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Edited Transcript of VVR.AX earnings conference call or presentation 20-Feb-19 11:00pm GMT

Full Year 2018 Viva Energy Reit Ltd Earnings Call

Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Viva Energy Reit Ltd earnings conference call or presentation Wednesday, February 20, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guy Farrands

Viva Energy REIT - CFO

* Margaret Kennedy

Viva Energy REIT - MD

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Conference Call Participants

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* Krzysztof Kaczmarek

JP Morgan Chase & Co, Research Division - Analyst

* Lauren Berry

BofA Merrill Lynch, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Viva Energy REIT Full Year Results 2018 Presentation. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 21st of February 2019. I would now like to hand the conference over to your first speaker today, Managing Director of VER Manager, Margaret Kennedy. Thank you. Please go ahead.

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Margaret Kennedy, Viva Energy REIT - MD [2]

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Thank you, Edwin. Good morning, ladies and gentlemen. As Edwin mentioned, my name is Margaret Kennedy. I'm the Managing Director of VER Manager, which is the manager of Viva Energy REIT. And along with my colleague, Guy Farrands, CFO, I have the pleasure of presenting the FY 2018 results for Viva Energy REIT.

In connection with today's results announcement, we've also announced that we've launched a fully underwritten institutional placement to raise approximately $100 million. Due to legal restrictions, we're unable to discuss the process or details around the equity raising other than the basic terms referred to in the announcement. Please refrain from asking questions about the specific details of the equity raising as we are legally restricted from answering those questions on this call.

All of the individuals who are attending today's results announcement will be able to listen to the results presentation and the results Q&A. However, only eligible persons meeting the applicable legal requirements will be allowed to stay on the call for the equity raising section of the presentation and the equity raising Q&A. If you're attending this presentation via the webcast, due to legal restrictions, please note that we'll be ending the webcast after the results presentation, and the results Q&A, but before the equity raising discussion and the equity raising Q&A. We thank you for your understanding in regards to this matter, and I'll now move on to the highlights.

2018 saw Viva Energy REIT continue to deliver on our strategic objectives. We announced distributable earnings of $0.1402 per security, which was again ahead of our guidance provided to the market. We've continued to grow our overall portfolio whilst maintaining our focus on quality assets. Our acquisition pipeline has been replenished, following the completion of the 2018 asset purchases. We've been busy with our capital management program, allowing us to continue to deliver growth, and we're pleased to provide an FY 2019 distributable earnings per security guidance range of 3% to 3.75% from FY 2018.

Our highlights have been split between financial, which Guy will go into more detail later, portfolio and acquisitions and capital management. On financials, our distributable earnings was $0.1402 per security for the year, up 4.5% on 2017. Our NTA was $2.20 at the end of 2018, an increase of 3.8% over the previous year. And we've continued to manage our costs and operating expenses to deliver an MER of 20 basis points, which is down from 24 in 2017. This is certainly one of the lowest in our sector.

Our portfolio is now comprised of 454 high-quality service station and convenience properties valued at just around $2.5 billion with a weighted average cap rate of 5.8%. Our portfolio has now increased from 425 properties at $2.1 billion when we listed in August of 2016 to the current $2.5 billion at the end of December 2018. Our WALE reflects our long leases with a WALE of 12.6 years at the 31st of December. Our portfolio mix remains at 75% metropolitan locations, reflective of the quality of our network.

Considerable work has been done by the Viva Energy REIT team on capital management during 2018. We've increased our debt facilities, lengthened our debt tenor and diversified our sources of capital in line with our capital management strategy. This has seen a gearing ratio at 36.2%, which reduces to 32.3% on a pro forma basis as a result of the placement announced today.

The equity raising we've announced today helps position our business for future growth. Today, we announced a $100 million fully underwritten institutional placement, which is supplemented with a non-underwritten security purchase plan to eligible security holders. The proceeds of this raising will be used to partly finance 8 acquisitions, which we completed in the second half of 2018, totaling approximately $47 million, and to provide headroom for future growth.

This provides pro forma gearing of 32.3% at the 31st of December, 2018, on this basis. In addition, we have revised the target gearing range, previously 35% to 45%, to 30% to 45% to better reflect the Viva Energy REIT capital management practice that has been in place since the IPO.

Following successful acquisitions in 2018, the pipeline has been restocked with an identified $130 million pipeline of potential acquisitions, $67 million of which are in advanced due diligence.

I'll now pass over to Guy, who will take you through the financial results in some more detail.

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Guy Farrands, Viva Energy REIT - CFO [3]

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Good morning, everybody, and just to add my welcome to the call to Margaret. Looking at Page 10 of the deck for statutory financial performance table. Revenue is up considerably, and there are 2 key drivers to that number. The first is the acquisitions but secondly is the fixed automatic 3% rental increases that happen every year to the very vast majority of our portfolio. The next line, straight-lining, reflects the fact that virtually the entire portfolio was subject to fixed automatic 3% rent increases. We're required to bring some of that as a noncash item to account under the accounting standards, so there's a further $26 million worth of revenue attributable to straight-lining.

The revaluation of investment properties is presented in a net number. The gross number was $77 million, reflecting the increase in the value of the portfolio. But from that, we adjust the straight-lining to make sure there's no double-counting and write-off of acquisition costs. The revaluations, which we'll go into later on in the presentation, have driven an NTA uplift of 3.8%. We continue to run the business very leanly at an MER of 20 basis points.

Now you would point out, well, the size of the assets is growing, so your costs are growing. That's not the case. Our costs were actually lower this year than last year. Finance costs have ticked up, reflecting the larger portfolio, which was largely debt -- which was debt financed during the year.

And finally, at the bottom of the deck, you'll note there was a small income tax expense, and I emphasize that's a one-off which you won't see repeated. And that leaves us to a statutory net profit of $167.1 million, which ties into distributable earnings calculation on the next page.

Distributable earnings are ahead of guidance, up 4.5% for the year. Guidance suggested an increase of 3% to 3.75%, and we've done substantially better than that at 4.5%. We've not changed anything about the way we calculate distributable earnings here. We add back the amortization and write-off of debt establishment costs. You'll see that number is a little bit higher than it was last year, and that's reflective of a lot of work that's been done on the debt side of the balance sheet.

I've talked about straight-lining adjustments and net revaluations of investment properties before. They're both noncash items, so obviously, they are bad debts to leave us with a $0.1402 per share -- per security distribution, 4.5% greater than last year.

Turning to the balance sheet. NTA is up 3.8%. Last year, we reported differently than we're reporting this year, and I want to explain that. People will remember that when we kind of talked about NTA at VVR, we gave you a number and then we said, well you need to deduct the distribution from that to get you to an NTA that's consistent with the balance of the sector. We have now changed the way we report to make it the same as the rest of the sector. So when we quote an NTA number to you now, that includes the distribution that is to be paid. So on a like-for-like basis, last year it was $2.12. This year, it's $2.20, up 3.8%.

Total assets have increased by 9.4%, including $48 million worth of new acquisitions, which are being announced today. Gearing at 31 Dec was 36.2%, but after the placement, that will reduce to 32.3% on a pro forma 31 Dec '18 basis.

Slide 13, capital management. It's been a big year in capital management. We've done 5 debt deals with a total face value of almost $1.1 billion. Of that, $200 million or around 22% represented capacity increase over last year. That consists of restructuring and renewing and lengthening our existing syndicated facility, entering into -- renewing and increasing a bilateral facility we had and a third new $100 million club facility arranged with 3 of our relationship banks.

The most important thing that has occurred in debt over the period, apart from the tenor and pricing improvements, is a change to the margin structure. People who followed the company for a while will know that we used to have a margin step-up of 35%. That's no longer the case. The margin remains flat between 30% and 40%. So that margin increase is gone.

Nonbank debt. We began introducing nonbank into the debt portfolio. We did 2 domestic deals, one for 10 years and one for 7 years, at a weighted average margin of 2.1%. And going forward, I think we will see more nonbank debt appearing in the portfolio over time. We restructured our swap book to take advantage of lower interest rates, and 93.4% of the debt has been swapped for weighted average of 3.9 years at a weighted average interest rate of 2.3%.

Page 14. The most important point here is to point out that we have altered our gearing policy to better reflect how the business operates. Previously, our target gearing range was between 35% and 45%. And we've lowered the bottom end of that range to 30% to 45%. This both reflect how we're operating the business at this point in time, but also means that there is plenty of capacity to make appropriate acquisitions as required. Distribution plan has been implemented and was in operation for the second half of this year. And interest cover is still -- actually increased to 5.3x.

And I'll pass back to Margaret.

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Margaret Kennedy, Viva Energy REIT - MD [4]

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Thanks, Guy. I'll now move on to talk about the portfolio and acquisitions. So our acquisition strategy slide should remain familiar to many of you who've participated in our presentations previously. Our acquisition strategy remains unchanged. That is, we'll continue to consider acquisition and development opportunities that are consistent with our common themes being: the property is high quality and strategically located; our portfolio mix remains geographically diversified; we have strong lease covenants from quality tenants; and that the investment provides security holders with the potential for capital growth over time.

2018 has been another busy year for the Viva Energy REIT team on the acquisition front. We acquired 16 sites for a total of $129 million at a weighted average capitalization rate of 6.4%. These acquisitions have been consistent with strategy, including the addition of Caltex sites and a 7-Eleven site to the Shell, Viva and Liberty sites in the portfolio. All sites were double or triple net leases with fixed 3% rental increases. There's further detail on the next slide on each of the sites we've acquired. In addition, as mentioned earlier, we've identified a further $130 million pipeline of potential acquisitions with $67 million of those being in advance due diligence.

This slide provides details from the 2018 acquisitions at a site level and includes the $47 million of acquisitions, which are being announced today.

Moving to portfolio overview. Our portfolio at the 31st of December 2018, comprises over 2.1 million square meters of property, which is geographically diversified and aligns with Australia's population spread and population density. 75% of properties by value are located in metropolitan areas with 81% in the populous Eastern states. The average cap rate for metro site is 5.5% and for regional, 6.8%.

When we go to our lease profile, this is another familiar slide showing the length of our lease portfolio with only 6 of our 454 properties having expiries before 2026 and then the expiries roll on in a very measured way. The current WALE is 12.6 years with a 100% occupancy.

On revaluations, Guy mentioned earlier, in line with our valuation policy, which requires 1/3 of our portfolio to be independently revalued each year, JLL conducted valuations of 150 properties and revalued them as at the 31st December 2018. The independent valuation saw an increase of $34 million with the total overall portfolio valuation, including those independent valuations, increasing by $77 million. The total portfolio weighted average cap rate at the 31st of December was 5.8%.

As mentioned earlier, we've continued to add further fuel brands to our portfolio, which now includes 2 large highway Caltex sites in Victoria and a 7-Eleven site in Queensland. This is in addition to the IPO portfolio of Shell/Viva sites and further Liberty and Viva site acquisitions we made in 2017 and '18.

On Slide 23, we have provided data from JLL back to 2014, which shows the VVR portfolio cap rate remains very much in line with the weighted average transaction yield from there and industry sales data, both the market transaction yield and the Viva Energy REIT portfolio cap. The Viva Energy REIT and market transaction yields have traded at approximately 3% spread to the 10-year bond rate over the last 2 years.

When we look to the convenience retail market trends, convenience retail is a sector -- as a segment continues to grow and develop at both fuel and non-fuel fronts. Viva Energy REIT has publicly stated that we welcome the developments on the alliance that was announced by Viva Energy and Coles on the 6th of February. We believe this announcement provides certainty on the tenure of the alliance and will support future growth for the alliance, which we would hope to be able to work with Viva Energy on.

Moving to strategy and outlook. Our network remains one that is virtually impossible to replicate, something that we're very proud of. We have high-quality properties strategically located with both fuel and convenience offers. Our network is very much aligned with population density. That is, our sites are located where customers are, and they're underpinned by 2.1 million square meters of land. We have a 100% occupancy to high-quality tenants on predominantly triple net leases with fixed 3% rental increases, and there's further opportunities for the business to grow through ongoing acquisitions and development opportunities. We'll continue to work closely with our major tenant, Viva Energy, on value-enhancing site optimization opportunities and new developments.

Viva Energy REIT is today providing guidance for FY 2019 of 3% to 3.75% growth over 2018 distributable earnings per security. We'll continue to optimize our core business and maintain our low management expense ratio. As outlined, we continue to explore acquisition opportunities that are consistent with our strategy and investment criteria. We'll manage our balance sheet to maintain diversified funding sources with pro forma gearing after the placement of 32.3% at this point in the cycle. Our target payout ratio remains unchanged at a 100% of distributable earnings.

This now concludes our results presentation, and we'll now move on to the results Q&A. Just as a reminder, due to the legal restrictions, we're unable to discuss the process or details around the equity raising other than the basic terms that have been referred to in this announcement. I'd ask that you please refrain from asking questions about the specific details of the equity raising as we are legally restricted from answering those questions. I'm now happy to take any questions relating to the results. I'll hand over to Edwin.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Lauren Berry from Bank of America Merrill Lynch.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [2]

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Just hoping you can confirm for me, of the $129 million acquisitions in FY '18, how many of these have actually settled in the year? And how many are left to settle in FY '19?

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Margaret Kennedy, Viva Energy REIT - MD [3]

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Yes, Laura, that's really easy. I can confirm that they have all settled in FY 2018.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Okay. So you actually settled $139 million total sites in FY '18?

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Margaret Kennedy, Viva Energy REIT - MD [5]

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Yes, $129 million, yes.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [6]

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Sorry, that was $10 million from the previous year sold as well, correct?

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Margaret Kennedy, Viva Energy REIT - MD [7]

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No, the list that we've got is the ones that were settled during the year.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [8]

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Okay, okay. So there was nothing announced in FY '17 that's settled in FY '18?

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Margaret Kennedy, Viva Energy REIT - MD [9]

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There were some announced, but this is what we've actually cashed out the door in 2018.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [10]

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Okay. So there's no further settlements scheduled for FY '19?

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Margaret Kennedy, Viva Energy REIT - MD [11]

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That relate to FY '18 properties. That is correct.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [12]

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Okay, cool. And does your guidance assume any acquisitions in FY '19?

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Margaret Kennedy, Viva Energy REIT - MD [13]

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Yes. I think we've been pretty clear in terms of what we've said around our guidance, and yes, what we've talked about in terms of our pipeline.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [14]

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Okay. So that's $67 million you have advanced due diligence that is included in that 3% to 3.75% growth?

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Margaret Kennedy, Viva Energy REIT - MD [15]

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That is right.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [16]

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Okay. And when during the year you expect those to settle?

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Margaret Kennedy, Viva Energy REIT - MD [17]

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They will settle across the course of the year.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [18]

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Okay. So why is -- I don't -- so low then, because you've got 3% fixed bonds in all your leases. You've done a lot of acquisitions. It just seems like it should be higher just given the underlying growth in the portfolio.

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Guy Farrands, Viva Energy REIT - CFO [19]

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The key issue, Lauren, is that interest rates have risen and that the original IPO swaps, the first tranche of which was $368 million, rolls off in August '19. And interests are higher than -- how I know than they were then, and that's the reason we're now, money, to be market-to-market.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [20]

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Okay, cool. And with the alliance agreement now renegotiated, is there any change to the way that you and Viva are looking around acquisitions or development of new sites?

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Margaret Kennedy, Viva Energy REIT - MD [21]

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So we're not a party to the alliance agreement, so I can't give you details around the sort of commercial terms of that because I just don't know them, to be quite honest with you. I think what it does, from Viva Energy REIT's perspective, we've talked about this many times, it provides certainty around both the tenure of the alliance, and I guess the path forward. So we see that as a real positive. I think it also means, whilst we've been working closely with Viva today, there'll be a number of opportunities that we'll continue to explore with Viva and ultimately Viva's subtenant, which is Coles.

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Lauren Berry, BofA Merrill Lynch, Research Division - Research Analyst [22]

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Okay, great. And then just finally on the valuations. Did any of your sites see cap rate expansion in the half?

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Margaret Kennedy, Viva Energy REIT - MD [23]

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No.

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Operator [24]

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(Operator Instructions) Our next question comes from Krzysztof Kaczmarek with JPMorgan.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division - Analyst [25]

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Just on Slide 18, the acquisitions settled to date. I'm looking at the footnotes there, and there are some committed expenditures to come through on 2 sites. So is it fair to say that, that just needs to be sort of added into the value of those assets, and then they'll be rentalized as well so that cap -- 7% cap rate on those assets stays unchanged?

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Margaret Kennedy, Viva Energy REIT - MD [26]

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That is exactly correct, Krzysztof. They're for some developments that are recurring. So we settled the land and the properties and therefore the developments that are occurring. And yes, we will achieve the same capitalization rate on those numbers.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division - Analyst [27]

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Okay, great. And then on Slide 20, your lease profile, again just looking at the footnote. Some of the assets that you recently acquired have been on shorter lease terms. So I think there's 3 there, they expire in FY '21. What gives you comfort around the fact that Viva's going to sort of bring you? And what's the mechanism there? Is it -- are they going to extend an option? Is it going to be a new lease? Can you just talk through that, please?

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Margaret Kennedy, Viva Energy REIT - MD [28]

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So we're in discussions with Viva on these particular properties. And without sort of going into specifics, you'd probably be aware that where we buy a site that has a lease on foot, we effectively inherit that lease. So we do our own due diligence into those properties to take a view in terms of the likelihood of Viva renewing those leases. So we've kicked off that process with them, and yes, we have a high degree of confidence around that.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division - Analyst [29]

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All right, okay. And just looking at the recent acquisitions, there's a sort of heavier weighting towards regional assets. There's been some market commentary that perhaps regional assets aren't as strong as metro assets. Can you just maybe talk about what gives you comfort around these particular sites?

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Margaret Kennedy, Viva Energy REIT - MD [30]

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Yes, I can. And look, there is a mixture of regional and metro in the acquisitions that we've made, as we have each year. I think the comment I would make, a number of the assets that we have acquired are key brand-new build of truck stops with large sort of fuel and convenience and food offers. And I think there's probably 2 classes of regional assets. So service station in a small country town is one regional asset versus the large format truck stops that are well equipped to take heavy vehicle traffic as well as passenger car vehicle and offer the full service in terms of facilities, food and convenience as well. And you'll find a number of the Liberty properties that we have acquired have been effectively rebuilt prior to our acquisition.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division - Analyst [31]

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Okay. And then just, I guess, maybe a bit difficult question off the top of your head. But do you know what the split is in terms of your regional assets, sort of just the country town type assets versus highway sites?

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Margaret Kennedy, Viva Energy REIT - MD [32]

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Look, the majority would now be -- our definition of regional is large regional locations. We have a very small number, which we'll publish obviously in our annual result -- in our annual report with all the details. We have a small number of in-country town as against major centers. And our definition of regional includes places like Townsville, like Wagga, like Geelong, which are large regional centers, which others might classify as metropolitan.

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Operator [33]

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There are no further questions at this time. I would now like to hand the conference back to Margaret. Please continue.

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Margaret Kennedy, Viva Energy REIT - MD [34]

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Thanks, Edwin. Due to the legal restrictions, we obviously now have finished the section on results. We now cannot discuss any further details relating to the equity raising, and we anticipate making further announcements in accordance with our ASX continuous reporting obligations in due course. So this will formally end the results FY 2018 part of the call. As noted at the start of the call, we'll now hold a presentation in relation to the institutional placement and then conduct an equity raising Q&A session. Investors that are not eligible to participate in the equity raising as per the applicable legal restrictions will now be disconnected from the call. If you're attending this call via the webcast, due to the legal restrictions, please note that we will now be ending the webcast. With that, we'll put it back to the operator, and then we'll start the next call. And we'd like to thank everyone for attending. Edwin, I'll pass back to you.

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Operator [35]

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Thank you, Margaret. Please proceed with the second section of the presentation. Thank you.