19.5 million and the ex-Bunnings Port Kennedy property, also in Western Australia, for $14.3 million were both completed at premiums to book value. Subsequent to period end, the group also executed an unconditional contract for the sale of the Chadstone Homeplus Homemaker Centre in Victoria for $86.0 million, with settlement expected in June 2026. The divestment followed the negotiation of a lease extension with Bunnings to July 2030 and an extensive public sales campaign, achieving a realized internal rate of return of 15.2% since its introduction to the BWP portfolio via the NPR transaction. The proceeds of the Chadstone sale will initially be applied to reduce drawn debt. These transactions demonstrate BWP's disciplined approach to capital recycling and the ability to capture value through active asset management. Moving to Slide 28. BWP's capital position remains strong, supported by diversified funding sources, extended debt maturities and investment-grade credit ratings from both S&P and Moody's. During the half, the group further diversified its funding sources and extended debt maturities, supporting increased balance sheet flexibility. Gearing at 31 December 2025 was 24.7%, which remains well within the Board's preferred range of 20% to 30%, while the weighted average cost of debt remains stable at 4.4%. And on to Slide 29. The group completed a new $300 million 5-year bond issuance, further diversifying funding sources and extending the weighted average maturity of debt. The group has sufficient available liquidity to address upcoming debt maturities, including the $150 million bond maturing in April 2026. BWP's diversified mix of domestic and international bank facilities and capital market funding positions the group well to support ongoing repurposing and tenant-led expansion activity and future portfolio growth opportunities. Turning to Slide 31 and governance. As disclosed in November 2025, our Chair, Tony Howarth AO, has retired from our Board, with the current chair of the Audit and Risk Committee, Ms. Fiona Harris AM, to succeed Tony as Chair. Fiona's appointment as Chair reflects strong Board support and alignment and will provide valuable continuity as BWP transitions to its new role as an internally managed business. On behalf of the management team and investors, I'd like to acknowledge and thank Tony for his significant contribution, strong stewardship, wise and commercial counsel and effective leadership of the Board. Tony is leaving BWP well-positioned following the recent internalization and lease reset and extension transaction. Turning to Slides 33 and 34 and our outlook. For the balance of the 2026 financial year, BWP will continue to deliver on its strategic agenda of portfolio optimization, profitable growth, and portfolio renewal. The group will remain focused on embedding the internalized model, with initiatives centered on systems enablement, remuneration alignment with security holder interests, and also additional resourcing, particularly in areas supporting growth, being investor relations and sustainability. The second half of the 2026 financial year will see the progression of material capital expenditure commitments, reflecting significant site repurposing activity and tenant-led expansion projects, with capital expenditure of between $60 million and $70 million expected for the 2026 financial year, subject to construction progress and project timing. BWP will continue to assess and pursue accretive growth opportunities, leveraging the reduction in the cost of capital achieved post-internalization and the group's diversified funding positions. Large format retail remains a key focus area, with favorable market conditions, including low rates of new supply and strong tenant performance, expected to support portfolio optimization through tenant mix curation and leasing spread opportunities. BWP's largest tenant, Bunnings, remains well-positioned, supported by external operating environment and its continued focus on expanding and innovating its addressable market. Rent reviews are expected to contribute incrementally to property income in the second half, with 93 leases scheduled for CPI-linked or fixed percentage increases, incremental to the 73 completed in the first half. In addition, three market rent reviews of Bunnings Warehouses are in the process of being finalized and are expected to be completed during the second half. Finally, and subject to no major disruption of the Australian economy or material change in market conditions, BWP affirms total distribution per security guidance for the 2026 financial year of $0.1941, or 4.1% above last year. And that concludes our prepared remarks, and I'll now hand back to the moderator to facilitate any questions, where myself; Andrew Ross, BWP's Head of Property; and David Hawkins, BWP's Chief Financial Officer, are available. Thank you.
Operator: [Operator Instructions] Your first question today comes from Cody Shield from UBS.
Cody Shield: So you've got the expansion and repositioning CapEx here. You're talking about more LFR acquisitions potentially. I mean, where do you guys see gearing landing over the next 12 to 18 months, and where would you like that to sit?
Mark Scatena: Thanks, Cody. Look, we have guided clearly to CapEx in terms of the outlook, so we have that CapEx profile to deploy this year, which we're very pleased to deploy into some very strongly performing incremental investments through repurposing and expansions. So we're very pleased with that. There's some more capital to deploy to complete some of that activity into FY '27. So if you think about the headroom and availability we have, we expect gearing probably to approximate kind of what it currently is, perhaps trend a little bit lower over time. But that's, of course, absent any inorganic activity that might play out. But I think if we deploy into the existing pipeline of asset repurposing, I think you'd probably expect gearing to broadly remain consistent.
Cody Shield: Okay. That's clear. And then just on the CPI escalations, I mean, they look a touch light for the period. What kind of lag do you have on the CPI that goes into that?
Mark Scatena: Can you just repeat that question, Cody? Sorry, we just missed that.
Cody Shield: So just on the CPI-linked escalations 2.6%. I mean, what kind of lag have you got on the mechanisms? Just thinking, because the CPI over the last, let's say 6 months to December '25?
Mark Scatena: It's about 3months lag.
Cody Shield: Okay. But that 2.6% then, I mean, it's a touch light, isn't it?
Mark Scatena: I think the one thing we'd probably point to on that and we call this out, I think on Slide 21. And that is if you just look at the composition of that lease outcome mix for the year, you can see we disaggregated that -- sorry, I should say, Slide 22 -- no, sorry, Slide 19, apologies. Slide 19. No, we disaggregated that. So we did that to give a little bit more flavor to the composition of that leasehold mix and the outcomes for the half. So you can see the composition there in regards to both CPI and the fixed movements, and we've split that across the Bunnings leases, and then we've had the LFR as a separate component there, and then we've given the aggregate in that fourth column. And we've also pointed to market rent reviews, and we have a footnote there that refers to 2 market rent reviews in the Bunnings market rent reviews, which had a cumulative outcome of 4.4% down for those assets. So I think one of those was Chadstone, which is a disposal asset. If you add back essentially those market rent reviews, again, one of those is now, or will subject to completion not be within the portfolio, that the overall growth in terms of income for an all-lease portfolio for the half was 3%. So again, essentially that some strong leasing spread outcomes in LFR offset by 2 market rent reviews in Bunnings, knowing that we've got 62 leases that we reset through the lease reset at the start of the half.
Operator: Your next question comes from Tom Bodor from Jarden.
Tom Bodor: Just picking up on that CPI question and the difference between the Bunnings CPI indexation at 2.5% and the LFR at 2.9$. Were there some caps on some of those Bunnings leases that had CPI escalations?
Mark Scatena: Yes. Yes, Tom, there were. There's a few leases in the portfolio that have got that cap in there. And just so everyone knows, these are actual actioned CPIs during the period. So yes.
Tom Bodor: Were those ones that were capped though, they were just 2.5% because the cap's 2.5%?
Mark Scatena: Correct. Right, Tom.
Tom Bodor: That's clear. Just on the guidance, you at the full year you said $5.6 million of capital profits released as an assumption sitting behind your guidance on DPU. Has your expectations changed around this $5.6 million number?
Mark Scatena: Tom, I think it's a good question in the sense that we guided to that headwind which was the repurposing shortfall in comparable rental income given, as I said, that repurposing activity, so we wanted to be very clear on that. Clearly, we have some transaction costs as well, which we bore in the half. I think if you look at essentially the FFO uplift at 6% and the distribution and the payout being slightly less than that, I think again we're providing for some flexibility in the second half. I think that guides to that. So we're pleased with that FFO growth. We're pleased with broadly that underlying set of earnings. But at this point, Tom, there's a lot to play for in the second half, as there always is. So we're hopeful that that level of capital profit release isn't required, but I think there's some flexibility in that guidance.
Tom Bodor: Bodor: So you're tracking ahead of the $5.6 million where we sit today compared to what you thought 6 months ago?
Mark Scatena: Yes, well we are, but again, a fair bit of activity, Tom, so we just want to make sure we're holding that.
Tom Bodor: Okay. Clear. And then just the final one, I guess maybe be interesting how the relationship with Wesfarmers has evolved post-internalization. Is it sort of obviously you've said they've been constructive in terms of internalizing and the process there, but what about just sort of broader discussions around their needs and wants as a tenant?
Mark Scatena: Yes, I suppose there are 2 components there, Tom. There's the Wesfarmers shared service agreement, and that is going very well, and that's entirely to expectation. They've been very supportive and enabling as it relates to continued strong technology support, continued strong insurance program support as we run off into our own program. So again, very pleased with that as it relates to Bunnings. I think as we called out during much of the lease reset and internalization discussion, our topics of interest and our topics of mutual discussion have moved into upgrades and expansions, and we're spending a lot more time discussing those prospects as part of that transaction element. So I would say that relationship's positive, still commercial and robust, as it always is, but I think it's pleasing that we have more of a focus on expanding our tenant's portfolio, which is incredibly important as a good landlord. And we've diverted some of that activity away that we were spending on market rent review. And there's also a very positive impact to that as well outside the Wesfarmers relationship, and that is that the asset management team, our leasing team, have more time to spend on perhaps the non-Bunnings part of the portfolio, and we're very hopeful that we are deploying that released effort into good activity. We talked a lot about leasing spreads, et cetera., in the LFR portfolio, so that is a key focus of the team.
Operator: Your next question comes from Lauren Berry from Morgan Stanley.
Lauren Berry: I just wanted to pick up on the payout ratio guidance that you've given as a range of 90% to 110% of FFO. Like if you look at the top and bottom end of that range, it's about like a $25 million to $30 million swing factor between those bookends. So just wondering why you've given yourself such a large range to play in there. And if there's any, I guess, read through to how you're seeing the next couple of years downtime from redevelopments?
Mark Scatena: Thanks, Lauren. I wouldn't read too much through that. I think you've seen for the half, we've paid out just shy of 99%. I think historically that has broadly approximated 100%. That's our intent going forward. But I think we just wanted to have some flexibility, Lauren, on the basis that we've been a little bit more active, there are some timing differences coming through the FFO line, for example, given some transaction activity. So I think it's more the flexibility and agility to meet, I suppose, some of that activity, Lauren. But yes, our intention most certainly is to pay out as fully as we can in terms of FFO. So I think it just gives us some flexibility, Lauren, that given the lumpy activity, we just wanted to give some allowance for that.
Lauren Berry: Yes. Sure, sure. Do you foresee more of these timing differences occurring in FY '27, or will '26 kind of be the bulk of them?
Mark Scatena: No. Most of the repurposing activity is happening essentially this half. That will carry forward into the first half of '27. So I think we've guided to Fountain Gate's completion in September, and then Noarlunga a little after that, and then our Broadmeadows Homemaker Centre a little after that into the first half of the calendar year. So yes, we'd expect most of that repurposing timing difference to be completed in the first half of the next financial year.
Lauren Berry: Okay. And just on the developments, are you able to give us a little bit more color on what kind of yield on cost you're looking at for the LFR opportunities?
Mark Scatena: Yes, I suppose there are a couple of things there. And if the yield on cost you're talking about the repurposing, Lauren, I think the deployment of that $60 million to $70 million we guided to. I think we've always said that there's a hierarchy, and the hierarchy that we really like to deploy capital into that repurposing activity, and our expectation there is that yield on cost is 10% and above. So that's our expectation. And then you can see clearly we then deploy into existing tenant expansion and upgrade activity, and that has a typically a lower yield, and then of course we've got the inorganic M&A activity. So that's the hierarchy. So in terms of that repurposing, we'd expect kind of double-digit yield on costs.
Lauren Berry: Double-digit, are you talking about just on your -- so when you've got like the development cost, say Fountain Gate, $32 million, you're saying like the yield on cost on that would be double digits?
Mark Scatena: Yes. On the CapEx.
Lauren Berry: Yes. Okay. And then just final one from me. I mean, you've given a lot more on LFR as it relates to your portfolio. Do you see a certain portfolio split evolving over time, say exposure to LFR versus stand-alone Bunnings?
Mark Scatena: No, no, we don't have a pie diagram expectation, a pro forma that we, for example, tried to showcase on Slide 13. I think it's more we'll deploy capital, Lauren, into activity that we think is very good for security holders and supports our objective, of course, of improving income and the portfolio over time. So that's the premise. What we've called out is that we are a relatively decent player in that segment and in that sector. And so we think we have some skill, we understand the lease structures, the tenant mix, and how we put capital into those assets. And the important thing is that the market is larger than the Bunnings Warehouse consolidated market, and it churns at a faster rate. So that means opportunities perhaps become more available in that portfolio. So that growth we expect to be more attainable over time, and we wanted to point the market to that. So we really like the sector. We absolutely love Bunnings Warehouses. We'd love to participate in both, of course. It's more just the addressable market and the churn of opportunity, and we wanted to explain that.
Operator: Your next question comes from Andrew Dodds from Jefferies.
Andrew Dodds: I'd just be interested to hear your comments around the 3 assets that were excluded from the Bunnings lease reset. I think from memory these were Rocklea, Wagga Wagga, and Geraldton. I think 1 or 2 of them might have had expiries coming up. So just any color you can provide on those three would be great.
Andrew Ross: Yes, sure. And it's Andrew Ross here. Geraldton, Bunnings has indicated to us that it's a property that they don't want to remain at, and in fact, they are in the process of relocating to a new site, not far away from the existing store. It's a much bigger store, newer store. So we've known about that for almost 2 years now, and we've disclosed that to the market. Wagga is another property that Bunnings had indicated to us some time ago -- years ago actually, that they were going to build a bigger store in Wagga and relocate to that one. That hasn't eventuated at the moment. So just recently, Bunnings actually exercised the next 5-year option, which is from the 31st of March 2021 -- 2026, for 5 years. And the third property that you mentioned is Rocklea. Bunnings also indicated to us, I think it was either earlier this year or late last year, that it was a store that they were going to close, and they were closing it as a result of rebuilding the Oxley store, which is about 3 kilometers away. It was flooded in the 2022 floods, and they've rebuilt it and doubled the size of that Oxley store. So their business decided that Rocklea was a closure.
Andrew Dodds: Okay. So then your sort of view around FY '26 being I guess the peak sort of vacancy period, just combining your comments now with the pre-commitments you've got on Fountain Gate, Broadmeadows, and the other development site, I mean, all else equal, it means FY '27 is shaping up to be a pretty good year in terms of occupancy across the portfolio, I'd imagine.
Mark Scatena: That -- it will absolutely improve, and we're looking forward to having some new assets as well, well some repurposed assets in the portfolio and some new tenants. So -- but again, most of that will happen in the second half.
Andrew Dodds: Okay. And then just finally, on the sale of Chadstone, I noted in your release that it's a 6-month settlement period, so not until kind of 30 June. Is this sale subject to capital raising by the acquirer?
Mark Scatena: No, no. That's not our understanding.
Andrew Ross: It's an unconditional contract. Sorry, did you hear that? That was an unconditional contract to sell Chadstone.
Andrew Dodds: Yes. No, got it.
Operator: Your next question comes from Howard Penny from Citi.
Howard Penny: Just my first question on transaction volumes and interest in your asset space and subsector at the moment. You give us a chart showing that cap rates have, at a market level, started to compress a bit over the last 12 months. But are you seeing a lot more interest and activity in large format retail and Bunnings centers at the moment? And just looking forward, maybe over the next 18 months, do you expect a higher level of activity in the subsector?
Andrew Ross: Yes, Howard, look, as you can see on Slide 21, there's a lot more dots on that page in 2025 than in the 4 years prior to that. We are seeing a lot more activity in Bunnings Warehouse transactions. There's been a number that have actually transacted off-market. And we're also seeing a lot more interest in large format retail. I mean, BWP's talking to a number of agents about off-market opportunities for LFR, and BWP might be successful in some of those. Some of those might not even come to the market. So I guess what I'm trying to say to you is we're being proactive in terms of talking to the market and potentially trying to buy some assets off-market. We're seeing some strong interest, some strong competition from other players in the LFR sector, and we think that that's only going to get more competitive.
Mark Scatena: I think, Howard, we're just -- sorry, just Mark here as well. We called out that asset churn is higher in that segment, and I think by implication there'll be more transactions in LFR. And I think if you couple that with the undersupply of lettable area and strong demand drivers like population, I think you would expect perhaps that some of those dots in LFR perhaps will happen at a higher rate than some Bunnings dots.
Andrew Dodds: And you make a point just on the undersupply. And I just thought, do you have a sense of the difference between the decision to sort of build new assets versus buying existing assets and the profitability of those two decisions at the moment across the sector?
Mark Scatena: Not from a sector perspective. I think if you put yourself, Howard, in our shoes, again, taking an asset -- a brownfield asset, repurposing that, that is very accretive deployment of capital with strong yields on that investment. So I think as we called out earlier, that sits at the top of our hierarchy of capital deployment. So that's something we're very attracted to. And Morayfield as an example, if those transactions can be configured in the right way, we can acquire good, again, existing assets at yields that are accretive to the cost of capital. So they're the things we are very keen on looking at.
Andrew Dodds: And just a final question just on leasing risk. Post the MPR transaction, the WALE has increased and the leasing risk seems to have been reduced. But just thinking of the leases coming up over the next 24 months, have you had any success in getting some decreasing that leasing risk to some degree already?
Andrew Ross: Howard, we're in discussions with a number of the non-Bunnings tenants in our portfolio, some 18 months from now, their lease expiries. So we're having a lot of discussions with them about trying to renew those leases at the moment. And I guess at the annual results, I'm hoping that we'll be able to report a lot of leasing deals to derisk that leasing income risk in future years. Yes.
Andrew Dodds: Well, that's all from me. Congratulations on the results.
Mark Scatena: Thanks, Howard.
Operator: Your next question comes from Murray Connellan from Moelis Australia.
Murray Connellan: Was wondering whether I could get you to comment on the average lending margins across your book at the moment, please. And I guess just taking a look at some of the expiries that you've got coming up, looks like the majority of them are still a couple of years away, but I guess just curious to hear about where you feel your average lending margins are relative to market and what the opportunities may be to compress those over time as far as you can tell.
David Hawkins: It's David Hawkins speaking. We've always been kind of really well supported by our debt providers. So we don't -- as most of our bank debt is on bilaterals, we don't really disclose our individual margins on those banks. But the best thing I can guide towards is our recent MTN transaction where we had margins of 105 basis points, which is pretty relatively close to what our margins are across the board. And in refinancing, we've got $150 million MTN maturing in April, which we refinanced or raised the money early late last year to cover that maturity. Most of the bank debt maturity, we can roll just going back to the banks to discuss extensions as required.
Murray Connellan: Would you be able to comment at all on I guess just what -- I guess, directionally, what you might be expecting over the course of the next few years?
David Hawkins: Subject to any market dislocation, I think we're pretty close to where our margins are. We probably won't get much more savings because we're relatively tightly priced as we are at the moment.
Operator: Your next question comes from [ C.K. Tan ], a private investor.
Unknown Shareholder: Yes, from me, I think one of the questions got answered, directions of the interest rates. I think this morning, basically what I'm seeing is that you guys are actually going into large format. So I trust that you guys have actually done quite some research in it. And I actually admire your ability to actually buy things off market. Question here is this. Obviously, when you look at cap rates, right, it's got to be accretive before you actually buy something. But on a replacement cost basis, do you guys actually look at it from a replacement cost basis? Because right now, I think one of the biggest concerns across Australia, not just large format, but any construction activities, obviously, it's very, very difficult to get things done. Cost of materials, labor availability and maybe even reliable construction team just to actually get projects executed. I mean, you guys can tell me how difficult it is, but would you actually comment on that? And also by lifting your exposure in large format, what sort of like risk profile, do you think is a compromise on the risk profile they're actually taking on?
Mark Scatena: C.K., I'll start. Maybe I'll just start with the LFR question and come back to replacement cost. So yes, what we wanted to characterize in the portfolio composition slides we presented is that we're a large-scale investor in large format retail. And that portfolio is something that has transpired over many years, and some of that is a function of interest in the sector, some of that is a function of Bunnings vacating and us deploying some capital into some highest and best use, and that highest and best use has been large format retail for some of those sectors. So we wanted to characterize our portfolio, C.K., just to demonstrate that we're a competent investor and operator of large format retail freeholds, and we have developed and invested capital into that sector. Now in regards to your comment on risk, I suppose we look at where the opportunities to grow accretively are, C.K., and that's why again we've quantified the addressable market and the churn. And perhaps the growth is more attainable in large format retail than Bunnings Warehouses, just because again those assets, those Bunnings covenants are incredibly tightly held, the churn is not as much, and the pricing is tighter. So I suppose when we look at an LFR asset like Morayfield, there's some recognition that we are up -- a little bit up the risk curve, reflected somewhat in the cap rate. But we like that addressable market. We understand the lease structures, the tenants we're comfortable with. We think the tenants have a strong outlook, or historically have had strong trading outlooks. And the fundamentals of the large format retail sector and those tailwinds of population growth and undersupply, we think they are good settings for investment into that sector. So that I suppose why we are happy to acquire. As it relates to replacement cost, I think you're absolutely right. Part of that undersupply factor has been that replacement cost is quite high. And that's a function, as you've articulated, a function of construction cost and prevailing costs. So we buying existing assets at the moment that is good deployment, investing into existing brownfield assets and improving those assets like we've done is good deployment of capital. We don't typically absolutely represent that versus replacement cost, but I suspect if we did, they would again look favorable relative to the replacement cost.
Unknown Shareholder: Yes, I mean, I would like to guess as much, but obviously I think, over the years, you guys haven't been very active in terms of like going out there to acquire. And I do agree through our historical conversation, the Bunnings Warehouse market is very, very tight. So unless you decide to actually take on more leverage like the other competitors that can potentially buy, but adhering to your conservative strategy, probably you may have to look into large format to actually do acquisitions accretively. Yes, that's what I mean. I'm in total agreement. Yes.
Andrew Ross: C.K., Andrew Ross here. What I would like add on what Mark has talked about is it's not our intent to go out and buy vacant blocks of land and build LFR centers and have a drag on our earnings. The 3 repositionings or repurposings that we've talked about in our slide deck, being Fountain Gate, Noarlunga, and Broadmeadows. They're -- well, Fountain Gate and Noarlunga is a result of Bunnings vacating those stores. Broadmeadows is not a Bunnings site and never was a Bunnings site. It adjoins the Bunnings that we own in Broadmeadows, but this is a property that we bought a couple of years ago, and we're developing on the surplus land there. Now all these development costs, we've tendered those costs and we know what they are. And so we also know pretty much what the rents are, being 3-quarters leased for Fountain Gate and Noarlunga, and we've got strong interest for the balance there. So we're pretty confident that we're going to achieve return on capitals above 10%, and Mark alluded to that earlier from one of the other questions. So with buying other LFR, we're focused really on existing centers. So it's not so much going and buying them and developing them. That's what I'm kind of trying to say to you.
Operator: Your next question comes from [ Claire McHugh ] from [ Green Street ].
Unknown Analyst: Just a quick one from me, just coming back to Lauren's points around the payout ratio. So I know that AFFO isn't a metric you disclose per se, but if we just look at sort of recent history, I think you spent around $6 million to $8 million a year on recurring maintenance capital. So is this a consideration as you're thinking about your FFO payout target? I mean, would it not be a little bit more prudent to have it to run it lower just on that basis, essentially given that maintenance capital is unfunded?
David Hawkins: I mean, that's why we give kind of a range of 90% to 110% on the FFO. Our stay-in-business CapEx or recurring CapEx hasn't been material over the years. We expect, as part of the lease reset, we've agreed about $5 million a year with Bunnings on that, so we expect our stay-in-business CapEx to kind of be around the $10 million to $15 million dollars going forward.
Unknown Analyst: Okay. So is it fair to say whilst you've given that range that it'll err on the lower end of that spectrum?
Mark Scatena: Again, lots of clear movements in, as we bridge into FFO and then into AFFO. So I think we would hope that on average we're in the mid part of that range. I think that's why that range is like it is. So we would hope that again the median is somewhere around that number 100, and that's our aim. But again, some flexibility to allow us to address some topics.
Operator: [Operator Instructions] Your next question is a follow-up from Andrew Dodds from Jefferies.
Andrew Dodds: Just quickly on the development funding mechanism you agreed on with Wesfarmers, which was 200 basis points above the 5-year swap rate. I'm just interested as to when this kind of rentalization gets struck, just given the movement in the 5-year swap rate, and if this is kind of factored into the guidance for this year.
Andrew Ross: Yes. The rate gets struck once both parties have got Board approval and are moving forward with the development. So there's a number of developments there that are in different stages of planning approval and Board approval. So at this point in time, we haven't agreed, or Bunnings hasn't notified us that they want to proceed on any one of those developments, although we're getting very close to one or two of them.
David Hawkins: None of those developments have been included in the guidance for FY '26.
Mark Scatena: So Andrew, I think in the presentation, Andrew, I think we said those projects would commence towards the back end of the calendar year '26. So if you think there about a construction time frame and then assume that, that rentalization commences when that payment is made at the completion, I think that gives you some guide to perhaps when those that income is realized.
Andrew Dodds: Okay. And do you realize a coupon on that CapEx as it's drawn, or just upon completion?
David Hawkins: So with all the Bunnings redevelopments, it only occurs on payment at the end. So Bunnings takes on all the construction risk, and we receive the rent the moment we make the payment at the end.
Operator: Your next question comes from Richard Jones from JPMorgan.
Richard Jones: Just the MER you called out at 50 basis points. Just how is that tracking, and where do you think that will trend over the next 12, 18 months?
David Hawkins: Richard, David here again. That MER of 50 basis points includes 7 months of the old management fee structure. So we expect that to trend down to around 40 basis points going forward, subject to no changes.
Richard Jones: Excellent. And just a follow-up just on Rocklea. I think you called out it was vacated in October last year. What's happening at Rocklea?
Mark Scatena: Richard, I'll let Andrew, but we're in the process of tenanted that, and so we're hopeful that that tenancy will commence relatively soon, which I'll let Andrew give some color on that. But that's been a bit of a projected.
Andrew Ross: Yes, so we've been talking with a potential tenant to lease the whole building there, Richard, and I'm -- we're close to doing a deal there, but we haven't finalized a deal yet. So hopefully we can have that leased before the 30th of June.
Richard Jones: Okay. Is anything incorporated in the $60 million, $70 million CapEx in repurposing for Rocklea?
Andrew Ross: No, because my current negotiations are they take the building as is.
Operator: That's all the time we have for questions today. I'll now hand back to Mr. Mark Scatena for any closing remarks.
Mark Scatena: Thank you, everybody, for attending today's results briefing, and we really look forward to seeing many of you, well, speaking to many of you over the coming days and seeing again a lot of you in March in Melbourne and Sydney. Thanks so much for joining in today, and have a lovely day.
Operator: That concludes our conference for today. Thank you for participating. You may now disconnect.