The Brickworks Limited (ASX: BKW) share price is up more than 1% after providing a property update just before Christmas.
Brickworks makes a lot of building products in Australia, but it also has a large property asset base, some of which is shared through a joint venture with Goodman Group (ASX: GMG).
Property update
Brickworks noted with limited property transactions taking place in the market, traditional valuation methods based on comparable sales have been replaced by methods focused on discounted cashflow (taking into account increasing interest rates) and initial yield.
Under this method, the properties with long lease assets that are unable to realise the immediate benefit of increased market rent have been significantly impacted.
The average capitalisation rate has increased to 5%, meaning the rental profit yield on the properties has increased (and perhaps the property valuations have decreased).
On the positive side, development activity has continued at Oakdale West, which is expected to result in a development profit of between $40 million to $50 million being recorded in the first half of FY24.
Brickworks also said there is still strong lease enquiries for large-sized industrial facilities. The Oakdale West estate is expected to be fully built by the end of FY24.
It has now received development approval at Oakdale East stage 2, and this extends its development pipeline by a further five years in an “extremely tight industrial property market.”
Sale
Brickworks is selling a 50% interest in the M7 hub, one of the estates held by the industrial joint venture trust, which has three multi-unit industries properties. The units will be sold to Goodman.
This sale will deliver $117 million of gross proceeds to Brickworks. This is a discount to the 31 July 2023 book value, but marginally higher than the FY24 first half revaluations.
Including tax, the transaction will deliver an estimated $11 million net profit after tax uplift to Brickworks.
After the sale, Brickworks’ debt is expected to reduce to around $600 million, resulting in a “conservative gearing level of around 14%.”
This is expected to reduce the net asset value its property trusts by around 14% in the FY24 first half.
Final thoughts on the Brickworks share price
The Brickworks share price has done very well – it’s up 25% this year. Its properties have an attractive long-term future, with rental growth in limited markets.
I love the business and the outlook for its Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares. It’s not the best time to invest, but I’d be happy to make a long-term investment today.
