Waypoint REIT (WPR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Viva Energy REIT Ltd. Full Year Results 2019 Conference Call. [Operator Instructions] I must advise you that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Chief Executive Officer of Viva Energy REIT, Hadyn Stephens. Thank you. Please go ahead.

Thank you, Ivan, and good morning, ladies and gentlemen. As Ivan mentioned, my name is Hadyn Stephens. And as of January 1, I'm the CEO of the ER Manager, the Manager of Viva Energy REIT. With me today I have Guy Farrands, the current CFO; and Kerri Leech, who will formally take over from Guy as CFO at the end of March. In terms of the agenda for today, I'd like to briefly touch on the highlights FY '19 before handing over to Guy to present our financials in more detail. I will then provide an update on our portfolio and acquisition pipeline before summarizing our priorities and earnings guidance for FY '20. We will then open the floor to any questions that you might have for the management team. If I can ask you to turn to Page 6 of the presentation. You will see the Viva Energy REIT delivered a solid result in FY '19 and is well placed to continue to deliver on its strategic objectives. In terms of financial performance, distributable earnings for the year were $0.1454 per security, representing 3.7% growth on FY '18, at the top end of our 3% to 3.75% guidance range. NTA per security increased 4.1% during the year to $2.29 and our MER remains one of the lowest in the sector at 22 basis points on a recurring cost basis. At a portfolio level, the group spent $89 million across 15 properties and fund-through projects during the year, which, in conjunction with a $100 million valuation uplift, resulted in a total portfolio value of $2.65 billion at 31 December across 469 properties. On the capital management front, $123.4 million of equity was raised during the year, and we will also assign an investment-grade Baa1 credit rating from Moody's in December 2019, which was a fantastic outcome and a strong external validation of VVR's financial strength. This credit rating should provide us with funding flexibility moving forward in both domestic and international debt capital markets. Finally, it's worth touching on our gearing calculation, which we have revised slightly to bring ourselves into line with the rest of the sector. Consistent with most of our peers, we will now be looking at this on a net debt-to-total assets, excluding cash basis, which, as at 31 December, was 30.4%, at the bottom end of our unchanged 30% to 45% target gearing range. I'll now hand over to Guy, who'll provide a detailed overview of financial performance for FY '19.

Everybody, and welcome. And if I could ask you to turn to Page 8, which is our statutory financial performance. I just want to call out a couple of things here on this slide. Firstly, if you look at rental income, up 8.6%. As always, there are 3 key drivers of that for our business. Firstly, every August, 95% of the portfolio has an automatic 3% rental increase. Second driver was we made several acquisitions in FY '18, and they contributed for the full year for the first time in FY '19. And also, the '19 acquisitions contributed for the part year. Second thing to call out is the net revaluation of investment properties. That's higher than last year. We revalued 1/3 of the portfolio independently, and now we're at a point where all of the properties have been revalued by different valuers since IPO. The underlying causes of the increase in revaluations are rental increases and some cap rate compression. And there's more data on that on Page 13. Management costs are higher than last year, but if you strip out the one-off costs that relate to management changes, they revert to 22 basis points, which is entirely consistent with our previous year's results. Looking at distributable earnings on Page 9. Our result here was at the very top of the guidance range we gave during the placement carried out in February 2019. Get to that number, we tax statutory net profit of $197.6 million; we add back the costs to restructure the interest rate swaps, which was done at the time of the placement, a small amount for writing-off debt establishment costs; and then we deduct the noncash revenue items that appear in the statutory profit, straight-line lease adjustments and that noncash net revaluation of the investment properties, which sees us with a 3.7% growth in distributable earnings per security. Since IPO in 2016, we have had a 4.7% CAGR in distributable earnings per security. Balance sheet on Page 10. A couple of things to call out here. Firstly, you'll see that prepayments, deposits and development costs are very substantially higher than they were this time last year. The reason for that is that this represents work in progress for fund-through projects that we're undertaking and also deposits that we've paid to acquire properties. As those projects are completed and those properties -- property contracts are settled, this amount will be reclassified into investment properties. As Hadyn mentioned, NTA is up by 4.1%; and gearing, at 30.4%, remains at the low end of our target range of 30% to 45%. Page 11 talks about capital management and some things I'd like to call out here. The state of our balance sheet is as strong as it was last time. 30.4% gearing; $250 million worth of undrawn debt capacity we could draw tomorrow; and thirdly, and perhaps most importantly, a Baa1 credit rating, that's the equivalent of BBB+ in S&P's methodology, which we were assigned in December. As you can imagine, there was quite a lot of work to get to that point, and this gives Kerri some fantastic options to term out the debt and potentially improve the cost of debt over the course of the coming year.

Thanks, Guy. On Page 13, you'll see a summary of our valuations as at 31 December 2019. As Guy touched on earlier, it is now 3 full financial years since IPO, meaning that the entire IPO portfolio has now been independently revalued. In FY '19, 164 properties were independently valued, with the remainder subject to directors' valuations. The total valuation increase was just under $100 million, representing a weighted average cap rate tightening of 3 basis points across the portfolio to 5.78%. As mentioned earlier and outlined on Page 14, VVR acquired or funded approximately $89 million of real estate in FY '19, comprising 7 lease investments acquired for $40.1 million, 8 fund-through sites acquired for $15.7 million and a further $32.7 million committed across various fund-through projects. The weighted average cap rate on the $89 million invested throughout the year was 6.8%, with a weighted average lease expiry of 13 years and weighted average rent review of 3%. Further details in relation to each of these properties is provided in the appendix to the presentation. Looking ahead to this year, the pipeline is looking very healthy with 3 acquisitions already settled for $20 million at a weighted average cap rate of circa 6.5%. We currently have $19.7 million of transactions under contract and a further $37.3 million Board approved under offer or in DD. Based on current work in progress and our broader pipeline, we are targeting $100 million of acquisitions in FY '20 and would expect to see a blended acquisition cap rate broadly in line with our portfolio weighted average cap rate. In terms of the key portfolio stats summarized on Page 15 of the deck, the portfolio remains geographically diversified, in line with the Australian population, and concentrated in metropolitan markets along Australia's Eastern seaboard. 73% of the portfolio, by value, is located in metropolitan markets, and we note that this weighting has remained relatively stable since IPO in August 2016. Fixed 3% increases remain the predominant rental review mechanism across the portfolio, accounting for 94% of the portfolio by income. And Viva Energy's contribution to income rose from 95% in FY '18 to 97% in FY '19 as a result of Viva's acquisition of Liberty Oil's wholesale business at the end of the year, improving the underlying credit quality of our tenant base. VVR's weighted average lease expiry remains strong at 11.7 years, with only 4 leases expiring in the next 5 years, representing less than 1% of income. Turning to key priorities and outlook on Page 17. We have commenced a comprehensive review of our existing portfolio, with a focus on identifying near-term value-add opportunities and longer-term alternative use potential. We remain active on the acquisition and development fund-through front and are targeting $100 million of deals in relation to these growth initiatives in FY '20. Capital management remains a key focus in FY '20, particularly in relation to debt. We plan to utilize our investment-grade credit rating to diversify our funding sources, extend debt and swap tenor and optimized bank debt arrangements. We are actively considering debt capital markets issuance, and we'll make appropriate disclosures to the market in relation to these initiatives in due course. Finally, we are pleased to announce that we expect FY '20 growth in distributable earnings per security of 3% to 3.75%, assuming no material change in market conditions and no other factors adversely affecting Viva Energy REIT. That concludes the formal part of the presentation today. But before we move to Q&A, I would also just like to publicly acknowledge the contribution of Guy Farrands to Viva Energy REIT. Guy has been an integral part of the business for almost 5 years, shepherding the vehicle through its IPO in August 2016 and contributing greatly to the institutionalization of this asset class over the last few years. He has provided invaluable support during the recent management transition, and the management team and Board wish him all the best as he returns to Sydney to pursue other opportunities. On that note, I'd like to invite any questions that people on the call might have for Guy, Kerri or myself.

[Operator Instructions] Your first question comes from Krzysztof Kaczmarek from JPMorgan.

So there's obviously been some activity in the service station space recently with the sale of the BP portfolio, the Caltex site sale and then potential Caltex REIT IPO. How do you sort of see transaction activity going forward in the space?