Waypoint REIT (WPR) Earnings Call Transcript & Summary

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

Thanks, Anastasia, and good morning to everyone on the call. We're going to try and keep the formal part of the agenda reasonably short this morning, and I'll start by providing a quick overview of highlights for the half before handing over to Kerri to provide an ESG update and go through our financials in a bit more detail. Kerri will then pass back to me to summarize our priorities and outlook for the remainder of the year before closing out the call with some Q&A. If I can ask you to please turn to Page 6 of the presentation where we have set out the key highlights for Waypoint from the first 6 months of 2021? Distributable EPS for the period was 5.4% higher at $0.0781 per security, driven primarily by strong rental growth, lower interest costs and prudent cost management, with a management expense ratio for the period of 26 basis points. NTA per security increased by 10.4% or $0.26 to $2.75, primarily as a result of valuation gains with 19 basis points of cap rate compression and fixed rental reviews resulting in a gross valuation uplift of $176.1 million or 6.4% on Waypoint's ongoing portfolio of 427 properties. Noncore asset sales were a focus for Waypoint in the first half with 37 assets now exchanged or settled for an average premium of 10.8% to prevailing book value. Transactions included the sale of 31 predominantly regional properties to Fawkner Property Group for $113.9 million and a further 6 metropolitan assets via auction at an average yield of 4.67% or 15.1% premium to book. A further 9 assets have been identified for sale in the second half of the year. And if these assets are sold, noncore asset sales over the last 12 months will equate to approximately 10% of Waypoint sites by number or approximately 5% by value. Strong valuation gains and noncore asset sales have further strengthened Waypoint's balance sheet with gearing of 27.3% at balance date, below our 30% to 40% target gearing range. As announced to the market in July, this has allowed Waypoint to progress its capital management plans with a total of $150 million earmarked by way of buyback and potentially a capital return and security consolidation. Our buyback program of up to $75 million has already been initiated and we intend to provide the market with further information on the potential capital return in Q4. We made some very good progress on the leasing front during the half with 5 leases or options to renew being finalized and a 3.5% uplift in income on these properties. We now have no nonfuel expiries for the next 2 years and only 2 fuel leases expiring over the next 5 years, both of which are very strong performers. It's also been encouraging to see our operators continuing to perform so well despite the various lockdowns around the country with Viva Energy Australia reporting a 7.9% increase in fuel volumes for the alliance network and a resilient result for its retail business generally, and Coles Express delivering a 7.7% increase in revenue for the 12 months to June 2021 and more than doubling EBIT during the period. I'll now hand over to Kerri to provide you with an update on Waypoint's ESG initiatives and to go through the financials in more detail.

Thank you, Hadyn. Turning to Slide 7. I'm pleased to provide an update on the ESG initiatives we've undertaken in this half. You may recall that our ESG strategy is centered around 4 key focus areas aligned to 6 of the UN Sustainable Development Goals. Our focus areas include ethical conduct and transparency, our people, climate change and energy and safety and the environment. This half, we published our Modern Slavery Statement and implemented enhanced procedures for vetting new suppliers. We also established our FY '20 baseline carbon emissions at 81.1 tonnes and have commenced working with Viva Energy to better understand our Scope 3 emissions. Our path to net zero starts now with FY '21 carbon emissions within the REIT's operational control to be audited and indirectly offset through donation to an accredited provider. We also commit to continuing to investigate further direct reduction and offset program opportunities. Turning to Slide 9 is an overview of the REIT's financial performance for the half. Rental income increased $2.6 million or 3.3% due to 2.9% like-for-like rental growth and $0.9 million additional income from net acquisitions and fund-through development, which were partially offset by $0.5 million lower development coupon income. The $0.9 million decrease in interest expense is attributed to lower average debt balances and base rate interest savings offset by higher margin cost of the USPP issued in October last year. Distributable earnings growth of $3.5 million or 6.1% was similarly driven by higher rental income and lower interest expense. Statutory profit increased $114.9 million or 83.9%, 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 21. Lastly, management and administration expenses remain largely unchanged, and the REIT continues to have one of the lowest MERs in the sector at 26 basis points. Now turning to Slide 10. We present the REIT's balance sheet. Other assets include 43 assets held for sale with a combined carrying value of $149.2 million. These include 31 assets sold to Fawkner in July and 3 assets sold at auction earlier this month. Remaining assets to be sold have a combined book value of $26.2 million. Investment properties increased $41.6 million, largely due to $189.8 million of gross property valuation gains net of $148.7 million of assets being reclassified to held for sale. Borrowings decreased by $17.3 million. This represents a $14.3 million repayment of debt and $3.2 million of USPP related net FX and fair value hedge movements, slightly offset by $0.2 million lower unamortized borrowing costs. Derivatives decreased $10.3 million, largely due to favorable movements in interest rate swaps. Overall, net tangible assets increased $0.26 or 10.4% to $2.75 per security at 30 June. This NTA growth is attributed to strong valuation gains and favorable interest rate swap movements. Turning to Slide 11, we present a snapshot of our debt and liquidity position. The REIT has $140.2 million of available liquidity to deploy as and when opportunities are identified. Following the recent asset sales and strong valuation uplift, gearing now sits at 27.3%. However, if completed, the proposed asset sales and capital management initiatives announced in conjunction with the sale of the Fawkner portfolio would increase pro forma gearing to 28.7%, closer to the bottom of our target gearing range. Following the refinancing of $100 million during the half, the weighted average debt maturity is 4.1 years. 90% of the debt was hedged at 30 June. However, our current hedging level is now closer to 55% following the expiry of interest rate swaps with a notional value of $276 million earlier this month. The REIT's weighted average cost of debt remained stable at 3.65% and our interest cover ratio is healthy at 5.5x. Lastly, we have established a new A-MTN program and are considering an A-MTN issuance later this year to further diversify and extend the tenor of our debt and reduce our exposure to variable interest rates. I'll now pass back to Hadyn to speak to the FY '21 priorities and outlook.

Thanks, Kerri. You'll see in the presentation, we've included further information obviously on the portfolio. But if I could ask you to turn to Page 19 of the presentation, which covers the key priorities and outlook for Waypoint over the next few months. I'd like to start by briefly reiterating the strategy that we announced to the market in February, which is to maximize long-term income and capital returns for our investors by curating a high-quality property portfolio that can evolve over the medium to long term with the inevitable changes facing the fuel and convenience retail sector in Australia. We intend to do this through, firstly, continuing to support our tenants as the operating environment evolves; secondly, through active portfolio management, which includes a combination of acquisitions, reinvestment in our core portfolio and noncore asset disposals; and finally, prudent capital management, including returning capital to securityholders if we believe that is the best use of funds at that particular point in time. With that in mind, as people are aware, the market for fuel and convenience assets has been very strong for some time now, and Waypoint has sought to take advantage of these conditions over the last 6 to 12 months by selling noncore assets at attractive premiums to carrying value. We're very pleased with the results that we have achieved and believe that the income profile of the portfolio over the next 5 to 10 years has been significantly derisked. With the strength of the market in mind, we'll continue to look at opportunities to further improve portfolio quality and maximize long-term income and capital returns for our investors. Noncore asset sales are an obvious way in which to improve portfolio quality, but we also remain very focused on putting our balance sheet to work, whether by way of acquisitions or reinvestment into our core portfolio. With gearing below our target range and liquidity of circa $140 million, we're in a strong position to fund further growth, provided that the investment is on strategy and can deliver long-term returns in excess of our cost of capital. In terms of capital management, we remain very focused on delivering on announced and planned noncore asset sales, and our aim is to then communicate the final structure of Waypoint's capital management plan in Q4 of this year. In addition, we have recently established an A-MTN program that sets us up for a potential issuance into this market in the near future. If completed, this will further extend the tenor of our debt funding to better match our underlying cash flows and would also continue the maturation of Waypoint's debt book from one reliant primarily on bank debt a year ago to one with a diverse range of bank and capital markets debt. On the ESG front, we intend to continue the good momentum achieved during the first half through a formal audit of the indicative results Kerri referred to earlier and intend to achieve net zero status from our own direct emissions by the end of the year. As confirmed to the market in July, our full year guidance remains unchanged at $0.1572 per security, which assumes that the potential capital management initiatives proceed as previously outlined, and is, of course, subject to no other material changes and market conditions or other factors affecting financial performance. And finally, we're pleased to announce that Waypoint will move to quarterly distributions moving forward, starting with the distribution for the September quarter which will be payable in mid-November. That concludes the formal part of the presentation today, and I'd now like to hand back to Anastasia to coordinate the Q&A session.

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

Hadyn, just interested in the portfolio rationalization, just kind of the status of where you're at on that. You've obviously identified and either sold or exchanged the bulk of the 46 properties that you're classifying essentially as noncore. Just interested, is that largely done in terms of the assets you've identified where there's leasing risk in?

Yes. Richard, it is. So our initial focus has been on leases expiring over the next 5 to 10 years. So -- and as I mentioned earlier, we're pretty happy with how we've derisked that profile over the next 5 to 10 years. We're happy with what we own today. But I think it's also important to point out, it's going to be a constant process for us as the sector evolves and we look to reshape the portfolio to move with those changes. So as we sit here today, we don't have any other assets identified for sale, but it's something that we are going to have to continually assess over time as the sector evolves.

And on the acquisition side, are you feeling priced out of the market? Or do you think you can still source assets?

We're finding it pretty hard, to be honest. I think I've mentioned before when we're looking at assets at the moment, we're seeing 10-year of IRRs and sort of 4% to 5%, mid-5% range versus a 6.5% to 7% cost of capital. So it's pretty hard for us to compete. It doesn't mean we won't find opportunities. Our focus really has to shift towards longer-term alternative use and whether that's convenience-centric offer or a very different alternate use. But at the moment, we are finding it pretty tough, and that's why we think selling assets into a very strong market is probably the way to go at present. Cycles come and go, that will change. But at the moment, we're finding it pretty tough.

Sure, makes sense. Just finally, just on the capital management. So the buyback activity has been relatively modest. I think it's fair to say. So does that mean it's more likely going to result in a capital return?