Waypoint REIT (WPR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Waypoint REIT's 2022 Half Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Hadyn Stephens, CEO and Managing Director. Please go ahead.

Thanks, Rachel, and thank you to everyone for joining us on our half year results call this morning. Starting on Page 6 of the presentation that hopefully you have in front of you, I'd just like to quickly call out some of the highlights for the 6 months to June 30. Distributable EPS of $0.0859 was up 10% on the first half of last year, with regional growth, lower interest expense and a reduced number of securities on issue offsetting the loss of income from noncore asset sales. As previously announced, Waypoint REIT agreed to sell 29 assets to Fawkner Property Group during the period for $141.8 million and we've now sold 69 assets or about 15% of the portfolio over the last 18 months for total proceeds of just under $280 million. Our investment portfolio now consists of 404 properties with a combined book value of $3.1 billion, with 10 basis points of cap rate compression and fixed rate reviews, delivering a gross valuation uplift of $139.5 million or 4.7% for the 6-month period. Waypoint's weighted average cap rate now sits at 5.02%. Valuation gains were a key driver behind a $0.23 or 7.8% increase in ETA per security to $3.18 and along with asset sales, also resulted in Waypoint's gearing reducing from 30.1% in December to 27.3% in June or 26.1% after adjusting for asset sales settled post balance date. Debt and interest rate hedging have been a key focus for the team in recent months. And pleasingly, we just last week completed an extension of our FY '24 $275 million revolving credit facility, which has pushed out our weighted average debt maturity to 4.9 years with no debt expiries before 2025. We've also been active on the hedging front, which Kerri will talk to in more detail later. But our current hedge position is 90%. We have an average hedge position for the remainder of this financial year of 89% and an average hedge position for next financial year, so 2023, of 78%. In terms of the performance of our key tenant, Viva Energy Australia, we know that Viva posted a record half year result last week, with exceptionally strong results from the refining and commercial divisions more than offsetting a softer performance from retail as a result of lower fuel margins, lower shop royalties and higher operating and marketing expenses. Strong free cash flow resulted in Viva ending the period in a net cash position of $324 million compared with net debt of $95 million only 6 months ago. I'll now hand over to Kerri just to take you through the financials in a bit more detail.

Thank you, Hadyn. Turning to Slide 9 is an overview of Waypoint's financial performance for this half year. Rental income decreased $1.5 million or 1.8%, largely due to $3.7 million lower rent as a result of asset sales, net of 3.1% like-for-like rental growth. Our MER remains low relative to the wider REIT sector at 29 basis points. The $0.3 million increase in M&A expenses this half represents higher insurance and consultancy costs and resumed business travel partially offset by favorable timing differences in property expenses. The $1.9 million decrease in interest expense is largely attributed to base rate interest savings following the replacement of $275 million of swaps at 2% in August '21, with floating rate debt and our inaugural $200 million AMTN issuance in September '21. Distributable EPS growth of $0.078 or 10% was similarly driven by interest expense savings more than covering the net reduction in rental income as well as a decrease in the number of staple securities on issue following last year's security consolidation and Waypoint's buyback activity. 10 basis points of cap rate compression were recognized this half year. However, statutory profit decreased $38.1 million or 15.1%, largely due to these valuation gains being lower than the 19 basis points recorded in the prior comparable period as well as the impact of asset sales. A detailed reconciliation between distributable earnings and statutory profit is included in the appendix on Slide 23. Now turning to Slide 10. We present Waypoint's balance sheet. Cash of $114.6 million at 30 June includes proceeds from the settlement of 21 assets on the last day of the period. These funds were used to pay down debt in early July. Other assets increased $45.9 million, largely due to $18.1 million of favorable derivative movements and a $24.9 million net increase in assets held for sale. At balance date, 14 assets valued at $58.8 million were classified as held for sale. Today, 5 assets valued at $16 million remain held for sale, including 3 for which conditional contracts have been exchanged. Investment properties increased $8 million due to $140.3 million of gross property evaluation gains, largely neutralizing the impact of assets sold or transferred to held for sale during the period. Borrowings increased by a net $11.4 million. This represents $23 million of additional drawn debt and $0.7 million of lower unamortized borrowing costs and AMTN discounts, partially offset by $12.3 million of USPP related net FX and fair value hedge movements. Overall, net tangible assets increased $0.23 or 7.8% to $3.18 per stapled security at 30 June. The vast majority of this NTA growth is again attributed to the valuation gains recorded on the portfolio during the cycle. I will now hand back to Hadyn to provide a market update and to speak to our property portfolio.

Thanks, Kerri. So turning to Page 12 of the presentation where we've set out some data from the last 2.5 years based on our own internal transaction base and just to show what's happening in the direct market. As you can see, fuel and convenience transaction activities has certainly slowed in the last 6 months with a circa 30% drop in the number and value of transactions or about 50% if we exclude Waypoint's transactions with Fawkner Property Group. There's also been a greater skew in terms of transactions towards high-yielding regional assets and assets outside of New South Wales and Victoria, which has seen average cap rates remain in that mid-5% range. Turning to valuations on Page 13. We saw 10 basis points of cap rate compression across the portfolio compared with 22 basis points in the second half of last year. The gross valuation uplift was $139.5 million with retail reviews delivering approximately 57% of the uplift and cap rate compression the remaining 43%. Cap rate compression was focused largely in Waypoint's metropolitan and highway sites with no change in weighted average cap rate for the regional portfolio. As I mentioned earlier, Waypoint has now sold approximately 15% of its portfolio since the beginning of last year, with key observations relating to the disposal program outlined on Page 14. 70% of the assets sold by value have been regional sites, and we have achieved an average premium to prevailing book value of 4.9%. We believe that the sales have resulted in a much more resilient portfolio in terms of tenant operating metrics and have linked us with a core portfolio with improved rent cover, higher underlying land value and higher population density within the relevant trade areas. As previously advised, we do anticipate selling a further approximately 5% of the portfolio over the next 3 to 5 years, market conditions permitting, but are not currently assuming any further significant disposals this year over and above the assets held for sale at 30 June. Back to Kerri for capital management.

Thank you, Hadyn. Turning to Slide 17, we present our key debt metrics. Gearing and liquidity were 27.3% and $152.3 million respectively at 30 June, including proceeds from assets contracted, but not yet settled as a balance date, pro forma gearing and liquidity are 26.1% and $199.6 million. Our cost of debt has reduced from 3.5% in FY '21 to 2.9% in the current half, largely due to base rate interest savings derived from the replacement of $275 million of swaps at 2% in August '21, with floating rate debt and our inaugural $200 million AMTN issuance in September '21. The weighted average debt maturity was 4.5 years and 72% of debt was hedged at 30 June. Our interest cover ratio also improved from 5.5x in December to 5.7x in June. I'll speak to the capital management actions undertaken both during the period and post balance date on the next slide. Turning to Slide 18. We provide a snapshot of our current debt and hedging profile. The interest rate environment has been very challenging to navigate over the past 6 months. In May, we entered $80 million of interest rate caps for $5 million term to replace $78.9 million of swaps set to mature in August to maintain our hedging levels. These caps were purchased for $3 million and have a 2.5% strike price. To provide greater certainty over FY '23 and FY '24 earnings growth, whilst balancing the tenure of our hedge book, the tenure of $196.5 million of existing swaps maturing in FY '25 were shortened by 6 months. This served to counter the impact of the interest rate caps on our weighted average hedge rate in these years. Then in mid-August, we took advantage of a temporary pullback in medium-term interest rates to top up our hedge book with an additional $63 million of 5-year vanilla swaps, an average rate of 3.55%. Post these activities, Waypoint is 90% hedged today, and our weighted average head maturity is 3.5 years. As Hadyn mentioned, we are also pleased to announce that we recently extended the tenure of our $275 million revolving credit facility, increasing our weighted average debt maturity from 4.5 years to 4.9 years on a pro forma basis with no debt now due until April 2025. Turning to Slide 19. We are also pleased to formally announce an on-market buyback program for up to 40 million securities or approximately $100 million that's now been initiated. Waypoint will be permitted to buy back securities from mid-September under this program. We believe the buyback represents the best use of surplus funds given the near-term acquisition outlook and that Waypoint is currently trading on a 6.3% yield and an 18.6% discount to NTA. Post completion of the buyback, Waypoint will have returned $300 million to security holders with the vast majority funded through noncore asset sales. Importantly, with pro forma gearing of 29.3% and liquidity of circa $100 million, Waypoint remains in a strong position to pursue acquisitions, reinvestment in the portfolio and/or further capital management initiatives as deemed appropriate in the future. We will also continue to explore opportunities to further increase our hedging profile as the buyback program is undertaken. Before I pass back to Hadyn, this is my final results call with Waypoint. And accordingly, I would like to take a moment to express my gratitude to Hadyn and the team, the Waypoint Board and our security holders for their collective support over the past few years. I'm proud of what we've accomplished together and wish Waypoint continuing success. Hadyn, with that, I'll pass back to you to talk to our key priorities and outlook for the remainder of the year.

Thanks, Kerri. So turning to Page 21. Our focus for the next 6 months is primarily on selling the 5 noncore assets that remain on our balance sheet, 3 of which are actually under conditional contracts at the moment and completing the on-market buyback program of up to 40 million securities for approximately $100 million that we've announced today. With pro forma gearing below the bottom end of our target range, we're well-placed to take advantage of any acquisition opportunities that may arise, whether they be fuel and convenience or opportunities that are consistent with our long-term strategy to diversify the portfolio away from fuel and convenience into other asset classes backed by long-term triple net leases to strong covenants. However, we remain cautious in the current environment, and we're not currently assuming that we make any acquisitions over the remainder of this financial year. Our distributable EPS guidance of FY '22 remains unchanged at $0.1644 representing 4% growth on last year. This guidance assumes approximately $150 million of asset sales, approximately $100 million of capital management initiatives and an average BBSW rate of 2.7% for the remainder of the year, noting again that we are 89% hedged for the remaining 4 months of the year. As always, this guidance remains subject to the disclaimer set out on this page. So that concludes the formal part of the presentation today. I would now like to hand back to Rachel to coordinate any Q&A. Back to you Rachel.

[Operator Instructions] Your first question comes from Richard Jones from JPMorgan.

Just interested just to see how your thinking has developed over the last 6 months just in relation to expanding the portfolio beyond fuel and convenience.

Yes. Richard, thanks for the question. We've looked at a couple of opportunities over that period. But to be frank, there hasn't actually been a lot come to market for us to look at. We've taken a cursory look at 3 or 4 opportunities. But really the focus, given what's been going on with interest rates and the like, is really selling those noncore assets and working out what we're going to do on the capital management front. So no real update there. As we've always said, it's very much a long-term strategy. We'll continue to look at opportunities as they come up. But at this point, no material change over the last 6 months.

And any development on what you may be interested in and what you're probably less interested in just in the...

No, no, we're keeping an open mind. It's going to be led by opportunities now a chance to look at those opportunities. So again, we're keeping an open mind. So we're not narrowing it down at this point. I think we will look to do that over the next 6 months. So with our full year results we -- I think we'll be in a position to provide a bit more detail around this. But we're not assuming we're buying anything we have fuel and convenience or other asset classes over the next 6 months, just given what's going on.

Sure. And a couple of other portfolios have traded including a couple in New Zealand. Just wondering if you've looked at those and...

No. For us, New Zealand is -- it's a new market that we don't particularly understand. We already own a $3 billion fuel and convenience portfolio. We're still open to opportunities in the fuel and convenience at the right price. We're going into a new market in the same sector just didn't make a lot of sense to us. And I think if we look at that portfolio, it's -- clearly, it's a reasonably large portfolio, but it's a low-cost unmanned network. So it's not really keeping with where we think things are going from a fuel and convenience point of view and being in a new market, it just wasn't something that we spend a lot of time on.

The next question is from [ Phil Montgomery ] from BTIG.

I find it interesting that you're now looking to potentially buy assets when I don't really believe you actually have a mandate to do so. I think your mandate is being priced in market with a big 20% discount to NTA is your mandate is really to sell assets and continue to sell assets. And in fact, you published you'd be able to wind up the vehicle. Any comments on that?