Waypoint REIT (WPR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Waypoint REIT FY '25 Results Webcast. [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, and thanks for joining us on the call today. A snapshot of the 2025 financial year is provided on Page 6 of the presentation. Aditya will take you through the financials and capital management in a bit more detail shortly. In summary, distributable EPS of $0.1664 was in line with the updated guidance we provided midyear and up 1% on 2024. NTA as at 31, December was $2.90, up 5% for the year. Our MER was 30 basis points, in line with the previous 2 financial years. Gearing remained largely unchanged at 32.7% despite the completion of the $50 million buyback during the year. As at 31 December, our weighted average debt maturity was 3.8 years, with over $400 million of debt facilities refinanced or extended during the year, and our weighted average hedge maturity was 2.8 years, with 90% of FY '26 debt hedged. I'll talk in a bit more detail about valuations, asset sales and leasing later in the presentation. The key highlights for the year include the sale of 6 non-core assets for $40.6 million, representing a 0.4% discount to book value with the proceeds effectively funding 80% of the buyback. Good progress on our FY '26 lease expiries with 25 of 28 expiries now resolved with a 97% retention rate by passing income and rental uplift of 11.7% on renewed leases and 11 basis points of cap rate compression during the year, with Waypoint's portfolio valued at $2.86 billion as at 31, December with a weighted average cap rate of 5.61%. Waypoint's major tenant, Viva Energy, reported its FY '25 results earlier this week, and although group EBITDA was down approximately 6% on FY '24, it was pleasing to see a significant improvement in the second half of the year with the Convenience and Mobility division posting a 65% improvement in EBITDA, underpinning a 30% improvement for the group. A summary of Viva's FY '25 result is provided in the appendix of the presentation. I'll now hand over to Aditya to take you through our 2025 numbers in a bit more detail.

Thanks, Hadyn, and good morning, everyone. Turning to Slide 8, which sets out our full-year results. Distributable earnings were modestly lower than the prior year due to the impact of non-core asset sales and a higher cost of debt. This was more than offset by the reduction in securities on issue following completion of the buyback. As a result, DEPS increased by 1% to $0.1664, in line with our upgraded guidance. Looking at the key drivers, rental income grew by 2%. This was underpinned by like-for-like rental growth of 3%, which was partially offset by the impact of non-core asset sales completed in FY '24 and FY '25. Operating expenses were higher, primarily driven by higher property-related costs such as non-recoverable land tax and some specific repair and maintenance items on our double net sites. The MER was stable compared to the prior period, reflecting continued discipline on corporate costs. Interest expense also increased as expected, in line with our weighted average cost of debt. For those interested, an earnings bridge is provided on Slide 22 with additional detail on the key movements. Finally, the statutory result for the year was a net profit of just over $200 million. A full reconciliation between operating and statutory earnings is also provided in the appendix. Turning to the balance sheet on Slide 9. The key item to highlight here is the increase to NTA, which was 5% higher at $2.90 per security. The largest driver of NTA is the property portfolio, which is now carried at $2.9 billion. Valuation gains were primarily driven by rental growth, which was mostly recognized at the half year and an 11 basis point firming in the portfolio's cap rate over the year. The other key driver of the balance sheet was the completion of the $50 million on-market security buyback at an average price approximately 10% below NTA. This compares favorably to our non-core asset sales, which were executed at less than a 1% discount to book value. Our balance sheet and capital position remains strong, and we have set out the key metrics illustrating this on Slide 10. Our capital management initiatives in FY '25 delivered tangible benefits. Gearing was maintained at the lower end of the target range. Liquidity was optimized following non-core asset sales, the security buyback and refinancing activity undertaken during the year and a high level of hedging was maintained, providing insulation against a high interest rate environment. Our weighted average cost of debt increased to 4.8%, which was below our guidance of 5%, driven by refinancing outcomes and lower commitment fees. Our ICR also continues to show healthy headroom to the 2x covenant. Turning to Slide 11 to look a little more closely at our debt and hedging profile. We were active on the debt front during the year, refinancing almost 40% of our facilities. As shown on the slide, these initiatives are expected to generate an overall margin saving of approximately 15 basis points across Waypoint's debt. This was driven primarily by the early repayment of a tranche of USPP notes that carried a margin of over 250 basis points. The maturity profile is well positioned with our next maturity being a $50 million bilateral facility due in March 2028. On the hedging front, we continued our disciplined approach of progressively adding hedging over time. During the year, we added new interest rate swaps and executed blend and extends of existing hedges. As noted on the chart, average hedge rates, including forward starts remain in the low 3% range through to FY '28, positioning us well relative to the forward curve. For FY '26, we are guiding to a circa 5% cost of debt, underpinned by our fixed rate debt and hedges, which provides certainty of cost for 90% of our borrowings. The impact of higher base rates is expected to be partially offset by the margin savings from the refinancing activity I mentioned earlier. I'll now hand back to Hadyn to provide a market and portfolio update and our outlook for the remainder of 2026.

As outlined on Page 13 of the presentation, fuel and convenience transaction volumes continue to recover in 2025 with a circa 10% increase to around $580 million for the year. Average yields were down about 40 basis points, reflecting both strong investor demand and a change in transaction mix from regional to metro and Queensland to other states, particularly Victoria. With the prospect of another rate increase or 2 on the horizon, we expect there to be an element of caution in the market until the outlook becomes clearer. We expect this caution to impact demand primarily for more secondary assets with demand for high-quality assets to remain strong. A summary of Waypoint's valuations as at 31, December is provided on Page 14 of the presentation. Across the 395 assets owned at balance date, including asset held for sale, we saw a $3.1 million increase in gross valuation in the second half with 4 basis points of cap rate compression being partially offset by softer market rent assumptions across both independent and directors' valuations as part of our regular market rent assessment and valuation process. Non-core asset sales for the year are summarized on Page 15, with 6 assets sold for $40.6 million at a 0.4% discount to book value. The majority of these have been disclosed previously with Nowra being the only additional asset contracted during the second half of the year. Turning to Page 16. We're pleased to confirm that the majority of our 28 FY '26 lease expiries have now been resolved with strong tenant retention and rental reversion outcomes achieved. To-date, Viva Energy has been retained on 23 of 24 sites where the market rent review and option process has been completed and one smaller non-fuel tenant has also exercised its option. The overall rental reversion outcome across these 24 renewed leases is an increase of 11.7% versus passing, which is a pleasing result and in line with Waypoint's independently assessed market rent range. The one site where Viva Energy did not exercise its option is Slacks Creek, which is a 2-hectare site located on the old Pacific Highway in South Brisbane and currently on mixed-use retail and commerce. We're currently investigating a number of options for this site, including a potential subdivision, whereby around 1/4 of the site will be retained as a service station and leased to a new operator with the remaining 1.5 hectares of land sold. Further high-level information on Slacks Creek is provided on Page 29 of the presentation, and we'll aim to provide a further update on our plans in August, along with an update on the 3 remaining expiries for this year. Moving to Page 17 of the presentation. Viva Energy provided an update on its OTR conversion program as part of its full-year results earlier this week. Viva opened or converted 35 OTRs during the year with encouraging early signs of performance uplift and expects to open a further 40 to 60 stores this year weighted towards the second half. Across our portfolio, 17 conversions have been completed to-date, all of which have been basic conversions funded by Viva. As we've said a number of times over the last couple of years, we remain open to acting as a funding partner for Viva on larger-scale OTR conversion projects if it makes sense for our security holders. To-date, we have not received any such funding request from Viva. Looking to the year ahead on Page 19 of the presentation, we're pleased to provide FY '26 guidance of $0.1714, which represents 3% growth on FY '25. We're targeting $10 million to $20 million of non-core asset sales for the year. We're well placed from a hedging perspective with 90% of debt fixed, and we'll also be exploring further refinancing opportunities to take advantage of the attractive lending conditions currently available in the market. With that, I'll hand back to the operator to coordinate Q&A.

[Operator Instructions] Your first question comes from Daniel Lees with Jarden.

Just in relation to the potential FY '26 OTR conversions of the 40 to 60 that have flagged the mix of new and conversions, what proportion do you think could potentially require funding from Waypoint?

Yes, we don't have any indication on that so far, Daniel. I think if you look at done 35 or 25 conversions to-date, 17 of those, they've all been basic conversions. We own approximately half of the RExpress/OTR network, if you like. I'd assume that half of those conversions would be on Waypoint sites. At this point, we don't have any indication that there'll be anything other than basic conversions. All of the plans that we've seen to-date with approved plans on 40 conversions in total, that will be the basic conversions and they're not the projects that we would be interested in funding or would make sense for us to fund. At this point, none would be the answer.

Then on leasing, it looks like you had some pretty good outcomes in the FY '26 expiries. I appreciate the portfolio is fragmented in terms of under and over renting. Do you think it's possible to get similar positive outcomes as you work through your FY '27 expiries?

Still early days on FY '27. We do think it's under-rented, but we've got a bit more work to do around that ourselves. We've got our valuation -- sorry, our market rent assessments from independent valuer that underpin our valuations. What we did for the 2026 expiries was get a second opinion on that before we went into negotiations with Viva. We still need to go through that process and come up with a view on what we think market rents are. At this point, we think it's under-rented, but too early to say what we think the outcome will be. To be honest, we wouldn't be putting out there what we think the outcome is because we see a negotiation with Viva to go.

Your next question comes from Mithun Rathakrishnan with CLSA.

The first one is just on the debt profile. It looks like you guys were able to cut margins around 15 basis points on the $400 million refinance over the year. I do appreciate the color provided on Slide 11. I guess just with the feedback from industry peers, do you see room for a further margin tightening at all? I guess just following yesterday's inflation debt number, does that change your outlook at all on floating rate assumptions?

Thanks for the question. It's a good one. I think you're right, we did get a pleasing outcome on the refinancing that we did in the year. I'd say, the outcome is a little bit bifurcated on the bank debt side, we're seeing some margin compression, but in the in the single-digit range, I'd say. The biggest driver of that 15 basis points was the early repayment of the USPP. That's just a historic margin on that note was around 250 basis points. I wouldn't necessarily extrapolate that across the whole debt book because that's a singular piece of debt that we've repaid early. Definitely, as Hadyn mentioned in the outlook, we're seeing pretty strong conditions in the debt markets. If we have the opportunity to extend tenor and bring in debt at an attractive price, we will definitely be looking at that this year. In terms of your other question on CPI, look, we're 90% hedged for this year. Obviously, it's at the margin when it comes to the way the floating rates work through our P&L. I'd say the forward curve has anticipated a fair bit of rate increases this year already, and that is factored into our guidance. I guess, to the extent that there are increases above and beyond that forward curve expectation, yes, there's probably a level of exposure there, but it's not material in terms of our outlook for this year.

I guess just secondly, with gearing still at the low end of the target range and the share price ranging between that 10% to 15% discount to NTA, would an additional buyback be of consideration at all over the near to medium-term?

Look, it's always something we're thinking about, but not at this point. I think our liquidity position at the moment of $90-odd million, we're pretty comfortable with that. We wouldn't want to be reducing it too much further than that. Look, buyback is something we always consider, but we probably need some further funding sources from non-core asset sales and the like to pursue another buyback. At this point, we're not considering it.

Your next question comes from Murray Connellan with Moelis Australia.

I wanted to just touch again on capital management, please. You've obviously spoken or you've answered a few regarding the balance sheet and buyback. Obviously, still gearing in the low 30s, and we're arguably going to see a bit of valuation growth over the course of the next 12 months as income growth comes through. You're obviously looking at those non-core asset sales. I was just wondering whether you can maybe give us a bit of a feel for how you're thinking about capital deployment and what the preference is there, how far up that preference stack would the buyback sit in comparison to, let's say, going out and acquiring in the market? Then I guess, how conservative do you feel you need to be with regards to the balance sheet, noting that Viva might look to partner with you at some stage?

Yes, it's a good question, Murray. I might have a first crack and then Hadyn, feel free to jump in. I think when we look at our capital deployment options with the business of the nature of Waypoint REIT, we can obviously invest in the existing portfolio through potential funding with Viva. That option hasn't really been a very fruitful exercise to-date because of the nature of the conversions being basic conversions, as Hadyn touched on earlier. There's obviously the buyback at the current pricing, that's obviously a really attractive deployment opportunity. We have obviously engaged in that in the last 12 months, where we've deployed $50 million into the security buyback. That's largely been funded through non-core asset sales. Typically, we've matched the proceeds from non-core asset sales with deployments into the buyback. If I reflect on the comments in the outlook, we're targeting $10 million to $20 million of non-core asset sales this year. Obviously not as significant amount as we conducted last year. When we look at market conditions in the transaction market and where interest rates are heading, we think there's going to be a bit of caution in terms of buyer sentiment. In terms of potential buyback activity, I think it will be very much linked to non-core asset sales, and we're not sitting here thinking that we're going to be overwhelmed in a flood of demand for assets at this point. We think buyers are going to be a little more cautious, and so that $10 million to $20 million may take a bit of time to execute. In terms of other opportunities, obviously, in the meantime, we're repaying debt with any non-core asset sales. We've got Nowra contracted. That's due to settle in the first half of this year, but that's only $6 million, so that will go towards repaying debt in the meantime.

Then maybe just following the conversation around non-core asset sales. This has obviously been a pretty gradual divestment process for you as you find a tail of assets in your portfolio. Do you suspect this is going to remain the case? Or are you starting to reach the stage where you're pretty happy with where the portfolio is?

Look, we're pretty happy, but I think that's just part of regular portfolio management, Murray is looking at our portfolio and selling assets that we don't think that we think are non-core for various reasons, performance, performance can change for asset. There can be roading changes. There's a whole range of things that can impact our view on a site. It's a pretty regular process. It's not as if we're going to sell $20 million or $30 million of assets, and that's it. I think in this sector, in particular, you really need to be looking at your portfolio on a regular basis and trimming it around the edges. It's an ongoing process for us.

Your next question comes from Richard Jones with JPMorgan.

Hadyn, just interested in your comments around the portfolio under-renting. Just wondering if you can give us some more color as to how under-rented you think the portfolio is and I guess, some reference points around how you come up with those numbers?

Just to be clear, our portfolio is not under-rented. Our view on our portfolio is we're about 6% over-rented at the moment, which is based on the independent valuation process we go through every 6 months and how that extrapolates into directors sales. That is really just on FY '27, Richard, so we think the FY '27 cohort is under-rented. More broadly speaking, we're about 6% over-rented. A lot of that over-renting is concentrated in later years, so 2033, 2034, but just to be clear, we're not -- based on our current value views and different values will have different views, but we're about 6% over-rented.

Your next question comes from Simon Chan with Morgan Stanley.

Just a question in relation to your '26 renewals. The leasing spread of 11.7% look pretty attractive, obviously. How does the new rent compare to the rent that you have factored in those asset valuations? Was it in line? Was it above? Was it below?

No, it was in line, Simon.

In your current book values for those 21 or 24 assets, etc., you had already factored in rent that was, say, 12% higher than passing.

Yes.

[Operator Instructions]. There are no further phone questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.