Waypoint REIT (WPR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Waypoint REIT One Half '24 results. [Operator Instructions]. I would now like to hand the conference over to Mr. Hadyn Stephens, Managing Director and CEO. Please go ahead.

Good morning, everyone. Thank you for joining us on the call today. I'll start on Page 7 of the presentation where you'll see that Waypoint delivered distributable EPS of $0.0828 for the 6 months to 30 June. This result was in line with the first 6 months of last year with higher net interest expense being offset by rental growth and lower operating costs. We note that the result is above our guidance range for the full year on an annualized basis. However, we do expect second half results to be lower, primarily due to higher interest exceeds. . The value of Waypoint's investment portfolio increased by 1.4% during the period, with contracted rental escalations for the majority of the portfolio, offsetting a 6 basis point increase in weighted average cap rate to 5.74%. The 1.4% increase in the value of Waypoint's investment portfolio underpinned a $0.06 or 2.1% increase in NTA per security to $2.79 and also resulted in a slight decrease in gearing from 32.8% in December to 32.6%, which remains at the bottom end of our target range. On the capital management front, $600 million debt was refinance during the half -- refinanced during the half -- sorry, and additional hedging was also implemented across 2025 to 2028 period. As a result of these initiatives, our weighted average debt maturity now stands at 4.5 years and our weighted average hedge maturity is 3.3 years. In terms of key initiatives at a portfolio level, with exchange contracts on 1 noncore asset, which is an unmanned site and regional Queensland to $2.7 million or a 3.6% discount to the December book value. We also completed the assignment of 14 leases from Viva to Chevron, that was a condition of the acquisition of the [indiscernible] and have renewed 3 nonfuel leases that were due to expire in late 2024 or early 2025. When we reported our FY '23 results in February, we were optimistic we've seen some progress on discussions with Viva regarding particularly funding OTR conversions across our portfolio. However, progress on this front has been slower than we had anticipated due to Viva's decision to take a more measured approach to its rollout strategy. We provided our consent for the lodgment of DAs on 7 Waypoint owned sites during the period. However, the associated works are relatively minor in scope and we currently expect Viva to self-fund these projects. I'll talk a little bit more about [ Viva network ] plans shortly. Our major tenant, Viva Energy had a strong first half performance with group EBITDA up 25% and group NPAT up 10%. Convenience & Mobility delivered a resilient performance in a challenging retail environment, where cost-of-living pressures are impacting demand, with fuel volumes and convenience store sales down 0.9% and 1.4%, respectively, on a pro forma basis. I'll now hand over to Aditya to take you through our financials and capital management in a bit more detail.

Thanks, Hadyn, and good morning. Turning to Slide 9, which sets out the half year results. Like-for-like rental growth was 3.1%, reflecting our fixed rent reviews of 3% per annum across 93% of our leases as well as stronger growth on CPI-linked escalations. Operating expenses were down, reflecting lower property-related costs on our double net sites as well as a disciplined approach to expenses in the current operating environment. The MER was stable compared to the prior period. These benefits were offset by higher interest expense as a result of an increase in the cost of debt. Distributable earnings for the half were $55.6 million or $0.0828 per security. This was in line with the prior period, and we are well placed to deliver our guidance for the full year. Distributions for the first half of $0.0824 per security have been set at 50% of our full year guidance of $0.1648. While this results in a payout ratio that is slightly lower than earnings in the first half, this will normalize to 100% at the full year. Finally, statutory profits in the half rose to $93.3 million, primarily driven by valuation movements on the investment portfolio, where a net gain of $35.7 million was recognized this half compared to a net loss of $31.1 million in the prior period. Turning to the balance sheet on Slide 10. The value of the property portfolio increased to $2.8 billion, with rental growth offsetting a mild softening in the portfolio cap rate. As noted by Hadyn, we have one asset [ held ] for sale at 30 June, which is expected to settle late in the third quarter. NTA was up circa 2% to $2.79 per security and gearing stood at 32.6% at the lower end of our target range of 30% to 40%. Our balance sheet and capital position remains strong, and we have set out the key metrics illustrating this on Slide 11. The balance sheet retained significant headroom to debt covenants, and it is encouraging to see that property valuations appear to be showing signs of stabilization. Our weighted average cost of debt increased to 4.3% and continues to benefit from our high level of interest rate hedging, which I will cover shortly. We expect our cost of debt to continue to increase over coming financial periods as favorable interest rates fall mature and are replaced with new swaps at prevailing market rates. Our ICR continues to also show healthy headroom to the 2x covenant. Turning to Slide 12 to look a little more closely at our debt and hedging profile. It was an active half on the debt front with $600 million of refinancing finalized. Our weighted average debt term has increased to 4.5 years and available liquidity covers our FY '25 and FY '26 debt maturities. A key highlight was the new $500 million multitranche facility that was put in place in May, securing 4 new lending relationships and for the first time, bank debt with a 7-year term. We are appreciative of the support we've received from our lending group. We reconfirm our cost of debt guidance for FY '24 at circa 4.5%. The increase from FY '23 is consistent with what we previously flagged and is primarily a result of higher rates on our hedge debt and the higher average margin following the refinancing. This higher margin was driven by the new facilities we put in place, having a longer tenor than the facilities that they replace. On the hedging front, we continue to maintain a high level of near-term hedging to support our overall resilience against interest rate volatility. Consistent with our approach to progressively add hedging over time, additional hedging was put in place during and just after the half year and is noted on the slide. As a result, Waypoint is 92% hedged to the end of calendar year 2024 and retains a high level of hedging to the end of FY '26. I'll hand back to Hadyn to provide a market and portfolio update and our outlook for the remainder of 2024.

In relation to transaction markets, as you see outlined on Page 14, there was a 20% increase in the number of fuel and convenience transactions in the first half versus the same period last year and a 33% increase in total dollar value transacted. Around 1/3 of these transactions occurred in June and the solid into the first half has continued into the second half with a 100% clearance rate at the most recent Burgess Rawson auction in August, where [indiscernible] fuel and convenience assets were sold, including 6 regional assets. The average yield on assets sold in the first half was about 50 basis points higher than the average yield last year with the softer average pricing reflecting a higher weighting towards Regional and Queensland transactions in the most recent half. Details on Waypoint's [indiscernible] valuations are provided on Page 15. 19% of the portfolio is independently valued during the half, with the remainder subject to directors' valuations. Waypoint's weighted average cap rate increased by 6 basis points for the half with our Regional assets experiencing the largest movement at 14 basis points. Waypoint's overall weighted average cap rate has now increased by 73 basis points over the last 2 years with Regional assets again seeing the greatest level of cap rate movement over this period with 82 basis points of expansion. Highway sites have proven to be the most resilient through the cycle with only 66 basis points of cap rate expansion. Moving to noncore asset sales on Page 17. Progress was limited in the first half with only 1 small unmanned assets in regional Queensland sold at a 3.6% discount to the December book value. We currently have 8 assets with a book value of circa $40 million in front of potential buyers, and we'll continue to progress these transactions in the second half. As also outlined on Page 17, [ sitting ] tenants of exercise options on 3 nonfuel leases, including both nonfuel leases due to expire this year. The weighted average reversion on these 3 leases is 4%, with Subway, North Lakes being the outlined with a 17% review. Worth noting that the previous lease term for Subway, North Lakes' 10 years were foreseen reviews over the term lease, meaning that the rents have grown significantly above market rents over the period. All of the recently agreed rents are in line with independent market investments. Turning to Page 20 of the pack. As many of you will have seen, VEA announced earlier this week that it now expects to convert 30 stores across its express network to the OTR format within the next 12 months, with 5 to be completed by the end of this year. [ Viva ] intends to use this pilot program to test, learn and adapt the OTR model for its network with a broader program extension of the OTR offering to take place once cost and [indiscernible] conversion format has been confirmed. On Page 21, we have provided some high-level information on the 7 sites for which Waypoint has provided us consent as landowner for the lodgement of DAs. Consistent with Viva's comments on broader initial tranche of 30 assets, the 7 assets are a cross-section of our portfolio and include both sites that are currently successful and sites that have underperformed in recent years. As mentioned earlier, the conversions in bold relatively minor rebranding and refurbishment works only, and for that reason, we expect Viva is likely to self-fund these projects. Turning to the outlook for the rest of the year on Page 23. In line with the more measured rollout of OTR conversions recently announced by Viva. We believe it's unlikely we'll be having any meaningful discussions around large-scale redevelopment plans and potential funding opportunities in 2024. We remain open to discussing these things as ready. However, we now expect this to be an opportunity for next year and beyond once Viva has assessed the results from the initial tranche of 30 OTR conversions and finalized its broader network plans. In the meantime, we'll continue to progress noncore asset sales with 8 assets currently being marketed and another 9 assets identified for disposal over time. We thought we would ideally align any disposal with funding of larger-scale OTR conversions alongside Viva, improving the overall quality of our portfolio and managing terminal risks remain key priorities for Waypoint and we'll continue to assess opportunities to sell assets through this lens. Waypoint's balance sheet remains in a strong position with gearing at the lower end of our target range and a high level of hedging over the next 2 to 3 years. Finally, we are today revising our FY '24 distributable EPS guidance to $0.1648 at the upper end of the original guidance range provided in February. The key factor behind this change is the slower pace of execution on asset sales than originally forecast with any further asset sales in the second half, unlikely to have a material impact on earnings, given the typical 90-day settlement period for disposals. [indiscernible] assumptions underpinning the revised guidance outlined on Page 23. And with that, I'll hand back to the operator to coordinate Q&A.

[Operator Instructions] Well, the first question comes from Adam Calvetti from CLSA.

Congratulations on the result. You got to comment a little bit on how the funding discussions have been with Viva. I think previously you spoke to potentially doing have a coupon over a bond yield. Is that being discussed with them?

No. No. Look, we haven't really had any discussions with them this half and then at the start of the year based on our conversations with them, we thought we might be in a position to sit down and have some detailed discussions during the half that taxes hasn't eventuated. I think things are taking a little bit longer than they originally thought. And so we're unlikely to get into those discussions, I think, for the rest of the year, Adam.

Yes. Okay. And with the 7 sites that they have sought their approval on, I mean I think in the master lease, when they do this major capital works and they complete the works they're able to extend the lease or recut the least to 15 years and there's a market rent review that happens then. Is that still happening? And have you quantified what the potential uplift in market rent might be at these sites?

Yes, the type of work they're doing on most, if not all, of those sites don't qualify as major capital works. So just the basic rebranding, refurbishment. So the major capital [indiscernible] with the lease likely to be triggered. .

Right. Okay. And then maybe just one more, if I may. You have a comment on valuations. There's been some positive uplift. You think we're at the bottom of the softening cycle?

Yes. Look, I mean, answer this question with the caveat that we don't know what's going to happen from here, but I think based on our discussions with our value in the most recent round and also seeing what's happening in the transaction market and the current outlook for REITs. My personal view is that we're -- this is probably the bottom, that can change very quickly, as we've seen over the last 6, 12, 18 months, but that's my personal feeling. And I think that's the sentiment that's shared and formally by our valuers. So we may see individual movements on individual assets, but at the portfolio level, I think we're near, if not at the bottom.

Yes, great. Congratulations on results.

The next question comes from Murray Connellan with Moelis Australia.

Hadyn, thanks for the comments around your views on asset valuations. I was wondering whether, just on a similar note, we could drill into how you're experiencing the direct market at the moment, please. Just with regards to those divestments that you've been targeting. Who the buyers are typically that you're seeing out there? And I guess there's scale. And then what are the dynamics maybe that are keeping the outcomes there a bit slower than you'd previously hoped? .

Yes. Okay. Thanks, Murray. I think in terms of the timing during the half, when we reported in February, as we said, we were seeing some green shoots and a lot of syndicators sort of floating around looking for products. Almost immediately, we had to see a bit of interest rate volatility that saw that sort of demand back off. But I think towards the back end of the half, there's a lot more interest out there from groups. It's really syndicators that we're dealing with. So of those 8 assets where we're dealing with offers on 5 of those. There's no guarantee that those 5 offers will be accepted or there'll be deals on that. But what we have seen towards the back end of the half and into the first -- the beginning of this half, that syndicated demand is back now. We're aware about the syndicators out there raising money to fund conditional purchases. And you've also seen the private investor market pickup, as I mentioned on the call, 100% clearance rate at the most recent Burgess Rawson auction, which is primarily private. So I think it's both syndicated and private more. We're dealing primarily with syndicated at the moment and -- but the auction market is certainly looking pretty positive with privates.

Sure, sure. And are syndicators typically engaging with you on multiple sites at a time? Or is it typically on a piecemeal basis? .

Typically multiple, but 2, 3, 4 assets.

[Operator Instructions] The next question comes from Richard Jones with JPMorgan. .

Just questions on -- just wondering if you can remind us, Hadyn, just a little bit of characteristics of the assets that you put on the market plus the show the 9 you've identified as potential asset sale that make them less core versus the remainder of the portfolio? .

Look, I don't like talking too much detail, to be honest, Richard, I mean is we're looking to sell their assets to a noncore to us that are particularly attributed to other buyers. Part of that attraction is the yield on the asset, which is a fair bit higher than -- on the assets, which is a fair bit higher than our portfolio cap rate. I think the yield is something that's indicated is certainly chasing at the moment. So relative pricing is part of it. And now from our point of view, it's all about -- every asset is different, but it's in different reasons for potentially looking to divest, it's really about continually trying to improve the quality of our portfolio and manage that term risk, which isn't necessarily substantially higher on these particular assets, but we believe it's higher. .

Okay. And if you look at any non-convenience retail assets in the past 6 months from an acquisition perspective?

No. No. We haven't looked at anything in the last 12 months. Yes, we're really focused on with our tenant there change of strategy, which we really believe in. It's obviously going to take a little bit longer to execute. But I respect the fact that they are taking a bit more time to -- before they roll this out and what does it do it right. I think that's right, I think from our point of view as well. So we're happy to be patient and wait to have those discussions when they're ready. And that's really our priority from a capital allocation point of view for the foreseeable future. .

There are no further questions at this time. I will now hand back to Mr. Stephens for closing remarks. .

Thank you very much, everyone, for joining us. I know we've got meetings with many of you over the next few days. If there is anyone else on the call that doesn't have a meeting set up just like ever a conversation around the results then please reach out to us, you'll see our contact details on the ASX announcement. Other than that, have a great day, and thanks again for joining. .

That does conclude our conference for today. Thank you for participating. You may now disconnect.