Waypoint REIT (WPR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Waypoint REIT Half Year Results 2020 Conference Call hosted by CEO, Hadyn Stephens; and CFO, Kerri Leech. [Operator Instructions] I must advise you that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, CEO of Waypoint REIT, Hadyn Stephens. Thank you. Please go ahead.

Thanks, Edwin, and thank you, everyone, for joining us on the call this morning. In terms of the agenda for this morning, I'd like to briefly touch on the highlights of the first half before handing over to Kerri to present our financials and capital management in more detail. I'll then provide an update on the property portfolio before summarizing Waypoint's priorities and outlook for the remainder of FY '20. We will then open the floor to any questions that you might have for Kerri or myself. If I can ask you to turn to Page 6 of the presentation, you'll see that Waypoint delivered another solid result in the first half of FY '20 and is well placed to continue to deliver on its strategic objectives. As flagged by our distribution announcement in July, distributable earnings half was $0.0741 per security, representing 3.2% growth on the same period last year. NTA per security increased 3.9% from December to $2.38, and our MER remains one of the lowest in the sector at 28 basis points. At a portfolio level, Waypoint invested $39.7 million during the period at a weighted average yield of 6.34%, which, in conjunction with an $86.6 million valuation uplift, resulted in a 4.7% increase in Waypoint's total portfolio value to $2.8 billion as at 30 June across 474 properties. Waypoint's weighted average cap rate tightened by 2 basis points to 5.79% as a result of independent and director valuations. Capital management was flagged as a key priority for Waypoint this year when we announced our FY '19 results in February, and it took on even greater importance and focus when Viva Energy's sell-down of its 35.5% stake triggered a debt review of -- across our $1 billion of debt at a time when global markets were becoming increasingly volatile due to COVID-19. Kerri and the team did a great job in guiding the REIT through this process, with waivers received on almost 90% of our debt facilities and $325 million of debt refinanced year-to-date. To top off a successful few months on the capital management front, last week, we announced the pricing of the group's inaugural USPP transaction, and Kerri will talk to this in more detail shortly. Gearing as at 30 June was 30.5%, a slight increase on the 30.4% reported in December, with valuation gains offsetting the impact of debt-funded acquisitions during the half. As announced in May, unconditional agreement was reached with Viva Energy for the internalization of the management function following Viva Energy's sell-down of its stake in Waypoint. The internalization will position Waypoint as an independent, stand-alone business with a simplified corporate governance framework and a clear separation between the REIT and its largest tenant. The transition is well progressed, and we are on track to complete by the end of the next month. COVID-19 has clearly had a significant impact on businesses and societies across the world during the first half of 2020. However, Waypoint REIT has largely avoided any material financial impact so far, with the vast majority of our tenants continuing to operate and not qualifying for any government-mandated rent relief. Waypoint's rent collection rate was 99.9% for the half, with rent relief limited to approximately $80,000 provided to 7 of our 14 nonfuel tenants in the half. I'll now hand over to Kerri to walk you through our financial results and capital management initiatives in more detail.

Thank you, Hadyn. Turning to Slide 8 is an overview of the REIT's financial performance for the half year. Rental income increased $4.8 million or 6% due to annual rent escalations averaging 3% and incremental income from acquisitions and fund-through development. Management and administration expenses increased $1.3 million due to higher insurance and regulatory costs, additional compliance head count, accelerated timing of independent valuation due to the uncertainty caused by COVID-19 and $0.5 million of nonrecurring costs associated with recent management changes. Notwithstanding, the REIT continues to have one of the lowest MERs in the sector at 28 basis points. The $1.1 million increase in finance costs is also attributed to debt-funded acquisitions. Overall, distributable earnings increased $2.1 million or 3.2% per security compared to the prior comparative period. Slide 9 sets out the reconciliation between distributable earnings and statutory profit. The 141% increase in statutory profit is attributed to the timing of independent valuations. Historically, independent valuations have been carried out once a year on 31 December. Due to COVID-19, we performed independent valuations at 30 June, and going forward, we plan to perform independent valuations every 6 months. Gross valuation gains of $86.6 million were partially offset by the write-off of acquisition costs of $2.4 million and straight-line rent adjustments of $10.6 million. Borrowing cost amortization increased $1 million, largely due to the write-off of costs associated with facilities replaced during the period through refinancing. Following $20 million of debt being repaid as a result of the review event, the swap hedging this debt was also terminated at a cost of $3.5 million. In the half year, the REIT incurred $0.1 million of costs in preparation for internalization, which is targeted to occur on 30 September 2020. Total internalization costs are estimated at $5.8 million and comprise a $2.5 million facilitation payment to Viva Energy, a $1.4 million expense in relation to a runoff insurance policy in favor of VER Manager and VER Limited and related legal fees and other expenses. Due to the nonrecurring nature of these expenses, they will not form part of the REIT's FY '20 distributable earnings. Now turning to Slide 10. We present the REIT's balance sheet. Cash and cash equivalents decreased $5.2 million due to lower cash needs as a result of less acquisition activity near balance date compared to the prior period. Other noncurrent assets decreased $4.2 million due to deposits being transferred to investment property on the settlement of sites at Redcliffe, Colac West and Emerald earlier this year. Investment properties increased $126 million due to the acquisition of 4 passive properties and 1 development property during the period and $86.6 million of valuation gains being recorded across the portfolio. The derivative financial instruments liability increased $5.5 million due to unfavorable swap movements during the period. Borrowings increased $33 million, largely due to debt-funded acquisitions, and overall net tangible assets increased $79.4 million or 3.9% per security. Gearing remains largely unchanged at 30.5% and at the lower end of our target gearing range of 30% to 45%. We have also raised $16.6 million of equity through the DRP, including $5.8 million of securities allotted in February and a further $10.8 million of securities to be allotted later this month. Turning to Slide 12 is a summary of our capital management activities undertaken to date. It has been a busy period, commencing with the review event triggered by Viva Energy's sell-down of their stake in February. As Hadyn mentioned, we received waivers from lenders representing 89% of total debt facilities at the time. One lender requested repayment of their $20 million facility, and terms of another bilateral facility were amended. We also successfully refinanced our revolving credit facilities with a new 4-year $275 million cred facility entered in April and a new 3-year $50 million bilateral facility entered in July. As Hadyn mentioned, we placed our inaugural USPP last week. Notes totaling USD 178 million or circa AUD 250 million are expected to be funded on the 29th of October, subject to standard investor due diligence and documentation. To more closely align with the 11.3-year WALE of our portfolio, these notes were issued across 7-, 10- and 12-year tenors with a weighted average maturity of 9.2 years. All notes have been fully currency-hedged and swapped back to Australian dollars at a weighted average rate of 2.81% above BBSY. Inclusive of the USPP, we have total facilities of $1.3 billion and undrawn debt of $371 million. However, we note that a significant portion of the USPP proceeds will be used to pay down the term loan maturing in June '22. The exact quantum to be paid down will be determined closer to funding, taking into account the REIT's acquisition outlook at the time. As noted earlier, gearing remains low at 35 -- sorry, 30.5%, and interest cover ratio remains healthy at 5.5x. The pro forma weighted average debt maturity, taking into account initiatives completed subsequent to 30 June, is 4.3 years. Slide 13 sets out the composition of our swap book. As noted earlier, we terminated a $20 million swap in connection with debt called as a result of the review event. In late June, we also extended maturity of swaps with a notional value of $196.5 million to August 2025. As at 30 June, 88.3% of the debt was hedged at a weighted average hedge rate of 1.88%, and the weighted average hedge maturity was 2.9 years. We continue to explore opportunities to further extend the tenor of our swap book. The REIT's pro forma weighted average cost of debt, taking into account the recent USPP issuance, is 3.5%. I will now hand back to Hadyn to provide a portfolio update.

Thanks, Kerri. On Page 15 of the deck, you'll see a detailed breakdown of our acquisition and development fund-through expenditure for the half. In relation to acquisitions, we acquired 4 stabilized assets for $27.3 million at a weighted average cap rate of 6.39%, on lease terms ranging between 10.3 years and 14.4 years. We also acquired another development site with Liberty for $5.2 million, Greenvale, with a further $3.8 million committed to the development of this asset. This represents our first metro development project with Liberty. In terms of development fund-through expenditure, $7.2 million was invested across 8 development projects during the half, 4 of which have now been completed, taking total acquisition and development expenditure for the period to $39.7 million at 6.34%. In addition to the $39.7 million spent during the half, Waypoint has a further $10.9 million of capital committed across 7 development projects, all of which are expected to be completed in the second half. This takes total expenditure and commitments year-to-date to $50.6 million at a weighted average cap rate of 6.44%. A summary of our valuations as at 30 June is provided on Page 16. As announced to the market in July, independent valuations were carried out on approximately 1/3 of the portfolio as a result of the ongoing uncertainty caused by COVID-19. The gross valuation uplift on these 157 properties was $30.2 million, with the weighted average cap rate tightening by 2 basis points. A further 317 properties were subject to director valuations with a $56.4 million uplift on the 312 properties owned throughout the period and first half acquisitions valued at cost or on an as-if-complete basis for the Greenvale property. The overall weighted average cap rate on the portfolio tightened by 2 basis points to 5.79%, noting a slight change in methodology, whereby developments are included on the basis of completion value, including committed capital, rather than book value. Page 17 provides an overview of the portfolio as at 30 June. As a result of acquisitions and valuation increases, Waypoint now owns a portfolio of 474 properties with a total value of $2.8 billion and a weighted average cap rate of 5.79%. The WALE of 11.3 years remains one of the longest in the sector, with 92.1% of our fuel tenancy subject to triple net leases and 95.3% subject to fixed rental increases of 3% or more. The portfolio remains heavily weighted towards the Eastern Seaboard, with more than 80% of the portfolio by value located in these states. Metropolitan sites account for 72% of the portfolio by value. Looking ahead to the second half of FY '20. Set out on Page 19 are 5 key areas of interest for our security holders. Firstly, in relation to the impact of COVID-19, we note that although the risk of second-wave outbreaks remains across all states and territories, we are in an enviable position, whereby the majority of our tenants provide an essential service and continue to operate. We have only 14 nonfuel tenants across the portfolio, and we'll continue to assist those SME tenants qualifying for rent relief wherever we can. At present, this is limited to 3 tenants in Victoria, within we're in discussions for further relief in Q3. As noted earlier, capital management initiatives and the internalization of management took a fair bit of the management team's focus in the first half of the year. Moving forward, our focus will move back to the underlying property portfolio, with 3 key areas to highlight. Firstly, we have 3 leases with Viva Energy expiring in 2021, with a combined passing rate of approximately $1.1 million and expiry dates ranging between May 2021 and September 2021. As always, there can be no guarantees of the ultimate outcome in relation to these expiries, but we have good line of sight on 2 of these properties, representing approximately 70% of the combined income, with 1 site being subject to market review with a ratchet and Viva Energy having signed a letter of intent in relation to the second property for a new 15-year lease at current rent when the property was acquired by Waypoint in mid-2018. The third property is currently going through an independent market rent determination as part of the auction process. Secondly, we have commenced very preliminary and high-level discussions with Viva Energy and other stakeholders across our portfolio regarding ways in which we might be able to work together on selective value-add opportunities, potentially including redevelopment of or further investment in certain sites across the network. It is too early to provide any detail at this point, and there is no certainty that these discussions will amount to anything material. We will provide further updates to the market if and when appropriate. Finally, we're reviewing the composition of the portfolio more generally, with the broad aim of ensuring that we're in a strong position to deal with lease expiries over the medium term and also better understanding potential alternative uses for our properties over the longer term. This may result in the disposal of selected noncore assets in due course, although again, it is too early to provide further details at this point, and we will provide further updates in due course. In relation to acquisitions and developments, we have taken a cautious approach to further commitments in recent months as a result of the debt review event triggered by Viva Energy's sell-down and general uncertainty in relation to COVID-19. However, $50.6 million has been spent or committed year-to-date, which is a significant amount of capital in the circumstances. At this stage, we have no further expenditure confirmed for the balance of FY '20, and we prefer to maintain a conservative position in relation to gearing and liquidity. However, we will continue to selectively consider further acquisitions that meet our investment criteria. In relation to capital management, the successful completion of the various initiatives year-to-date leaves us in a very strong position, with gearing at the bottom end of our target range, approximately $370 million of liquidity, a much-improved weighted average debt maturity and no debt facilities maturing until June 2022. Although we will continue to explore ways in which we can further diversify our funding sources and extend the tenor of our debt and swap books, we remain very comfortable with our pro forma position post the USPP. Finally, as announced to the market last week, we're very pleased to be in a position to upgrade guidance for the full year to 4% to 4.25% growth in distributable earnings per security. That concludes the formal part of the presentation today, and I'd now like to invite any questions that people on the call might have for Kerri or myself.

[Operator Instructions] Your first question comes from [ Jeffrey Thomas ] from [ Longborn Investment ].

I just have a question in relationship to the gearing range. And I'm just a little uneasy about this top gearing at 45%. And I want to address this to the Board, if they would consider bringing this gearing range back to, say, 25% to 40%, something like that. We've seen things in the past where, particularly in property trust, with gearing up to 45% and valuations start dropping, and then the look-through value starts to get very uncomfortable. And with this, I recognize that you've got a good portfolio, and it's a very secure one, but I would still ask the Board if they would consider bringing that gearing range a little bit back to be more appropriate not only for now, but going forward.

Thanks for your question. We acknowledge that the gearing range is quite wide at 30% to 45%, and the initial range was set at IPO a few years ago. Notwithstanding, we've operated at the lower end of the range since IPO. And both Hadyn and myself are very comfortable at that lower end of the range and don't have any intentions to go towards that higher end. So by all means, we'll take your comment on board. But I guess, with some history and where we sit today, we don't anticipate going anywhere near the top of that range.

Yes. Well, that's very comforting to hear. But I would just say, perhaps that 45% could be reviewed by the Board. That would be appreciated, I would have thought.

Okay. We'll take that on board, [ Jeffrey ]. Thank you.

[Operator Instructions] Your next question comes from Nira Sonah from Evans & Partners.

A couple of questions from me. Firstly, just on management expense ratio, so currently, your MER is around 28 bps and historically in the range of 22 to 24. So how should we think about this ratio going forward? And how much of the management expenses for this half is recurring and nonrecurring?

Yes. Thanks for your question. So when we did our results last February, we had guided people to the higher 20s as a go-forward number from an MER perspective, and the 28 basis points is including the nonrecurring costs. So if you were to exclude those, it would be 24 basis points for the half. But I think a higher 20 number is a more reasonable number to think of going forward.

Like most groups, Nira, we're seeing some particular cost pressures around insurance and other sort of factors coming through. So that's why we're sort of comfortable in that high 20s sort of range.

All right. And just on Slide 16, just on your independent valuations. So for the regional portfolio, there is a slight increase in cap rate by 2 bps. It's small, but can you provide more color around this? Like what was the driver around that increase in cap rate?

I think that we see the metro tightening and the regional widening a little bit is consistent with what your expectations are given the market. And our evaluations are performed once every 3 years. So I think the fact that there's a little bit on either side, it's really a testament that our directors' valuation process is working, and we're roughly in line with where independent valuation is when it comes around every 3 years.

Okay. All right. And a last question, just want to hear your thoughts around the recent transaction in the sector with Ampol and just Charter Hall revaluing its BP portfolio like around the 5%, 5.5% cap rate.

Look, the -- I think the Ampol/Charter Hall transaction is a good result for both parties. It releases capital for Ampol to constrain on their core business. And it provides Charter Hall and its partner with access to a high-quality portfolio with a long WALE and the defensive nature of the income stream they get, which is highly valued by the market at the moment. So -- and we can't really comment on the timing of the BP portfolio from 5.5% to 5%. I imagine, a large portion of that is in relation to the length of that WALE. But we don't have insights into what went into that valuation process.

Would you then expect that, down the track, you might eventually benefit from those kind of independent valuations?

Yes. It's something we talk about a lot. I think it's -- the sense we get from valuers is that it's very hard for them to take those portfolio transactions into account. The way they value our portfolio is on a property-by-property basis based on comparable assets in that location. So without visibility through to the underlying portfolio, it's something they found difficult to date to take into account, albeit something that we continue to test with them because clearly, there's a lot of institutional capital that's prepared to pay pretty tight cap rates for these -- for similar assets.

[Operator Instructions] Your next question comes from Leanne Truong from Ord Minnett.

Yes. Just a question, just following up on the gearing. Obviously, you guys have financed -- I mean you've got a lot of liquidity available right now. So I was just wondering what level of gearing would you be comfortable at before you, I guess, do an equity raise? Is it like a 35% mark? Or what mark there would you be comfortable at?

We're comfortable with gearing at the moment, Leanne. I'm not going to answer at what point we'd be comfortable before we raised equity. We have no -- we're comfortable with where gearing is at. We don't feel a need to acquire any further assets. In fact, we're taking -- again, we're taking a fairly conservative and selective approach on that. And yes, we'll continue to look at acquisitions, but we don't have any plans at this stage.

Yes. So that $100 million target that you had hung in place earlier in the year, it looks like that's going to be a lot lower than this financial year.

Yes. We're not putting a target out there. We're happy with what we spent today. We'll continue to look selectively at acquisitions, but we're not compelled to spend money for the sake of it to -- for any reason. So we're comfortable with where we're sitting at the moment.

Yes. Okay. And just a question on valuations. You did mention that you're going to be doing valuations once every 6 months now. So I guess what's the process there? Are you going to still do 1/3 of the portfolio? Or how is that going to change?

Well, we'll move from 1/3 a year to 1/6 every half year and still getting a representative sample.

Just as a reminder, so that's about 5,000 per valuation, is that right, on average?

Yes. I guess it really depends on where the assets are located and the travel expenses attached to the regional ones, but I think that's a fair estimate.

Yes. And just my final question. I know the asset is small in the scheme of things, but Redcliffe, wasn't that supposed to expire this financial year? I can no longer see that in there.

There was an option that was exercised early on that one. So we -- I believe it's a CPI review, so there's no debate as to what the rent will be. So it's been pushed out.

So it's been exercised. Okay. Yes.

Yes.

There are no further questions at this time. I would like to hand the conference back to Hadyn. Please continue.

Thanks, Edwin. And just lastly, thank you very much, everyone, for your time this morning. And we look forward to further discussions with people during one-on-one meetings over the next few days. Thank you very much.

Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.