Hello, and welcome to the Waypoint REIT Half Year 2023 Results webcast call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, again, press star one. I'll now turn the conference over to Hayden Stephens, Managing Director and CEO. Please go ahead.
Thank you, operator, and welcome to everyone joining us on the call this morning. Just starting on page seven of the presentation, I'll quickly call out some of the highlights for the six months to 30th June. Distributable EPS for the half of AUD 0.0828 was in line with the guidance provided at the start of the year, but down 3.7% on the corresponding period, with key drivers being lower rental income as a result of asset sales and higher interest expense, partially offset by rental growth and a lower number of securities on issue as a result of the buyback program last year.
In relation to valuations, we saw a further 12 basis points of cap rate expansion during the half, with Waypoint REIT's overall weighted average cap rate now having increased by 39 basis points over the last 12 months to 5.4%. Cap rate expansion during the half was partially offset by contracted rent increases on 360 properties incorporated into the June valuation process, with an overall investment property valuation decline since December of AUD 27.2 million or 0.9%. Despite this valuation decline, Waypoint's balance sheet remains strong, with gearing at the lower end of our target, 30%-40% range.
No debt expires until 2025, and further hedging put in place in the first half, resulting in 93% of our current debt book being hit, debt book being hedged for the 18 months through to the end of 2024. Turning to leasing, Waypoint has 4 leases expiring this year at the Fawkner site in Melbourne, representing 0.4% of income. Two lease renewals have been completed to date, with a small negative reversion of 2% on the Viva lease at this site and the Subway tenancy renewing at passing rent. Negotiations remain ongoing with the remaining two non-fuel tenants, and we expect to complete these in the second half of the year.
The operating environment for our tenants remains positive, with fuel volumes continuing to recover post-COVID, strong fuel margins during the half, and above-trend growth in industry convenience store sales over the last 18 months. The convenience and mobility division of our major tenant, Viva Energy, delivered a 40% increase in EBITDA in the first half and also completed the acquisition of Coles Express in May, which allows them to directly capture convenience store earnings on around 700 sites nationally and provides Viva with a higher degree of control over the future direction of this network. We also note that Viva Energy has announced the proposed acquisition of OTR, a leading independent convenience operator with 174 fuel and convenience stores and annual sales of more than AUD 3 billion.
The transaction remains subject to regulatory approvals, including ACCC, but if successful, the acquisition is expected to be earnings accretive and will also further diversify Viva's earnings away from fuel, with OTR's per store sales being more than double that of the Coles Express network, and the contribution of non-fuel sales to gross profit of Viva's convenience and mobility division expected to increase from around 30% to around 50%. With that, I'll now hand over to Aditya just to take you through the financials and capital management in a bit more detail.
Thanks, Hayden, and good morning. Turning to slide nine, which sets out the half year result. As Hayden mentioned earlier, distributable earnings per security for the half was AUD 0.0828. This was down 3.7% on the prior period, but we are well placed to deliver our guidance for the full year. The decline in earnings was a function of lower rental income as a result of asset sales and higher interest costs. These impacts were partially offset by fewer securities on issue following the buyback completed last year and contracted rental growth.
Statutory profit for the half fell to AUD 29.1 million, primarily driven by valuation movements on the investment portfolio, where a net loss of AUD 31.1 million was recognized this half, compared to a net gain of AUD 133.2 million in the prior period. Our management expense ratio increased slightly to 31 basis points, a result of lower asset values rather than higher costs. Non-property expenses remain in line with the prior period, demonstrating the team's focus on cost control in an otherwise inflationary environment. Waypoint continues to offer one of the lowest management expense ratios in the sector. Like for like rental growth was 3.2%, reflecting our fixed rent reviews of 3% per annum across 93% of our leases, as well as stronger growth on CPI-linked escalations.
Turning now to the balance sheet on slide 10. The value of the property portfolio reduced to AUD 2.9 billion. Over the last 12 months, the value of our 402 assets has declined in aggregate by around 5%, reflecting cap rate expansion of 39 basis points over that period. Otherwise, the balance sheet has been largely stable, reflecting a period of lower transaction activity. Gearing increased slightly to 31.1%, but remains at the lower end of our target range of 30%-40%. Available liquidity at year-end was AUD 100 million, and we are managing the balance sheet to ensure it retains significant headroom to debt covenants, which we've outlined on slide 11.
In the face of higher interest rates, our cost of debt has stepped up to 3.7%, resulting in a reduction in our interest cover ratio. Our ICR continues to also show healthy headroom to the two times covenant. We expect our cost of debt to continue to increase over coming periods, as favorable interest rate swaps mature and are replaced at prevailing market rates. Turning to slide 12, to look a little more closely at our debt and hedging profile. A key feature of Waypoint's capital management approach has been to retain relatively high levels of interest rate hedging. This continues to provide our earnings with significant insulation from movements in interest rates. Some additional hedging activity was completed during and just after the half year, and is noted on the slide.
As a result, Waypoint is 93% hedged to the end of calendar year 2024. We will look for opportunities to further increase hedging in FY 2025 and beyond, in line with policy and subject to market conditions. Our debt maturity profile remains well positioned, with no maturities until April 2025. As usual, with the support of our lending group, we are evaluating our refinancing options, and we'll look to deal with these ahead of expiry. I'll now hand back to Hayden to provide a market and portfolio update and our guidance for the remainder of 2023.
The transaction market for fuel and convenience retail property remains challenging, as outlined on page 14. First half transaction volumes in terms of both number of transactions and overall transaction value were in line with the second half of last year, but were around 40% of the levels seen from 2020 through to the first half of last year. We estimate that only around one third of the properties listed to date has actually sold, with a strong flight to quality thematic, as evidenced by the strong skew in the half towards metro properties located in New South Wales and Victoria, for transactions actually completed in the first half. These assets and markets are typically lower yielding, which partly explains the fact that the average yield on transactions completed in the half was 38 basis points lower than the second half of last year.
More detail on historical transactions is provided on page 15 of the presentation, which highlights the transaction volumes and yields on regional assets have experienced the most softening since the market peaked in 2021. Average transaction yields for all fuel and convenience assets have now increased by around 50 basis points, from circa 5.25% to circa 5.75% over the last 18-24 months. Turning to valuations on page 16. Around 20% of the portfolio was independently valued at June, with the remainder of the portfolio subject to directors' valuations. As I mentioned earlier, we saw a 12 basis point increase in the weighted average cap rate across the portfolio during the half, which brings the total cap rate movement over the last 12 months to 39 basis points.
Highway sites have proven to be the most resilient over this period, with sites in capital cities and other metro areas being the hardest hit due to their relatively low yields. The table on the bottom right shows the impact that rising interest rates have had on cap rates in the sub-5% range, with the proportion of Waypoint's portfolio with a sub-5% cap rate falling from around 45% 12 months ago to around 35% at June. As shown on page 17 of the presentation, New South Wales, which is the largest proportion of Waypoint's portfolio at 31%, has seen the largest cap rate expansion of 60 basis points over the last 12 months, reflecting the fact that New South Wales had a relatively high proportion of assets previously valued with cap rates of 4% or less.
Finally, before turning to the outlook for the second half of the year, page 18 provides an update on leasing. As I mentioned earlier, 2 of the 4 leases expiring this year at Fawkner have been finalized, with Viva renewing at a 2.4% discount to passing and Subway renewing at passing rent. Two further leases are expected to be finalized in the second half. Given the relatively long lease, lease term of the portfolio, only 5 fuel and convenience leases have required renewal across the portfolio since IPO, with an average positive reversion of 1.2% and a weighted average of 2.1%. 5 non-fuel leases have also been renewed, with average negative reversion of between 5% and 6%.
However, we note that 4 of these leases were renewed at or above passing rent, with one material negative reversion of around 30% in late 2020, dragging the non-fuel average down. Looking forward, Waypoint has only one fuel and convenience lease expiring in 2024 or 2025, with 7 non-fuel leases expiring over the same period. These 8 leases account for only 0.7% of Waypoint's total income, with the lease to Viva at the strongly performing Rouse Hill site in Sydney, accounting for around half of this. And it's worth remembering that fuel and convenience make up more than 99% of our income versus non-fuel tenants. Turning our focus to the next six months, our key priorities are outlined on page 20 of the presentation.
Viva Energy's recent acquisition of Coles Express and the proposed acquisition of OTR are transformational steps towards their vision to become a convenience retailer that sells energy, rather than a fuel retailer that happens to sell convenience. The ACCC's provisional findings in relation to the OTR transaction are expected to be released on the 21st of September, which could be either a final decision or a statement of issues that would need to be addressed by Viva before the ACCC makes that final decision. A positive determination from the ACCC would have two near- to medium-term implications for Waypoint. Firstly, as part of this submission, Viva has proposed to divest their operations at 23 sites in South Australia, including 14 owned by Waypoint, which could collectively account for around 2% of our portfolio.
We've not yet had any detail from Viva on how the sale would be achieved or the identity of the proposed third party or parties, but expect that we will enter into formal discussions on this if and when ACCC approval is granted, noting that Waypoint has certain consent rights in relation to any assignment of the relevant leases. Secondly, Viva has flagged to the market that it intends to transform suitable stores across the national network to the full-service OTR offer, and we expect that many of these stores will be on sites owned by Waypoint. We've had some initial high-level discussions with Viva regarding these redevelopments and Waypoint's potential role in funding them, but as yet, do not have any clear sense of the quantum of capital required or the timing of the proposed redevelopment program.
Again, we expect that such discussions will accelerate if and when ACCC approval is granted, and we will further consider Waypoint's participation and the optimal funding mix for any capital required once we have further details on Viva's plans. In relation to capital management, more generally, we've commenced work in relation to refinancing our 2025 debt maturities, which comprise around 30% of our total debt book. As Aditya noted earlier, we're well positioned from an interest rate hedging point of view for the next 18 months, with more than 90% of our debt fixed until the end of 2024. But we'll continue to assess opportunities to optimize our hedging profile in later years. Our security holders are always interested in plans for further non-core asset sales, given our track record in this regard over the last 2.5 years.
As previously indicated, about 5% of our portfolio is currently considered non-core, and we will continue to monitor market conditions for opportunities to dispose of these assets over time. However, given the subdued market conditions at present and the lack of any real buyer depth in the market, we do not currently expect to make any material disposals in the second half of the year. The prevailing macroeconomic backdrop remains uncertain, but Waypoint is well positioned as we enter the second half of the year, with gearing at the lower end of our range and a high level of hedging.
This underpins our guidance for FY 2023 distributable EPS of AUD 0.1648, which is unchanged and in line with last year. The key assumptions underpinning this guidance are outlined in the presentation. That concludes the formal part of the presentation today, so I'll just hand back to the operator to coordinate Q&A. Back to you, Kyle.
Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from queue, simply press star one again. One moment for your first question. Your first question comes from the line of Ben Brayshaw of Barrenjoey. Your line is open.
Oh, hi, Hayden. Thanks for the presentation. I guess I was just wondering if you could maybe provide some overarching comments on, on the 14 assets in South Australia, how you're thinking about those from a long-term ownership perspective. You mentioned on the call as well, that you have a right of, I guess, consent, in relation to, novation or assignment of lease. So could you perhaps just, comment on, on what that involves as well, please?
Sure. So, we do have, for an assignment at least, which is what we, I guess, assume to be the most likely mechanism by which Viva would transfer these operations. We do have consent rights, which, I guess, effectively boil down to the financial standing of the proposed assignee. So, you know, it will all come down to the identity of that party and our view on their creditworthiness. In effect, we don't know who that is at the moment. You know, we do understand that they've had discussions with various parties in the market.
I guess we just have to wait and see who, you know, the identity of that party, our view on their creditworthiness, whether we're happy to have them as a covenant, whether we would require Viva to continue standing behind that assignment, which is a rise as well in many assignments situation. And in relation to the long-term ownership of those assets, again, that would come back to the identity of that party, and I guess what we think is their strategy for those sites and how that strategy would position them in the market relative to the competition long term.
Great. That's it for me. Thanks.
Thanks, Ben.
Your next question comes from the line of Richard Jones of JP Morgan. Your line is open. Richard Jones, perhaps your line is on mute.
Richard?
Your next question comes from the line of,
May come back to Richard.
Yep. Your next question comes from the line of Leanne Truong of Ord Minnett. Your line is open.
Good morning, everybody. Just for my first question, a follow-up from Ben's question. In terms of the South Australian assets, how many of them were in your, I guess, that 5% non-core asset sales that you had identified over the medium term?
I think there's a couple in there, Leanne, but we've actually, I think if you look at our non-core asset sales over the last couple of years, it's actually been quite South Australian-heavy. So, a lot of the weaker sites, the weaker-performing sites in South Australia, we've already divested over that period, but there are a couple in that 14.
Yeah. So do you think that number may increase potentially with, I guess, the VA announcement?
Yes, potentially. I think, you know, if VA is looking at sites in South Australia that it needs to divest, it makes sense that those sites would be, you know, the competing OTR offer would be the stronger one. So I think there is a chance that increases once we know ... Again, it comes back to the identity of the incoming party and their plans for a particular site, but I think certainly there's a risk that that number or a chance that that number would increase.
Thanks. And just on a second question, I mean, obviously, it's still subject to ACCC approval, but do you have an idea of how much it might cost to potentially redevelop each site? So whether it's a standalone or extending, I guess, the shop front for the QSR offering.
No, no, we haven't had any indications from Viva on that. I think publicly, they've said average cost of AUD 3 million-AUD 5 million, no, sorry, AUD 2 million-AUD 3 million per site. That's obviously an average across their portfolio. It will depend to a certain extent on what's actually proposed in terms of the expansion. A lot of their sites have vacant workshops and vacant stores next door that they can push through pretty easily in terms of expanding those sites to incorporate QSRs and a broader convenience offer. But that AUD 2 million-AUD 3 million is, you know, the only figure that we're aware of at this point.
Thank you.
Your next question comes from the line of Richard Jones of JP Morgan. Line is open.
Thanks, and hopefully you can hear me now. Sorry, Hayden.
No problem.
Yep. Just interested in, in terms of the lease terms in relation to potential CapEx spend, just wondering if you can work us through what rights you have in terms of can you, you know, approve or knock back any proposed developments. And then second part to that question would be: How would a return be determined on the CapEx spend for you guys to participate?
I think Halfway Creek provides a pretty good example of that, Richard. So on that particular property, that property had three years to run on the lease. We got a 15, an extension out to 15 years, so a 12-year lease extension, plus a coupon on the money that we spent. So I guess the way we look at it is both the initial yield we're getting on the capital we're spending, but also the capital value implications of the longer term and an improved property as well. So we sort of put all that into the mix.
Obviously, we're a listed stock, so the impact on EPS is, you know, an important consideration, but also we're a property owner, so long-term return is really what we're looking at. So, and the long-term return is driven by the income yield we're getting on the way through, but also what that lease extension does and the improved property does for the overall, you know, long-term IRR on the property. So that's the answer to the second part of the question. In terms of the first, which was whether we could knock back developments, I mean, we do have overarching rights, but nothing can be done to materially diminish the value of our properties.
But it's hard to see how a redevelopment would do that, you know, even if we're not participating. So and not participating is certainly an option for us. You know, if we've got a tenant that's prepared to spend money on the properties, that's a good thing, and it's a good baseline for us to compare things to. But, you know, clearly, if we can put capital to work and achieve a good return from that investment, then that's something we'd like to consider, and, you know, we're certainly willing to do so with Viva over the next few months.
So, it's one of the options as well, if the return hurdles are not met, that you can still look to lock in a longer lease. Obviously, with the tenant investing in the asset, it's obviously a welcome thing. So-
Yeah, that actually, it actually they have that right. If they proceed with the redevelopment that we don't participate in, they have the right to extend the lease out to, I think it's 15, 15 years, but we don't have the right to enforce an extension, if you like.
Yep. Okay. And then the terms are just as is? It just goes through a-
Yes
L onger review period, is it? Yep.
Yeah.
Okay.
Yeah.
Okay, good one. And then just your view on markets. I know you had some good detail in the presentation, so thanks for that. But obviously, the rate of cap rate move in the second or in the last six months has been half of what it was in the prior six months. Just your view on where return expectations are going and how that may influence, you know, cap rates into the next 12 months.
Yeah, it's a good question, isn't it? Look, well, I think my personal view, you know, assets are still trading, but there is that flight to quality. So private investors are still willing to park their money in these assets. I think with the shape of the forward curve, maybe we've seen, you know, we're close to, if not the top of that cycle. So I think, and the fact that cap rate softening has slowed, it feels to me like things are slowing. I still think there's a bit more to go.
I think maybe, you know, if we're looking at our weighted average cap rate of 4.4% across our portfolio, I think the market's implying a 6%+ cap rate, maybe somewhere in between that is sort of where I think things may end up as we currently sit here today, but obviously, things can change very quickly as well. So, you know, if buyer sentiment changes materially or seller sentiment as well, and, you know, we see a flood of transactions actually hit the market and sellers hitting the bid, then, that can change obviously pretty quickly. But I think sitting here today, that's sort of my gut feel, somewhere between where the cap rate is now, and where the market's implying our cap rate of about 6%.
Good one. Thanks, Hayden. Appreciate it.
Your next question comes from the line of Adam Calverley i of CLSA. Your line is open.
Hi, Adam and Aditya. Thanks for the presentation. Regards to new leases, rather Viva or other operators, are you looking to include a clause for convenience store sales and fuel volumes, mandatory disclosure?
I think the way our leases work, and look, we're not, you know, we're not positioned to be looking at new leases with other tenants at the moment. We're not involved in any developments or fund through developments. So it really comes down to Viva, which is obviously a, you know, a large, you know, the majority of our income. So we do see fuel volume data and margin data on a site-by-site basis across the portfolio at the moment. When the leases were signed and the master agreement was signed at IPO, there was no provision for the convenience store sales side of that, given that was controlled by Coles Express and seen as confidential.
But there is a clause in the master agreement that, you know, that allows for access to reasonably required information from the tenants. So I think our view is that now that our tenant controls the convenience store sale side of things, that access to that data is a reasonable request, and that's something we'll be working through with Viva over the next few months as well as we talk through these redevelopments and I guess the broader relationship in the context of their acquisition of Coles Express and OTR. So short answer is, Adam, yes, we'd like to get that, and we'll be pushing hard to get that information if we can.
Yeah, great. Can I just-
Sorry, just to make a point, it would be highly confidential and not something that we can pass on to third parties, you know, in much the same way as the fuel information is. We have access to that data. We're very conscious of our confidentiality arrangements around it, you know, and we haven't disclosed that to date, and we'd take the same approach on the convenience store sales.
Yeah, great. And just maybe dig into that a little bit more. Have you sought any, like, legal advice on actually obtaining what that clause could mean to whether you will actually be able to obtain the convenience store sales?
No, we're not at that point yet.
Okay, great. That's it for me. Thanks.
Your next question comes from the line of Adrian Atkins of Morningstar. Your line is open.
Hi, guys. Just on those 14 sites in South Australia, I'm just wondering if you, if you know the average lease term, and I, I assume most of those would be metro sites. That'd be right?
Yes, they are metro sites, Adrian, and I don't know the average lease term off the top of my head, to be honest.
Yeah, we'll have to come back to you on that one.
Come back to you on that.
Okay, no problem. Just a second question, if you don't mind. You know, we've got falling property values and, and rising interest rates hurting credit metrics. I'm just wondering, you know, are you comfortable if there is a fair bit of development to be done, just funding that from debt, or are you looking at, you know, maybe a DRP or some sub debt or anything, any other options?
Good question. I think, the challenge at the moment is that we don't know, as Hayden touched on, the scale, timing, quantum of what that spend could look like. So it's a little difficult to plan for, when we don't know the depth of the opportunity in front of us. Definitely, you know, we've, we've always targeted our gearing at that 30%-40% range, and if you look historically, we've tended to be at the lower end of that range, and I think that's probably something that we would consider as appropriate as we head into the coming few years. So I think, you know, dependent on the scale and the timing of, of the opportunity and our level of participation, that will probably drive our view on funding mix.
So I think yet to come, but, all, all of those options, including potentially, you know, ideally what we'd like to do is obviously, sell our non-core assets and, and funnel that capital back into the core portfolio. But we'll just have to see how transaction markets and, and the depth of the opportunity emerges over the coming months.
Yeah, I think it's important to just remember the timing of the program, which is a key driver. This isn't something that's gonna happen overnight. This will be something that probably happens over 2, 3, 4, 5 years. So I think that takes the funding pressure off. Obviously, we need to have a fair idea of how we are going to fund it, but it's not as if all the capital will be required on day one. So that provides us with a bit of flexibility, as Aditya mentioned, debt's an option, asset sales are an option, equity is an option, depending on how that might be funded. It could be DRP. There's various ways that we'll look at it. But I, again, just the timing of that program is really important to keep in mind from a capital point of view, because it's not something that will happen overnight.
Okay, thank you.
Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Murray Connellan of Moelis Australia. Your line is open.
Morning, Hayden. Morning, Aditya. I was wondering whether you could just give us a quick update on your more longer term thinking around your previously stated strategy of diversifying away from fuel and convenience. Obviously, you've remained a net seller of assets and, you know, arguably not necessarily the time to be acquiring in the direct market right now, given cost of capital. But just, I guess, on your long-term thinking, is that still the strategy?
It's still an option, Murray, but I think it's fair to say that that option has sort of taken a backseat given recent developments. I think it's something we'll still think about longer term, but our near and medium-term priority is really on our existing portfolio. I think what's changed over the last 12 or 18 months is the fact that previously we were dealing with a tenant that didn't control their sites. You know, it was in a joint venture with a joint venture partner for whom the investment was pretty small, and there was no real incentive to spend money on those sites.
I think Viva having taken control of the Coles Express side of things gives them a lot more control over their network and flexibility to do what they want to do and need to do to address the longer-term challenges that they've got. And obviously, with the acquisition of OTR, will help accelerate that and really brings on a, you know, a best-in-class operator, which around which they can build a, what we hope would be a best-in-class network. So I think our thinking's certainly changed, and the priority is very much on our existing portfolio.
And ideally, if we can continue to improve our existing portfolio by selling non-core assets, investing that capital into core assets that we think will survive longer term, then, you know, that's a pretty good story and pretty good strategy. Definitely priority A is the existing portfolio. Long-term diversification may be something to think about, but here and now, priority is very much existing portfolio.
Thanks very much.
We have a follow-up question from the line of Adam Calveri of CLSA. Your line is open.
Just wanted to follow up on, you know, do you think it's likely if you're going to achieve a positive spread of returns for the current cost of debt on, on future developments or the, or the rollout of CapEx work?
I'm happy to take that one, Adam. I think that is largely gonna come down to our negotiations with Viva, and the commercial outcome. But I think it's fair to say, first and foremost, you know, we are mindful of the earnings trajectory and making sure, you know, we're a REIT, and we want to make sure that we continue to deliver strong distributable earnings. But at the same time, you know, our focus is very much on long-term returns. And so, you know, Hayden touched on earlier the Halfway Creek example, where I think we struck a really good balance between the near-term coupon that we're getting on that development, but also the significant value that was generated through the 12-year lease extension.
So, I think it'll be a combination of, you know, focusing on near-term returns, but also very much with a mind to that longer-term return profile of the portfolio.
Yeah, great. And with the Halfway Creek redevelopment at that 5.75% yield, would that be creating a positive spread in today's environment for you?
It's around neutral to earnings at the moment.
Yeah, and Adam, I think there's a lesson there for us. I think striking a fixed coupon with the benefit of hindsight was probably not the right thing to do. I think just given some of the delays you can have in these developments, you obviously open yourself up to risk on that. So I think there's a learning there from that for us as we discuss more broader opportunities with Viva.
Perfect. Thanks, guys.
There are no further questions at this time. I will now turn the conference back to Hayden Stephens for closing remarks.
Just to say thank you very much for joining us this morning. I'm sure we'll be talking with a few of you over the next few days. If anyone like anyone else would like to have a one-on-one meeting with us, we're more than open to that, so please just let us know. Again, thank you very much for joining the call this morning.
This concludes today's conference call. You may now disconnect.