Waypoint REIT (WPR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Waypoint REIT Full Year 1 (sic) [ 2021 ] Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Hadyn Stephens, CEO and Managing Director. Please go ahead, sir.

Hopefully, you've got in front of you. I'd just like to quickly call out some of the key highlights for the year. It was another very good year for Waypoint REIT, with distributable EPS of $0.158 at the upper end of our guidance range, driven primarily by organic rental growth, lower interest expense and capital management initiatives. The result represents 4.25% growth on the prior year, and Waypoint has now delivered compound annual growth and distributable EPS of 4.5% over the last 5 years. Waypoint enjoyed strong valuation gains over the year with 40 basis points of cap rate compression and fixed retail reviews resulting in a gross valuation uplift of $320.1 million or 11.6% across the portfolio. Cap rate compression was split relatively evenly across the year with 21 basis points in the second half, resulting in a $130.4 million or 4.4% increase since June. These strong valuation gains were a key driver in Waypoint's gearing ending the year at the bottom of our 30% to 40% target range and along with a lower number of securities on issue as a result of capital management initiatives drove an 18.5% increase in NTA per security to $2.95. Waypoint's NTA per security has now increased at a compound annual growth rate of 7.9% over the last 5 years. Active portfolio management was and remains a key component of our strategy, with 40 properties sold during the year for $137.1 million, representing an average premium of 10.5% to prevailing book value. These asset sales allow Waypoint to implement a comprehensive capital management program with $132 million returned to securityholders in November and $41 million of securities bought back on market at an average price of $2.68 per security or a 9% discount to year-end NTA. In terms of the financial performance of our main tenant, Viva Energy announced a strong result in 2021 with underlying EBITDA almost doubling to $484 million, with strong results in commercial and refining offsetting our weaker retail performance. Fuel volumes across the Alliance network were negatively impacted by lockdowns in the second half but were flat for the year at approximately 56 million liters a week before recovering strongly in December to approximately 65 million liters a week. Total fuel volumes across the network were up approximately 8% due to Viva's continued expansion into regional markets and strong diesel sales. However, softer margins due to rising oil prices and higher marketing and other costs resulted in a 20% reduction in retail EBITDA for the full-year to $187.5 million. I'll now hand over to Kerri to provide you with an update on our ESG initiatives and to go through the financials in a bit more detail before she hands back to me to provide an update on strategy and our key priorities for the year ahead.

Thank you, Hadyn. Turning to Page 8, we provide an update on the delivery of our ESG strategy. As you may recall, our strategy is focused on 4 key areas aligned to the UN Sustainable Development Goals. The major initiatives completed since we reported our half-year results all fit under the climate change in energy focus area. We are pleased to confirm we have achieved our carbon neutral target for 2021 with residual Scope 1 and Scope 2 emissions under our operational control as well as certain Scope 3 emissions offset by donation to a gold standard voluntary emissions reduction certified projects sponsored by South Pole. We also obtained third-party limited assurance over our FY '21 carbon emissions for the first time and completed a Task Force on Climate Change-related Financial Disclosures gap analysis. In addition, we granted easements on another 2 sites and continued support of VEA's electric vehicle charging station pilot program. We acknowledge there is plenty more work to do and value the commitments and actions taken by our tenant operators, including Coles commitment to 100% renewable energy by 2025 and the net 0 targets recently announced by VEA. We look forward to continuing to work with our tenants, operators in this space. Turning to Page 10 is an overview of Waypoint's financial performance for the year. Rental income increased $3 million or 1.9% due to 3% like-for-like rental growth and $0.8 million incremental income from acquisitions and development, offset by $2.3 million lower income due to asset sales. Management and administration expenses increased $0.6 million or 6.5%, largely due to higher insurance and property level costs, partially offset by lower independent valuation costs and the benefit of having no nonrecurring expenses this year. Notwithstanding the current year increase, we are pleased to report that Waypoint continues to have one of the lowest MERs in the sector at 28 basis points. The $1.8 million decrease in interest expense is attributed to base rate interest savings and lower average debt balances due to the asset sale proceeds being used to temporarily pay down debt, partially offset by the full-year impact of the higher USPP margin. Overall, distributable earnings increased $4.1 million or 4.25% per security over FY '20. Statutory profit increased $163.7 million or 58.5% largely due to fair value gains recorded on investment property. A detailed reconciliation between distributable earnings and statutory profit is included in the appendix. Page 11 details the key movements driving the $0.65 annual increase in distributable EPS. Net rental income growth accounted for $0.39 of the increase with a slight reduction of $0.08 attributed to higher management expenses. Net interest expense savings and accretion from the reduced number of securities on hand further contributed increases of $0.22 and $0.12, respectively. Now turning to Page 12, we present Waypoint's balance sheet. With respect to the $22.4 million increase in assets held for sale and other assets, all assets classified as held for sale at 31 December 2020 were sold during the year, and the current balance represents 3 contracted properties as well as 6 uncontracted properties. Hadyn will provide more details on these assets later. Investment properties increased $171.7 million or 5.9%, largely due to valuation gains of $319.8 million, including $130 million recorded this December, net of assets with a carrying value of $148.7 million being sold or reclassified to held for sale during the year, most of which have now been sold. The $30.3 million distribution provision reflects the change in distribution frequency from half yearly to quarterly in the second half of the year. Borrowings have increased $83.7 million or 9.9%, largely due to debt being drawn to fund distribution requirements and capital management initiatives in excess of asset sale proceeds received to date. The $29.1 million decrease in derivatives represents favorable movements on both cross-currency swaps and interest rate swaps. As hedge accounting is applied for the USPP, the unrealized gains on the currency swaps are largely offset by counter movements in the borrowings line above and within hedge reserves. Overall, net tangible assets increased $175.1 million or 9%. On a per security basis, the increase was $0.46 or 18.5% and primarily driven by a combined strong impact of valuation gains and lower securities on issue as a result of capital management initiatives undertaken during the period. Turning to Page 13, we summarize our key debt and liquidity metrics. As previously mentioned, our drawn debt has increased $83.3 million to fund distribution requirements and capital management activities in excess of asset sale proceeds realized to date. At 31 December, Waypoint had undrawn debt of $93 million and available liquidity of $76.1 million. Following our additional buyback activity earlier this month, available liquidity today is $59.6 million. Pleasingly, gearing of 30.1% now sits within our 30% to 40% target gearing range. Waypoint's weighted average cost of debt has decreased slightly to 3.46% and our interest cover ratio remains healthy at 5.5x. Our weighted average debt maturity has increased 0.7 years to 5 years at 31 December due to the $200 million inaugural AMTN issuance and refinancing of $285 million of bank debt with a smaller banking group reflective of Waypoint's go-forward banking needs. Following these activities, Waypoint has no debt expiring until April 2024. At year-end, 73% of Waypoint's debt was hedged at a fixed rate of 1.56%, and the weighted average hedge maturity was 3.6 years. We intend to extend this tenor of our swap book this year further to protect against future interest rate volatility. I'll now hand back to Hadyn to speak to our portfolio strategy.

Thanks, Kerri. If I could ask you to turn to Page 15 of the presentation, where we have provided an update on our fuel and convenience portfolio strategy. As I mentioned earlier, Waypoint sold 40 assets last year for $137 million, representing circa 5% of the portfolio by value. The assets sold to date primarily in sites with leases expiring before the year 2030, which was the initial focus of our review process. Having completed the review process during the year, we have identified a further 10% of the portfolio by value that we aim to sell over the next 3 to 5 years with $150 million of disposals forecast to be completed this year. These proposed asset sales are part of Waypoint's ongoing portfolio enhancement program with regional assets making up the majority of the sites being up for sale along with some smaller assets in metropolitan locations. As part of this process, we've also taken the opportunity to resegment the portfolio from our historical metro, regional split into 4 categories that better reflect how we think about the portfolio. Waypoint's focus moving forward will be on sites located in capital cities, key satellite cities and metropolitan growth corridors and highway service centers on major passenger and freight transport groups. These categories currently account for 87% of Waypoint's portfolio by value, with this weighting likely to increase over time as we sell further sites in smaller regional towns and cities. Turning to Page 17. Diversification is an issue that's become increasingly topical in our discussions with investors over the last 6 to 12 months. And we're pleased to be able to confirm that Waypoint intends to implement a long-term diversification strategy that we believe will broaden avenues for growth, mitigate some of the key long-term risks facing our current portfolio and also improve Waypoint's ESG profile over time. As set out in our FY '20 results presentation, Waypoint acknowledges the macro trends that will impact the fuel and convenience sector over time with the key issue being the energy transition and the shift from traditional fuels to alternative fuels over time. We continue to believe that the demand for traditional fuels will remain resilient for some time yet, and that our portfolio is well placed for the energy transition. However, we also believe that continued repositioning of the portfolio over the next 5 to 10 years is required in order to address some of the risks that Waypoint associated with that transition, the key ones being sector and tenant concentration. The first [ limit ] of our strategy to reposition the investment portfolio for the long-term has been asset sales with 40 assets or circa 5% of the portfolio sold to date and a further 10% of the portfolio identified for sale over the next 3 to 5 years, including $150 million of asset sales this year. We believe that asset sales to date have significantly derisked the portfolio by improving our likely future tenant retention rate, and we expect our ongoing active portfolio management strategy will see the overall quality of the portfolio continuing to improve over time. The second limit of our strategy is to reduce our relative exposure to fuel and convenience by diversifying the investment portfolio. Management and the Board considered a number of different options, including a wider convenience retail mandate or expansion into specific alternate asset classes. However, we ultimately decided on a strategy that we believe is most consistent with Waypoint's current investment thesis, namely providing investors with exposure to secure and growing retail income streams, underpinned by long-term, primarily triple net leases to well-capitalized tenants. [ Initial ] this decision, whereas our assessment that income security is typically the driver of an investment decision at Waypoint rather than exposure to fuel and convenience as an asset class. Accordingly, our proposed diversification strategy is asset class agnostic, with the investment decision process to focus on the nature of the lease and the credit worthiness of the tenant rather than asset class. Our strong preference is to triple net leases with initial terms of at least 10 years to well-capitalized tenants with strong competitive positions in industries with solid fundamentals. The fundamentals of the underlying asset will also be important with a preference for commercial properties that are fungible in terms of use and/or tenant. However, we're also open to considering more specialized opportunities that are critical to the operations of the tenant and deliver forecast long-term returns in excess of our cost of capital. By defining our future investment strategy in this way, we believe that the core principles underpinning Waypoint's investment thesis since IPO will remain largely unchanged, namely a secure and growing income stream via long-term leases to creditworthy tenants. The set and forget nature of the proposed investments will require minimal additional resourcing, enabling Waypoint to maintain its sector-leading low MER, and we are proactively addressing the key long-term risks facing the vehicle, principally sector and tenant concentration to protect securityholder value. And finally, that the addressable market for external growth will be broadened materially, opening up additional avenues by which to enhance securityholder value over time. We have a range of funding options open to us to pursue this strategy, including current gearing capacity of around $250 million and the potential to cycle -- to recycle approximately $300 million into new opportunities as we progress our fuel and convenience asset sale program. In terms of timing, we do not have any specific goals or targets at this point, and it tends to take a patient and disciplined approach to reshaping a portfolio over the long term as market conditions allow. We know that this will not be an easy or quick process, which is why we believe that it isn't important to start now. We're also very conscious of ensuring that key stakeholders are informed of the proposed strategy ahead of time hence our announcement today. Turning to Page 19. Further development of the diversification strategy is a key focus for the year ahead. This will primarily involve engagement with all stakeholders, including our investors, lenders and Moody's as well as broadening our internal origination function and communicating our strategy to potential deal sources in the market. At this point, we're not assuming that we make any acquisitions this year with our guidance of 4% growth for the year, assuming $150 million of asset sales and $100 million of capital management initiatives in addition to the $10 million of capacity under our current on-market buyback program. As always, guidance remains subject to no material changes in market conditions and no other factors adversely affecting Waypoint's financial performance. With that, I'll conclude the formal part of the presentation today, and I'd now like to hand back to Zed to coordinate the Q&A session.

[Operator Instructions] The first question is from the line of Murray Connellan from Moelis Australia.

I was just wondering whether you could just elaborate on the impact that assumed asset sales and capital management initiatives have on proposed guidance. Does the forecasts that you're baking in effectively assume a gradual movement in this capital over the course of FY '22?

For guidance purposes, we've assumed the majority of those transactions happen midyear. And given if we do the security consolidation, it would be subject to securityholder vote, it would be towards the end of the year.

And then I was just wondering whether it might be -- whether you might be in a position to elaborate a little bit further around the potential diversification of the portfolio. Are there any particular asset classes you're looking at, at the moment? And I guess, just what sort of timing can we expect on the diversification?

I'll take that one. In terms of timing, as I mentioned, we haven't assumed that we do anything this year. We are going to be very patient and disciplined with this strategy. It's very much a long-term one that we need to get ourselves ready for that now. And that's why we're informing the market today so that we can actually get started on that strategy. There are a few things we need to do around resourcing and about getting our message out there into the market about what we are looking for. In terms of the asset classes, again, we're not focusing on asset class as such. We're focusing on the nature of the lease and the tenants. So we're not rolling out any -- or specifically focusing on any particular asset classes at this point. We do you think those -- that corporate sale and leasebacks are going to be a big part of the strategy moving forward. That's been a big market over the last 5 years or so, $13 billion of transaction has done, almost 200 individual transactions. And we see that trend continuing, and we'd like to be part of that flow. But this year, the short-term is really getting ourselves in a position to be able to execute this strategy. So that's our focus for the next 6 to 12 months.

[Operator Instructions] Our next question comes from the line of Leanne Truong from Ord Minnett.

Just a question on your asset sales. I know at the half-year result, you had flagged [ a further 9 ] assets to sell. You've only sold 3. So I was just wondering if the asset sales are taking a bit longer than expected?

Those particular ones are, yes, we saw -- we did see the market take a bit of a breather towards the back end of last year, the auction market. But -- so there are some of those assets that we still have for sale, and we are putting back in place [ EOI ] campaigns for those assets. They're primarily smaller regional assets that are probably best suited for an EOI sort of campaign than putting them up to auction. So they will be put to market -- they're actually on the market now. So we may -- they may well take a little bit of time to ship those particular assets, but, yes, we are in the market with them.

And so I mean, you noted that you're looking to sell mostly regional assets. So you've basically guided about 6 months, I guess, the time to sell. Do you think it's not like what are you seeing in the market in terms of the smaller regional assets? And are the $150 million in assets that you're flagging, are they small assets or the larger assets? Just a bit of background on that, please.

Sure. So they are primarily smaller regional assets, but we've got that in our guidance. It is a reasonable expectation of that transaction happening. We're confident that we will sell those assets, those $150 million of assets this year. As you can imagine, there's whole range of -- when I say smaller regional assets, the whole range of quality on those assets. So the ones that we've struggled to sell to date are probably at the lower end of that spectrum. But the ones that we're flagging for our -- that are included in that $150 million, certainly high-quality, but still smaller regional assets, but we're confident that we will sell.

And just a last question on that. So are you expecting to sell these assets at a decent premium to book value versus historically?

We'll sell them at the highest price we can, Leanne.

Next question is from the line of Solomon Zhang from JPMorgan.

First question just on, I guess, your metro assets and potential higher and better use, given your metro assets are pretty well located and the underlying land value is pretty high. How are you thinking about unlocking that as the sort of medium- to longer-term?

It's very much a medium- to longer-term story around that. You're right, we do have a number of sites in the portfolio that do have pretty significant land value and alternate use potential. The most obvious ones are also very strongly performing fuel and convenience centers. And as you know, our tenant has long-term leases on these sites with options around them, 7 by 10-year options in most instances. So our ability to get our hands on those sites and extract that value is really conditional on the performance of the sites and whether or not [ we ] wants to continue to operate them. So we don't have -- we have only 2 sites coming up in the next 5 years, Fawkner and Rouse Hill, both of those are very stronger performing sites that we don't expect to be handed back. So it's very much a 5- to 10-year strategy around any of those potential sites and alternate use perhaps longer in many instances.

Yes. And just around your diversification strategy. I mean, you're targeting sort of long way or strong fundamentals. Those asset classes are generally pretty in demand. How are you thinking about competition for those asset classes relative to sort of your cost of capital?

Yes. Look, they are probably sought after a moment. I think you made that comment about any asset class at the moment. But we have to be in the market, those are the sorts of assets that we think best fit our vehicle and it's a strategy that we can execute. So we need to be in the market and we need to get ourselves set up to be looking at those opportunities. So I think we've shown that we're pretty disciplined with our capital allocation and what we've done through the capital management program and asset sales. So I think you can expect the same disciplined approach on acquisitions. If we're outbid, we're outbid, but we want to be out there and looking at these opportunities and putting our best foot forward on the ones that we think makes sense for the vehicle.

Yes. But any sort of high-level thoughts on indicative asset classes, sort of, say, like secondary industrial or sort of metro office or any color you can provide there?

No. Look, again, it's not around asset class for us. It's the nature of the lease and the creditworthiness of the tenant. So we're open to all asset classes, not ruling anything in or out at this point. I think if you look back at a number of the sale and leaseback transactions, they have been in that sort of industrial manufacturing sort of space. So we would imagine those would continue to be the sorts of transactions that we see in the market. But at this point, we're keeping a very open mind.

Does that answer your questions, sir?

Yes, that's clear.

[Operator Instructions]

I guess, we might be done, Zed, on the questions?

Yes. Mr. Stephens, we do not have any further questions. I would now like to hand the conference back to you for closing remarks. Over to you, sir.

Okay. Thank you very much for your time this morning, everyone. We look forward to one-on-one discussions that we've got set up with a number of you over the next few days and anyone that doesn't have a meeting in the diary or a call, please let us know we're more than happy to chat at any stage. So please just let us know. Have a good day, and we'll speak soon.

Thank you very much, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you. You may now disconnect your lines.