Thank you for standing by and welcome to the Waypoint REIT full year 2023 results call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. You will need to press the star key followed by the number 1 on your telephone keypad if you would wish to ask a question. I would like to hand the conference over to Mr. Hayden Stephens, Managing Director and CEO. Please proceed.
Thank you, Sheree, and welcome to everyone joining us on the call this morning as we report Waypoint REIT's results for the financial year ended 31 December 2023. As outlined on page 7 of the presentation, Waypoint delivered distributable EPS of AUD 0.1648 for the year, which was in line with both guidance and the previous financial year. This was a solid result in the current environment with strong like-for-like rental growth, a high level of interest rate hedging, and a lower number of securities on issue as a result of previous capital management initiatives combining to offset the negative impact of rising interest rates and prior year asset sales. Rising interest rates have had a fairly significant impact on transaction markets and valuations over the last 12-18 months, with Waypoint's weighted average cap rate increasing by 39 basis points in FY 2023 to 5.68%.
The value of Waypoint's investment portfolio fell by 6% during the year, which also drove a 9.6% decline in NTA over the period. Despite the fall in asset values, our MER remained unchanged at 30 basis points due to lower operating expenses compared with FY 2022, and the balance sheet remains in good shape with gearing of 32.8% at the lower end of our target range. Pleasingly, Waypoint's Baa1 investment-grade credit rating was affirmed by Moody's in January. In December, the ACCC announced that it would not oppose Viva Energy's acquisition of OTR Group, and Viva currently expects the transaction to complete in the first half of 2024. I'll talk about the potential implications of this transaction for Waypoint later, but two things to note quickly at this point.
Firstly, we're currently in the process of negotiating, documenting, and assignment of leases on 14 Waypoint-owned sites in Adelaide from Viva to Chevron, with the transfer of operations on these sites a condition of the ACCC's approval of the transaction. Viva Energy remains the tenant on these 14 sites until the assignment is completed. Secondly, we've agreed with Viva to defer the planned redevelopment works at Halfway Creek that we announced in February last year, with the project likely to be wrapped up and renegotiated alongside the broader redevelopment discussions with Viva that we'll be having in coming months. With that, I'll hand over to Aditya to take you through our financials and capital management.
Thanks, Hayden, and good morning. Turning to slide 9, which sets out the annual result. As Hayden mentioned earlier, FY 2023 distributable earnings per security was AUD 0.1648. The result is consistent with our guidance and in line with FY 2022, which is pleasing given the backdrop of higher interest rates. Like-for-like rental growth was 3.4%, which broadly offset the loss of income from the non-core asset sales completed in FY 2022. Interest expense also increased over the period as expected, driven by higher base rates on our hedged and unhedged debt. This was offset by a reduction in the weighted average number of securities due to the security buyback completed in FY 2022. Our management expense ratio was maintained at 30 basis points.
Non-property expenses were, in fact, down 6%, demonstrating our focus on cost control, and Waypoint continues to offer one of the lowest management expense ratios in the sector. A full earnings bridge is provided on slide 26 of the presentation for those interested, with additional detail on the key movements. The statutory result for the year was a loss of AUD 79.1 million, driven primarily by valuation movements on the investment portfolio, which Hayden will cover in more detail later in the presentation. Turning to the balance sheet on slide 10. The value of the property portfolio reduced by 6% to AUD 2.8 billion. This was primarily due to a 39 basis point increase in cap rates over the year, taking the portfolio cap rate to 5.68%. NTA reduced to AUD 2.73 per security, in line with those valuation movements.
Otherwise, the balance sheet has been largely stable, reflecting a period of lower transaction activity. Gearing at year-end sits at 32.8%, at the lower end of our target range of 30%-40%. Available liquidity at year-end was AUD 101 million, and the balance sheet retained significant headroom to debt covenants, which we've outlined on slide 11. Our weighted average cost of debt for FY 2023 was 4% 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 years as favorable interest rate swaps 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 and our hedging profile.
FY 2023 was another active year on the hedging front, with a major initiative set out on the slide. We continue to maintain a high level of near-term hedging to enhance our overall resilience against interest rate volatility, as well as to provide greater earnings visibility. Our fixed-rate debt and hedges provide certainty of loss for 93% of our borrowings in FY 2024. Our average hedge rate for FY 2024 is 2.3%, which I note is 24 basis points higher than in FY 2023. Finally, slide 13 covers our debt profile. With our next debt maturity in April 2025, plans are well progressed on refinancing and enhancing our debt maturity profile. The first step in this process was the extension of a AUD 100 million bilateral facility, which was executed last month for a 5-year term.
Further plans are being progressed for our remaining near-term expiries, which we are looking to execute in 2024. Our debt profile remains well balanced with a combination of bank and term debt. As a result of these initiatives and the increased average rate on our hedges, we expect our weighted average cost of debt in 2024 to increase to 4.5%. I'll now hand back to Hayden to provide a market update.
Thanks, Adit. As outlined on page 15, transaction volumes for regional assets dropped off sharply in 2023, with metro transaction volumes remaining broadly stable, ultimately accounting for 80% of transactions by number and about 90% by value. Overall transaction volumes for the year were down about 60% on the market peak that we saw in 2021 by both number of transaction and dollar value, with metro transactions down about 50% and regional transactions down about 80%. The decline in transaction volumes over the last couple of years has been driven largely by the negative impact of rising interest rates on buyer sentiment over this period, although there are some green shoots appearing in terms of increased buyer interest in recent weeks as the outlook for interest rates has stabilised somewhat, at least for the time being.
Details behind Waypoint's December valuations are provided on page 16. Waypoint REIT weighted average cap rate increased by 27 basis points in the second half, taking the overall weighted average cap rate movement to 39 basis points for the full year and 66 basis points for the 18-month period since June 2022. 85 properties were independently valued at December, with 163 properties, or 40% of the portfolio, independently valued during the year. As illustrated on page 17, New South Wales and Victoria have experienced the highest cap rate expansion over the last 18 months due to the relatively high weighting to metro assets that were historically on very low sub-4.5% cap rates. Only about 5% of the portfolio is now held at a sub-4.5% cap rate, compared with about 30% 18 months ago.
A summary of Viva Energy's result for the financial year ended 31 December 2023 is provided on page 19. Viva reported a 34% fall in group EBITDA for the year, albeit off a record result in the prior financial year. A materially lower contribution from the energy and infrastructure division was the key driver of the overall fall in group profit, with lower refining margins and a prolonged refinery shutdown for maintenance during the year. The convenience and mobility division result was 7% lower than FY 2022, with strong fuel margin growth and modest fuel volume growth being offset by higher operating costs. The modest growth in fuel volumes was attributed to elevated fuel prices and cost of living pressures weighing on mobility.
Viva completed the acquisition of Coles Express in May 2023, with the acquisition effective at being EBITDA break-even for the eight months of Viva ownership from May to December. Convenience store sales growth, excluding tobacco, was strong at 8%, with a shop margin of about 36% being recorded in the fourth quarter, in line with the FY 2023 margin reported by Ampol. Viva also announced the proposed acquisition of OTR during 2023, and as I mentioned earlier, they expect to complete the transaction in the first half of 2024. The acquisition of OTR is an important milestone for Viva Energy as it seeks to diversify its earnings mix over time and delivers Viva a world-class convenience offering with significant potential to drive a much higher share of revenue and profit from in-store sales as it rolls out the OTR brand and offering across the Coles Express network.
Turning to page 20 of the presentation, we're conscious that there's a lot of interest in the market regarding what the Coles Express and OTR transactions could mean for Waypoint. We've yet to have formal discussions with Viva regarding any potential redevelopment plans for Waypoint-owned sites and therefore do not have any details about the exact timing or quantum of funding that Viva might seek from Waypoint to finance these developments. However, Viva did release some initial high-level information around the proposed redevelopment program at its investor day in November, with a preliminary brand transition schedule and project assessment outlined on the slide. Although the information relates to the broader Coles Express network of more than 700 stores and not just the 364 sites owned by Waypoint, we'd highlight three things from it that we think are relevant for Waypoint as we consider the future redevelopment of our sites.
Firstly, about 80% of the Coles Express network will ultimately be converted to OTR branding, with the remaining 20% being rebranded as Reddy Express. Many sites will ultimately become OTR offerings will be rebranded as Reddy Express as an interim step, and this process is already underway. Secondly, only about 30% of the current Coles Express network will undergo significant works as part of the OTR redevelopment program, with the remaining 70% either undergoing a basic rebrand to Reddy Express or a basic conversion to OTR within the existing shop area. Finally, the OTR redevelopment program is scheduled to be carried out over a five-year period, with only 20% of the portfolio to be converted to OTR between now and the end of 2025 before the program ramps up in 2026 through 2028.
As noted on this page, I'd reiterate that although there's no obligation on Viva to seek funding from Waypoint for the redevelopment of these sites nor any obligation on us to provide that funding, there is a mutual willingness to engage at the appropriate time, and we look forward to doing so in due course. Turning to the outlook for the year ahead on page 22, we do expect to enter into discussions with Viva on their redevelopment program once the OTR transaction completes, but for now, we're not assuming any redevelopment-related expenditure or income in our guidance for FY 2024. As I mentioned earlier, we are starting to see some green shoots emerging in transaction markets, with agents reporting increased inquiries from potential buyers, including syndicators.
Whether or not this improvement in sentiment continues will be heavily dependent on the outlook for interest rates as the year progresses, but we think the time is right to explore further non-core asset sales and will be aiming to sell non-core assets with a combined book value of approximately AUD 80 million this year. To that end, we've recently agreed commercial terms to sell three non-core assets in regional Queensland with a December 2023 book value of approximately AUD 9 million. The top market transaction, which remains subject to due diligence, was a result of recent inbound enquiry, with the three assets having previously been marketed for sale in late 2022. Waypoint has historically used the proceeds from non-core asset sales to return capital to security holders.
This year, the plan is to initially use any sale proceeds to repay debt and await further details on any potential deployment opportunities in relation to the OTR rollout, which may provide an opportunity to reinvest in the core portfolio and achieve attractive risk-adjusted returns. Waypoint, again, has a relatively high level of interest rate hedging for FY 2024, with 93% of drawn debt hedged. As the CEO mentioned, although we have no debt expiring till mid-2025, we're currently exploring refinancing options with a view to further enhancing the REIT's maturity profile. Finally, Waypoint's FY 2024 distributable EPS guidance is a range of AUD 0.1632-AUD 0.1648, with the key factor determining where we land in that range being the quantum and timing of any asset sales completed during the year. Other key assumptions underpinning this guidance are outlined on page 22.
That concludes the formal part of the presentation. I'll now hand back to Sheree to coordinate any questions.
Thank you. If you would like to ask a question, please press the star and the one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up your handset to ask your question. Our first question is from Adam Conidi with CLSA. Please proceed.
Hi, Adam. Thank you for the presentation. My first question is, what's driving the quantum of the asset sales?
Look, the quantum's not—we haven't picked a number that we think we need to sell. We've had a list of non-core assets for a while now, post the first stage of our asset sales back in 2021, 2022. The list that we've got that we'll be looking to try and sell this year are really assets that we don't think are likely to be converted to OTR. We're reasonably confident in that. And they're just assets that are non-core to us long-term that we'd prefer to sell and potentially reinvest that capital back into our core portfolio over time.
Great. Maybe just following on from that, in terms of the market transactions in the regional portfolio, I think the cap rate's about 7.44% and the books at 7%. Are we expecting further devaluations for FY 2024?
Are we expecting further devaluations? Look, hard to say. I mean, look, first of all, I wouldn't directly compare that 7.44 number in terms of transactions with our valuations. That average is based on 11 discrete transactions within financial year 2023 in the regional markets. They don't necessarily drive the valuations in our portfolio. But to your broader question around cap rates, personally, this is a personal view. I think we're getting close to being done. I think that the negative sentiment that was driving a lack of buyers in the market seems to be disappearing, and now we'll be going back to more fundamental analysis of valuations based on transaction evidence. We obviously don't know and we can't control that transaction evidence, but it does feel to us as though we're getting near the top. So we're not expecting material cap rate movements from here.
Again, this is a personal view. I don't have a crystal ball. We may see a little bit of further cap rate movement at June, but I'd also note that our valuations are insulated to the tune of about 16 basis points at June through the rent reviews that we have across about 90% of our portfolio.
Great. And maybe just one more, if I may. In terms of guidance for FY 2024, what are we expecting for like-for-like growth?
Yeah. Like-for-like growth next year, as you know, over 90% of our leases are fixed at 3%. So I'd say that's a reasonable assumption. The remainder, there is some exposure to CPI, but it's not material in the scheme of things.
Great. Thanks a lot.
Your next question is from Leanne Truong with Ord Minnett. Please proceed.
Yeah. Good morning, guys. Just some follow-up questions. So in terms of the AUD 80 million asset sales, obviously, over the last year, you didn't really flag any asset sales. So I was just wondering, you announcing the asset sale today, is it a function of improved market conditions, or is it more you're looking to have a bit of capital in case you have to redeploy it later on?
It's a bit of both, Leanne. Look, as we sit here today, we do think that market conditions are improving, and so we'd like to test the market for those non-core asset sales. As I mentioned earlier, these are assets that we'd prefer not to own longer-term, and we'd prefer to recycle that capital into our core portfolio. So we don't have any we're not entirely sure yet what sort of capital Viva might be looking for for the redevelopment program, but clearly, asset sales, non-core asset sales, is a potential source of funding for us. So we're not kidding ourselves that it's going to be an easy process selling AUD 80 million of assets this year, and the market conditions can change pretty quickly, as you know. But it feels like the time's right to test the market on those assets.
Yeah. And just the second question also, follow-up on guidance. And obviously, at the top end, you've assumed pretty flat growth. I'm just wondering, so what's the offset to the like-for-like rental growth?
Leanne, it's Hayden here. It's a good question. The primary offset is the rising average debt cost, and that's probably a key reason why we've specifically guided to that in the results presentation. So we'll see our average debt costs rise from about 4% this year last year, rather, FY 2023, to 4.5% in FY 2024. So that increase essentially offsets the rental growth coming through the portfolio.
Okay. That's it. Thank you.
Your next question is from Ben Brayshaw with Barrenjoey. Please proceed.
Good morning, Hayden. I was wondering if you could just discuss, I guess, the slide where you have around 30% of the portfolio requiring major works as outlined by VEA in relation to how that relates to your asset base?
In terms of number of assets, then?
Yeah. Number of assets and the quantum of CapEx that you typically expect would be associated with that at the asset level.
Yeah. Look, I mean, the quantum is a difficult one to answer, Ben. I mean, we've seen what have we seen? We've seen Halfway Creek, which was not a lot being done for the shop, a lot of hard stand and sort of external works. That was about a AUD 3.6 million cost, although I think the cost of that ultimately has blown out a little bit. It's probably more like AUD 5 million. We've seen other knockdown rebuild or potential knockdown rebuild projects over time from Viva for anything from AUD 5 million to AUD 10 million, depending on what's required. And that was when that was when they were back as Coles Express redevelopments, so not incorporating any QSR that we'd expect to see with OTR. So huge range there in terms of the potential cost involved.
I mean, when you look at our, I think it's important to point out that those percentages there and the numbers are based on the entire Coles Express network, not the 364 that we own. But if you did just take the same percentages, you're talking about about 55 remodels in our portfolio, 36 major refurbs, and 18 knockdown rebuilds, so 109 assets out of about 402. Those numbers won't be right because we've probably got a high proportion of high-quality, high-potential sites in our portfolio. But it gives you an idea. It's probably around 100 sites, but the cost is an unknown at this point, and I really wouldn't want to guesstimate what that is. I mean, our approach is we're being very patient. Viva needs to close the OTR transaction.
We know they're doing a hell of a lot of work in the background on their network plans, and we'll sit down with them at the appropriate time and get more detail at that point.
Yeah. No, fair enough. Okay. Thanks for the color. Just as a follow-up question, Hayden, any discussions with VEA on the assignment of leases outside the 14 sites identified in South Australia?
No.
Great. Thanks for your time.
Okay.
Your next question is from Richard Jones with J.P. Morgan. Please proceed. Richard, your line is live. Are you there? Okay. We will go to our next question, which is Solomon Zang with J.P. Morgan. Please proceed.
Apologies. Slight mix-up there. Morning, Hayden, and Aditya. Thanks for your time. Maybe just a follow-up to Leanne's question on the non-core asset sales, could you just maybe just specify whether it is those regional assets that you're looking at the best where liquidity has been reasonably poor, but you're optimistic that will improve in 2024?
It's a mix of assets, Richard. So we've got some regional assets, and then we've got some capital cities, and we've got some other metro. So three of the regions, as I mentioned before, we've agreed terms with a party. There's no guarantee that that transaction will complete, but we've agreed terms on those. And the rest of the assets we're looking at are a mix of regional capital cities and other metro.
Yeah. Is there any sort of specific locations that you're happy to call out, or? And why then view it as non-core or?
No, I'd prefer not to, Richard.
Maybe just turning to slide 20, so the brand transition schedule. Do you ever have to just talk to the logic of the sort of two-stage brand transition from OTR's perspective to Reddy then OTR? Is it effectively just trying to get rid of the Coles Express brand quickly and then?
Yeah. Yeah. We understand there's transition arrangements in place with Coles on that. Effectively, Viva needs to complete that transition to a new brand. So you might have seen they have started transitioning that brand, and there's very little actually required to do that. It's a very similar logo, same color scheme. It's not a hard thing to do. So really, it's just an interim step for the portfolio before the majority of it's then transitioned to OTR.
Yeah. And just in terms of the AUD 0.04 fuel-saving arrangement with Coles and the Coles shopping, is that going to be ongoing, or is that going to be transitioned out going forwards? Because I mean, imagine it's a decent draw card to the service stations.
I don't recall, actually. Richard, I'd have to go back and look that one up. Sorry.
Thanks for your time.
Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Our next question is from Adrian Atkins with Morningstar. Please proceed.
Good morning, guys. Firstly, I just wanted to understand the difference between interest expense on that slide 9 of the presentation compared to in the official accounts.
Hi, Adrian. Good question. So you're talking about the finance expense on the face of the P&L?
Yes.
Yeah. So the key difference between the interest expense that flows into our Distributable Earnings is the amortization of debt establishment costs. So that's the key difference. That was about AUD 1.7 million. There's a full rec in the appendix of the presentation and in the accounts as well.
Oh, okay. Thanks. Then just in terms of the development opportunities, if there's some attractive opportunities, I just want to understand, would you guys be prepared to increase gearing, or is it a bit too risky in this environment?
That's a good question. I think we don't really know at this stage what the request is. So it will depend on the quantum and the timing of that request. One of the reasons we put that transition schedule that Viva's published in the presentation is to give a sense that it doesn't appear to be a lot of capital upfront. It feels like it's going to be phased over time. We'd like to be able to fund it internally through non-core asset sales. That would be our preference. It's really going to be dependent on how receptive the market is to asset sales over the course of this year. But obviously, we do have gearing capacity. We're sitting at the bottom end of the range, and there's options that are outlined, I think, on slide 20.
Obviously, equity is one, but that would be last on the list in terms of new funding for redevelopments.
And just to reiterate, Adrian, we're not obligated to fund these either, so we have optionality around that. So any decision on funding will obviously take into account the impact on or potential impact on gearing and our capital mix, and we'll be part of that decision-making process.
Okay. Thanks, guys.
There are no more further questions at this time. I'll now hand the conference back over to Mr. Stephens for closing comments.
Just to say thank you, everyone, for joining us this morning. We've got a few meetings booked over the next few days, so look forward to discussing further with you at that stage. If anyone would like a one-on-one meeting or call with management, please just reach out. We're more than happy to chat. Have a good day. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.