OTR Conversion And Lease Escalations Will Secure Future Stability

Key Takeaways

• Active portfolio optimization and investment in upgrades are likely to boost tenant quality, site economics, and returns, while minimizing downside risks.
  
• Built-in rental increases and strong demand for essential assets underpin revenue stability and long-term income growth.
  
• Heavy dependence on a single tenant, sector headwinds, sluggish upgrade programs, and industry trends threaten earnings stability, asset relevance, and future income growth.

Catalysts

Waypoint REIT is Australia’s largest listed REIT owning solely fuel and convenience retail properties; it has a high-quality network across all Australian States and mainland Territories.

• The ongoing OTR conversion program by Viva, with potential for Waypoint REIT to fund and participate in upgrades, positions the company to benefit from stronger tenant performance, longer leases, and better site economics, supporting future revenue and potential net margin growth.
  
• The majority of Waypoint's leases incorporate fixed annual increases (3% per annum for 93% of leases) and some CPI-linked escalations, providing built-in inflation protection and visibility over rental income, underpinning stable and growing revenues in coming years.
  
• Accelerating sales of non-core assets at a premium to book value and redeployment of proceeds into value-accretive investments enhance portfolio quality and optimize capital allocation, which is likely to improve return on assets and support net margin expansion.
  
• Stabilizing property valuations, increased transaction volumes, and improved buyer confidence driven by a more favorable interest rate outlook suggest improving market conditions, which may mitigate downside risks to asset values and support NTA and earnings stability.
  
• Continued urbanization and population growth in Australia are expected to sustain resilient demand for essential service assets-such as convenience retail and service stations-anchoring high occupancy rates and rental growth, thus supporting revenue and long-term income stability.

Waypoint REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waypoint REIT's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 79.7% today to 85.2% in 3 years time.
• Analysts expect earnings to reach A$149.5 million (and earnings per share of A$0.21) by about August 2028, up from A$131.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$202.0 million in earnings, and the most bearish expecting A$111.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the AU Retail REITs industry at 13.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Waypoint REIT Future Earnings Per Share Growth

Risks

• Heavy reliance on Viva Energy as an anchor tenant, coupled with recent declines in Viva's Convenience and Mobility division earnings (down 22% like-for-like and overall group NPAT down 20%), highlights counterparty risk and makes Waypoint's revenues and rental growth vulnerable to the operational performance of a single major tenant and their ability to pay agreed rents into the future.
  
• Persistent headwinds facing the service station and convenience sector-including cost of living pressures, falling tobacco sales, and rising operating costs (especially wage inflation)-could structurally weaken tenant profitability and rental cover, limiting Waypoint's ability to sustain or grow net rental income and ultimately pressuring net margins.
  
• The slower-than-expected rollout of the OTR conversion program and uncertain landlord participation in funding could delay realisation of expected earnings uplift, while significant capex commitments or below-cost-of-capital returns on funding for tenant upgrades may impair earnings growth, cash flows, and return on assets.
  
• Portfolio valuations are showing some signs of stabilisation, but any future rises in interest rates, cap rate expansion, or persistent declines in assessed market rents (notably a 0.7% decrease in 2H24), could reverse recent NTA gains, depress asset values, and constrain capital recycling opportunities, directly impacting earnings and underlying security valuations.
  
• Regulatory and secular shifts-including the transition to electric vehicles (reducing long-term demand for traditional fuel stations), increasing ESG scrutiny on fossil-fuel infrastructure, and the broader consumer shift toward e-commerce and alternative mobility-pose medium
• to long-term threats to both occupancy rates and the relevance of Waypoint's core assets, thereby raising risks of future revenue decline and asset obsolescence.

Valuation

• The analysts have a consensus price target of A$2.705 for Waypoint REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$175.3 million, earnings will come to A$149.5 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of A$2.62, the analyst price target of A$2.71 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.