Waypoint REIT (WPR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Waypoint REIT FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Hadyn Stephens, CEO. Please go ahead.

Thanks, Jen. Good morning, everyone, and thank you for joining us today to Waypoint REIT's FY '20 Results Call. In terms of the agenda this morning, I'd first like to touch briefly on the highlights for the year 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 and spend a few minutes going through Waypoint's strategy as well as our priorities and outlook for 2021. If I can ask you to turn to Page 6 of the presentation, we have set out the key highlights for Waypoint in 2020. Clearly, it was a challenging year for all. However, the nondiscretionary and everyday needs focus of the businesses operated by our tenants mean that Waypoint was relatively unaffected by COVID-19 and was able to collect 99.9% of rent during the year. It was a strong endorsement of our business model that we were not only able to maintain our guidance through the worst COVID-19 but we're also able to upgrade guidance during the year. To that end, Waypoint delivered distributable EPS for the year of $0.1515, representing 4.25% growth on FY '19 at the top end of our revised guidance range. NTA per security as at 31 December was $2.49, representing an 8.7% increase for the year and 4.6% increase since June. The increase in NTA was underpinned by $177 million of gross valuation uplift for the full year, with higher values in the first half due to fixed rent reviews on the majority of the portfolio, being followed up by 17 basis points of cap rate compression in the second half, with WayPoint's weighted average cap rate reducing from 5.79% in June to 5.62% at the end of the year. Strong valuation gains during the year have also seen Waypoint's gearing fall to 29.4%, which is just below the bottom end of our target gearing range, which we have now revised to 30% to 40% to better reflect what we see as a sustainable gearing range moving forward. It was a very busy year in terms of capital management, particularly the first half, as we dealt with the implications of Viva sell-down of its 35% interest and the resulting debt review at a time of significant COVID-related uncertainty in global markets. The review event was successfully navigated by the team. And during the course of the year, we also refinanced $325 million of debt and completed Waypoint's first USPP issuance. Our weighted average debt maturity is now sitting at 4.3 years, and we have no debt expiring until June 2022. Waypoint invested $51.3 million across 5 acquisitions and 12 fund-through developments during the year, with the majority of this being settled or committed in the first quarter, and lower volumes for the rest of the year as we digested the impact of COVID-19 and focused on liquidity, capital management and future strategy. As foreshadowed at our half year results, noncore asset disposals are now very much a part of Waypoint's strategy moving forward, and we exchanged contracts on 2 sites towards the end of the year for $5.5 million or 14.3% premium to June carrying values. We are currently dealing exclusively with a party on a third asset and have identified a further $20 million to $30 million of noncore asset sales for 2021. Despite the disruptions caused by COVID-19, our operators' businesses have performed strongly over the last 6 to 12 months, with Viva Energy Australia's retail business posting an 18.9% increase in underlying EBITDA for the full year and Coles Express reporting a 10.5% increase in sales and 14.3% increase in EBIT for the 6 months to December. We also note that Ampol reported its FY '20 results earlier this week with EBIT from its convenience retail business increasing 43% on FY '19. A key theme running through these results is retail fuel margin strength more than offsetting volume weakness from COVID-19 travel restrictions in addition to strong convenience sales growth as people shop closer to home. Finally, we are pleased to be able to confirm our guidance for the year ahead, where we are forecasting distributable EPS of $0.1572 or 3.75% growth on FY '20. No acquisitions have been assumed for the purposes of this guidance. However, we have assumed that $20 million to $30 million of noncore asset sales are completed during the year. This guidance is subject to the usual caveats as outlined in the footnotes on this page. I'll now hand over to Kerri to run you through Waypoint's financial results and capital management in more detail.

Thank you, Hadyn. Turning to Slide 9 is an overview of the REIT's financial performance for the year. Rental income increased $11.7 million or 8% due to 2.9% like-for-like rental growth, income from acquisitions and fund-through developments of $5.6 million and development coupon income of $1.9 million. Interest income decreased $1.2 million due to the lower cash rate and development coupon income being reported within rental income in 2020. Management and administration expenses increased $1 million or 12%, largely due to higher insurance and statutory costs. To provide further transparency over our cost base, a detailed bridge showing the key line item movements compared to the prior year is included in the appendix on Slide 30. Notwithstanding the current year increase, we are pleased to report that the REIT continues to have one of the lowest MERs in the sector at 30 basis points. The $2.7 million increase in interest expense is attributed to debt funded acquisitions and development expenditure and the higher cost of the USPP debt issuance, partially offset by base rate interest savings realized during the year. Overall, distributable earnings increased $6.8 million or 4.25% per security over FY '19. Statutory profit increased $82.3 million or 42%, largely due to fair value gains recorded on investment property. A detailed reconciliation between distributable earnings and statutory profit is included in the appendix on Slide 29. Slide 10 details the key movements in distributable EPS compared to the prior year. Like-for-like rental growth accounts for $0.0055 of growth and rental income from debt funded acquisitions and development activity accounts for another $0.0046. This growth was partially offset by $0.0013 of higher management expenses and $0.0027 of dilution from equity raised over 2019 and 2020. Now turning to Slide 11, we present the REIT's balance sheet. Other assets include 4 assets held for sale with a combined carrying value of $14.3 million. Hadyn will provide more details on these assets later in the presentation. Investment properties increased $213.1 million, largely due to $176.7 million of valuation gains recorded across the portfolio. This includes $89.6 million from this December's valuation cycle. The REIT also acquired 5 properties for $32.5 million and spent $18.8 million across 12 development sites during the year. The REIT had a net increase in borrowings of $2.7 million. Additional debt of $25.6 million was drawn during the year to fund acquisitions and developments. This increase was offset by $20.8 million of foreign exchange and fair value hedge gains recorded on the USPP as well as a $2.1 million increase in capitalized borrowing costs. The USPP is fully hedged through cross currency swaps. As a result, these unrealized gains are largely offset by the $28.7 million increase in the derivatives line below. Overall, net tangible assets increased $0.20 or 8.7% to $2.49 per security at the end of the year. Turning to Slide 12, we summarize the impact of the capital management activities undertaken during the year. As Hadyn noted, the first half of the year was focused on working through the review event triggered by Viva Energy sell down and refinancing $325 million of bank debt. Despite the pandemic, we've pleasingly received waivers -- waiver consents from 89% of lenders and refinancing was completed on terms generally consistent with existing bank debt. We are also proud to have completed our inaugural USPP issuance with $249 million funded in late October. The USPP notes were issued across 7-, 10- and 12-year tenors with a weighted average maturity of 9.2 years and a margin of 2.81% above BBSY. $200 million of the USPP proceeds were used to pay down term debt. And today, the REIT has total facilities of just over $1 billion with $127 million of available liquidity to deploy as and when opportunities are identified. As Hadyn mentioned, we've reduced the top end of our target gearing range from 45% to 40%. At year-end, gearing sits just below the bottom of our revised target gearing range at 29.4%. The REIT's weighted average cost of debt was relatively unimpacted by the USPP, landing at 3.6% for the year as a whole. Our interest cover ratio remains healthy at 5.3x. These capital management activities serve to increase the weighted average debt maturity by 1.4 years to 4.3 years at 31 December. At year-end, 89% of the REIT's debt was hedged at a weighted average hedge rate of 1.88% and the weighted average hedge maturity was 2.4 years. We continue to actively explore opportunities to further extend the tenor of our debt in our swap books. I will now pass back to Hadyn to provide a portfolio update.

Thanks, Kerri. Moving now to Page 14, which provides a snapshot of the investment portfolio as at 31 December, with 470 properties valued at $2.9 billion on a weighted average cap rate of 5.62% and WALE of 10.8 years. You'll note that we have revised the presentation of our portfolio analysis to now include our 14 nonfuel tenancies, along with stats of our fuel tenants. This does not have a material impact on our numbers given that fuel tenants comprise more than 99% of our income, but it is the more accurate and transparent way to approach this analysis and will be the way that we will show up moving forward. Page 15 provides detailed analysis of our valuations as at the end of the year, with a 17 basis point improvement in weighted average cap rate over the last 6 months. Our regional properties increased 23 basis points over this period with a 15 basis point movement across our metro assets. This reflects continued strong demand for metro assets in the direct market with many assets trading in the sub-5% range, an increased demand for regional assets as buyers have chased yield compressing average transaction yields in this space by about 25 basis points in 2020. Between the June and December valuation cycles, 263 assets were independently valued in 2020 or approximately 56% of our total portfolio by number. Page 16 provides a breakdown of the $51.3 million spent during the year, with 5 sites acquired for a total consideration of $32.5 million at 6.25%, and a further $18.8 million invested across 12 development fund-through projects during the year. 6 development projects have reached practical completion, with another 6 scheduled for completion in the first half of this year. Turning to Page 17. As mentioned earlier, Waypoint exchange contracts to sell 2 properties in December 2020 with a third asset currently in exclusivity. The 2 assets were sold for a combined premium of 14.3% to the June 2020 carrying values. Post balance date, our site in Macleod was acquired by the Victorian Department of Transport for the Northeast Link project, and we are currently in discussions with the government about compensation for this property. Its carrying value at 31 December of $6.8 million is supported by a recently completed independent valuation. Noncore disposals will be a key part of Waypoint's strategy moving forward. And we have identified $20 million to $30 million of potential asset sales for 2021 or approximately 1% of our total asset base by value. We will look to sell these assets through a combination of public auction and private treaty channels. As mentioned in conjunction with our half year results in August and outlined on Page 18, Waypoint has 3 leases with Viva Energy Australia expiring this year, accounting for 0.7% of current rental income. The first lease is at Blaxland in New South Wales, where the independent market rent assessment was almost complete. Viva will then have 1 month to decide whether or not to exercise its 5-year option at that market rent. At Caboolture, Viva provided Waypoint with a letter of intent when the site was acquired in July 2018, committing to a new 15-year lease from expiry of the current lease. We're jointly undertaking an assessment of the property's fuel infrastructure and we expect that the new lease will be entered into after this process has been completed. Halfway Creek expires in the second half of the year, with the rent review process expected to commence in March for Viva's 5-year option. Moving now to strategy. The first half of 2020 was focused very much on dealing with Viva's sell down of its interest in Waypoint, which triggered 2 events that took out the large chunk of management's time, namely the debt review event, which was compounded by the global uncertainty in relation to COVID-19 at the time, and the internalization of management. With Waypoint's liquidity position and management structure clarified, the second half of the year was an opportune time to take a closer look at our business and strategy moving forward. We note that although Waypoint has a relatively simple day-to-day business model, there is a level of uncertainty for our sector in the longer-term that we need to be planning for and acting upon today. What we've included in the presentation and we'll talk about today is a relatively simple strategy for a relatively simple business, though we hope it provides our investors with some clarity around the levers that we have and where our focus will be moving forward. Summarized on Pages 20 to 22 of the presentation. Firstly, the key trends expected to impact the fuel and convenience sector over the long term, with the key ones being the energy transition and the continued evolution of the convenience offer. Secondly, the implications of those trends for the sector as a whole at both the operator and landlord level. And finally, the implications for Waypoint strategy. Instead of stepping through these pages, if I could ask you to turn to Page 23, we've summarized the key takeaways to 8 bullet points. Firstly, it's important to remember that Waypoint owns a high-quality portfolio of 470 sites distributed around Australia, in line with population density and concentrated in metropolitan locations along Australia's Eastern seaboard. The portfolio has been accumulated over more than 100 years by one of Australia's leading fuel retailers to form an irreplaceable network of sites and key metro and regional locations. The sites are subject to long-term leases to Viva Energy Australia and subleased to Coles Express, which operates them on a day-to-day basis. We, therefore, have a high-quality network of fuel and convenience sites located in key markets around Australia and operated by 2 world-class groups in Viva Energy and Coles. This combination of strong locations and strong operators means that Waypoint's portfolio is broadly speaking, well placed to deal with the challenges expected to impact the fuel and convenience sector over the longer term. Furthermore, as summarized in Point 2, it's also important to remember that the timing and magnitude of these changes will differ from region to region and site to site across the circa 7,000 fuel and convenience sites around Australia, with some sites well placed to make the transition and some likely to struggle as the operating environment changes. The diversification of Waypoint's portfolio by both asset and geography provides a natural hedge for the potential risks associated with the key trends that we've identified. As I'm sure most of you are aware, the 2 key trends that are expected to impact the sector over the longer-term are the transition to alternative fuels and the continued evolution of the convenience offer as a key driver of site visitation and profitability. Our view is that the transition to alternative fuels is inevitable but is more likely to be a case of evolution than revolution. Australia remains a long way behind other markets in terms of direct government support for the EV industry. And this is seen as one of the main reasons why our uptake continues to lag other markets globally. The time line for mass EVs option remains highly uncertain, but we expect that demand for traditional fuels will remain resilient for some time yet, particularly for the freight transport sector that makes up 43% of fuel consumed in Australia. CSIRO forecasts support this position, with their base case projections suggesting 25% fleet share for EVs by 2040 and circa 35% by 2050. The Australian government's recent Future Fuels discussion paper also notes that conventional vehicles will remain the most popular and widely available vehicles in Australia in the short- to medium-term and that liquid fuels are projected to remain the most commonly used fuels in the heavy freight industry given the high energy density and convenience to store and handle. EVs are coming, but our view is that we have a long runway and that rather than completely usurping petrol and diesel in the near- and medium-term, what we expect to see is an increasingly diversified fuel offering on sites, with alternative offerings such as EV charging stations alongside traditional fuel bowsers underpinned by an increasingly important convenience offer to attract customers. Although we expect to see some continued rollout of dedicated EV charging sites over time, incumbent fuel and convenience operators have a distinct advantage in owning some of the best locations around Australia, along major highways and close to existing high-traffic road infrastructure in metropolitan areas and being able to offer high-quality roadside convenience and amenity. Accordingly, we believe it is more likely that we will see operators integrate these alternative offerings into existing sites over time. This trend is already playing out with groups such as EV partnering with traditional fuel and convenience operators on the rollout of their fast charging network along the Eastern seaboard. As noted in point 4, we expect that the convenience offer will continue to become an increasingly important driver of site visitation, not only for Australian motorists but also for nonfuel buying customers. There is a huge opportunity here for operators, given the experience in other markets such as the U.S. and U.K., where the convenience side of the offer is much more integral to both site visitation and operator profitability. For example, in 2019, 80% of Australian motorists visiting a service station only bought fuel, whereas in the U.K. only 19% cite fuel as their main reason for stopping. Change will be heavily influenced by global players with operations in offshore markets, where this evolution is already well advanced, and we'll continue to see operators in the domestic market testing a range of developments and formats designed to drive growth in this area. Clearly, the energy transition and convenience megatrends will have implications for fuel and convenience operators over time, and therefore, implications for our portfolio. Whilst location will be an important factor in whether or not a site will work, the on-site offering is also critical. This leads us to the fifth bullet point outline here, which is that by virtue of the long-term leases we have in place in our role as the owner of the site freehold rather than leasehold operator, Waypoint's ability to directly influence the on-site offering is limited. This responsibility and opportunity sits primarily with the relevant retailers, in our case, being the Viva Energy, Coles Express alliance. On that basis, we are best placed to counteract or take advantage of the long-term trends impacting our sector by concentrating our efforts in 2 areas: firstly, supporting our operators as a capital partner; and secondly, making sure we own the right sites through active portfolio management. In terms of supporting our operators, we intend to work with them to improve and adapt their offerings over time to deal with the long-term trends identified. Noting again that the primary responsibility for these initiatives rests with the operators, given the long-term leases in place. Our role here is really one of support, principally through being a capital partner. And we are in active dialogue with our key operators in relation to ways in which we might be able to assist on this front. Secondly, we expect that there will ultimately be a flight to quality by operators, who will seek to insulate their portfolios from the impact of the long-term trends, particularly the energy transition, by consolidating their networks and focusing on sites that will either withstand the energy transition for longer. For example, sites with a heavy reliance on freight transport or sites that can be adapted for alternative fuels and/or future consumer demands in relation to convenience retail. On that basis, we've looked to improve the overall quality of our portfolio over time with these long-term trends in mind. We will do this by continuing to buy high-quality sites and through the disposal of sites deemed to be noncore, with the proceeds recycled into high-quality assets, either via acquisition or reinvesting in our core portfolio to the extent opportunities are identified. The process will be gradual and will need to be refined over time as the local fuel and convenience operating environment evolves. Finally, it's worth reiterating that, as outlined in points 7 and 8 on this page, we're very much still in the market for high-quality acquisitions and we'll also reinvest in our core portfolio in partnership with our operators. However, we're also mindful of capitalizing on current market conditions to sell noncore assets as part of our strategy to continually improve the quality of the portfolio and derisk it in the context of the energy transition and the continued evolution of the convenience offer. Another important component of our strategy moving forward is an enhanced focus on ESG issues, and I'll now ask Kerri to give you a brief overview of developments on this front.

Thanks, Hadyn. Turning to Slide 24, we provide an overview of our ESG strategy. You will see that we have aligned our key focus areas to the UN Sustainable Development Goals. This approach is consistent with that adopted by Viva Energy, who, as our main tenant, we will be working closely with to further our ESG efforts. We have identified 4 key focus areas to date, and we'll look to add further focus areas over time. For each focus area, we've separately identified work streams which are in our direct control from those which we will work collectively on with our tenants. The majority of the actions completed in 2020 have been in relation to forming frameworks, policies and procedures to better govern and monitor ESG matters going forward. We are particularly pleased that we have been able to complete a sustainability design assessment over our 15 development projects. We confirm that all 15 have noncorrodible underground fuel systems, automated tank gauging and spill containment systems, energy-efficient LED lighting, monitorable power metering and recycling arrangements. We look forward to progressing our ESG strategy further in 2021. I'll now hand back to Hadyn to speak to our strategic priorities and outlook.

Thanks, Kerri. If I could ask you to turn to Page 26, we would highlight the following for the year ahead. In relation to our core portfolio, we're very focused on the 2 current nonfuel vacancies in our portfolio and the 5 leases expiring in 2021. Although these together represent less than 1% of income, they still represent important asset management outcomes for the Waypoint team this year. We also continue to pursue reinvestment opportunities across the portfolio with our tenants and operators. We expect the market for acquisitions to remain competitive in 2021, particularly for the high-quality assets that we are seeking. Off the back of those same strong market conditions, we will continue our noncore asset disposal program with $20 million to $30 million of disposals identified for the year ahead. In terms of capital management, we will continue to explore opportunities to diversify our funding sources and extend the tenor of our debt in swap books. We will also explore potential capital management initiatives, noting that we have circa $130 million liquidity at present, with gearing below the bottom end of our target gearing range and a further $20 million to $30 million of proceeds expected this year via noncore asset sales. Although our preference to invest this capital in new assets or on reinvestment opportunities within our existing portfolio, capital management initiatives remain an important tool for Waypoint to consider to enhance returns from investors. Finally, as I mentioned earlier, we're pleased to confirm our guidance for FY '21 at a target distributable EPS of $0.1572 per security, representing 3.75% growth on FY '20. Again, this target does not assume any acquisitions in FY '21 but does include $20 million to $30 million of noncore asset sales for the year. 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. Over to you, Jen.

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

Just in terms of noncore asset sales, you've sold 2 assets. You've got another 20 to 30 to sell in the pipeline over the next year. Can you maybe just talk about what constitutes noncore in your view?

Sure. Look, there's a range of reasons why it would be noncore for us, Krzysztof. One reason is duplication of sites across our network. So in some locations, we will have 3, maybe 4 sites within a certain market. So it doesn't really make sense for us to own that number of assets. So that's a key part of the initial ones that we've identified. And I think just also, we're really just looking at the performance of those assets and our view on what the tenant might do down the track and how they sort of fit into our longer-term view of the sector. So there's a range of different reasons. But look, they're not bad assets as such. Some of them are good assets, but we think we can recycle that capital into opportunities either within our existing portfolio or opportunities that we might be looking at in the market and just makes sense to do that.

Okay. And then just on the acquisitions front. I noticed there've been no new acquisitions in the second half and there's been limited new developments added to the pipeline. I guess how are you thinking about the -- and then also I should note that you've concluded no acquisitions in your guidance. How should we be thinking about the run rate going forward? Are you basically assuming that there's going to be a tapering in acquisition and development activity going forward?

Look, we're not going to give a run rate, Krzysztof. We -- as you say, our guidance is based on no acquisitions. We're still very active in the market. We've got 2 acquisitions, people who are well plugged into that market, talking to all the operators, developers and owners out there. So -- but I'll just say our guidance, there are no acquisitions assumed in that. But I would say I'd be surprised if we get to the end of the year without having bought or invested money in anything. But by the same token, if we get there and we haven't done that, we're not going to be disappointed. We're focused on buying the right stock.

Okay. And I guess just on that, how has your view on acquisitions evolved in terms of the acquisition criteria, just given the -- what you've talked around convenience being more important? Has, I guess, your view of an ideal site changed over time?

No. I think we've probably just focused a bit more on the terminal risk of acquisitions. So we really want to be sure that at the back end that we maximize the likelihood of tenants exercising their options. So very focused on the fuel performance of sites that we look at and sites in our own portfolio, but also having in mind to what we think is going to happen in the future. So I think that view on the future will evolve over time. And as we sit here today, the fuel side of things still very much the primary focus. But I guess it's just having a -- I guess thinking a bit more about that terminal risk at the back end.

Okay. Great. And then just one final question from me. Slide 37 in your presentation in the appendices. It seems like you've done a little bit of work on the alternate use of your metro portfolio. You've identified there's around 10% of the portfolio where the highest and best use is something other than the service station. Are you able to say whether that is incorporated in the current book value? And if not, can you give an indication as to sort of what's the potential uplift there?

Look, I wouldn't want to give an indication of the potential uplift, Krzysztof, just because it's -- as it says, it's a fairly high level and indicative assessment. But I can confirm that it's not included in our book value. So the assets are valued on the basis of existing use service station. Yes.

And with the lease term in mind as well.

Yes. The other thing to bear in mind is that we don't have the right to develop these today. I think as a general comment, the sites where we've identified higher and better use are also very good service stations and trading very well. So we don't expect to be able to get our hands on these sites for some time yet.

Your next question comes from Murray Connellan from Moelis Australia.

Just -- probably just a follow-up from the previous question. But your gearing at the moment is a touch below the bottom end of your target range. Obviously, the asset sale plans are likely to drop that further a little bit, and that's before we consider the likely run rate of organic rental growth and what that's likely to do to your valuations. I was wondering how you're thinking about gearing at the moment in the context of what your stated target range is? And I suppose what your ambitions would be for getting back towards the central point of that range?

Thanks. I think as Hadyn mentioned, we've got a number of options that we can pursue, and it's really looking at the balance between where the acquisitions come out and the disposals and the relative timing and our reinvestment in the portfolio. So I agree the gearing is a bit low, and we will look to increase that level, either through acquisitions or capital management activities.