DEXUS (DXC.XA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the DEXUS FY '25 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Ross Du Vernet, Group CEO and Managing Director. Please go ahead.

Well, good morning, everyone, and thanks for joining us for our 2025 full year results presentation. I'd like to begin today by acknowledging the traditional custodians of the lands and water pays upon which we operate, and pay our respects to Elders past and present. Today, you'll hear from Keir on the financials, Andy and Office, CrisolIndustrial; and Michael on Funds Management. Concluding the presentation, I'll provide a summary and then open up to any questions that you may have. DEXUS is a unique investment proposition with scale across the real asset spectrum. Our high-quality balance sheet portfolio of mainly office and industrial, together with a large diversified funds management business differentiates us in a competitive market. Each of our sectors are scalable and with the potential for continued strong returns. We also benefit from access to diverse pools of capital through the cycle with third-party capital accounting for more than 70% of the platform's assets. With our executive team now fully in place, we are well positioned to drive performance across both sectors and funds as we enter the early stages of a new cycle. Our strategy is unchanged. Our vision to be globally recognized as Australasia's leading real asset manager continues to guide our decisions. The DEXUS platform leverages our strength in transacting, managing and developing quality real estate and infrastructure assets to deliver superior risk-adjusted returns for DEXUS security holders and our clients. Our high-quality balance sheet portfolio, together with a large diversified funds management business continues to differentiate us. Our culture, the quality and scale of the portfolio and the projects we have underway, coupled with our approach to people, enable us to attract, retain and develop leading talent to ultimately create value for customers, clients and our investors. Turning to the FY '25 result. We delivered on our guidance and maintained office occupancy well above market, ensuring strong cash flows and AFFO. We had a record year of leasing across the industrial portfolio. Our divestment program is on track with $1.1 billion divested and gearing maintained at the low end of our target range, despite the impact of devaluations over the past 2 years. Property portfolio valuations turned positive in the second half as the cycle turn. Our core diversified fund and our shopping center fund outperformed their peers and benchmarks. And against the backdrop of some fund specific matters that we continue to work through. We're delivering on our fund strategies, divesting assets to facilitate $1.8 billion of redemptions and enhancing portfolio quality. Pleasingly, we facilitated over $450 million of secondary unit transactions and continue to raise equity for growth-focused strategies, like DREP2. Our medium-term goals aligned to our strategic priority areas of transitioning the balance sheet, maximizing contributions from the fund business and unlocking our deep sector expertise. We are making good progress against each of these goals. In addition to the highlights already outlined, we selectively deployed capital into funds, including DRIP 2 and DWS supporting the acquisition of Westfield Chermside, which has reset that fund. We materially reduced costs and closed 2 subscale funds. We strengthened organizational capability with key executive hires and system investments. We achieved strong customer advocacy supported by a high Net Promoter Score. And while progress has been slower than we would have liked, we continue to actively explore opportunities for new product launches to position the platform for growth in a recovering market. We remain committed to sustainable outcomes, focusing on our priority areas where we can make the greatest impact across our customers, climate and the communities. DEXUS continues to be recognized as a global leader in sustainability and some of our sustainability highlights are shown on this slide. Our commitment to sustainability continues to enhance asset quality and support long-term performance. We see this reflected in the choices that our customers make. Recognition is a welcome outcome that our focus remains on delivering meaningful impact and ultimately long-term returns. I will now pass you on to Keir to cover off on the financials.

Thanks, Ross, and good morning, everyone. Turning to the results in detail. In line with expectations, total AFFO for the year was $484 million. with the distribution of $0.37 per security, reflecting a payout ratio of 82% aligned with our updated distribution policy. Office FFO reduced marginally as a result of divestments, largely offset by fixed rent increases and the recently completed refurbishment at 123 Albert Street. For the industrial portfolio, the reduction in income was driven by divestments and downtime as well as the impact of higher one-off income in the prior corresponding period. partially offset by development completions and fixed rent increases. FFO from management operations increased to $155 million, reflecting more than $40 million of performance fees during the year and the benefit of cost savings, partly offset by the impact of redemptions, disposals and lower valuations. The impact of redemptions is expected to continue into next year, completingly we have secured circa $35 million of performance fees for FY '26. Active management of the cost base has resulted in lower group corporate costs for the period. An increase in net finance costs was largely driven by lower capitalized interest following completion of 123 Albert Street as well as higher interest rates. Higher funding costs are also expected to continue to impact in FY '26 as the weighted average hedge rate increases. As expected, trading profits were significantly lower this year and circa $40 million of trading profits post tax have been secured for FY '26 from the sale of Brook Hollow and Chester Hill. Leasing CapEx has increased slightly as a result of the impact of higher incentives from office deals struck in prior periods, flowing through the portfolio this year, partly offset by the impact of divestments. We are seeing clear signs that we have passed an inflection point in property markets. Overall, for the 12 months to 30 June, the value of the portfolio declined by 1.1%. And significantly lower in contrast to previous periods. Pleasingly, the second half of the year saw valuations increase by 0.4% for office and 1% for Industrial, demonstrating the quality of the portfolio. Across the broader Dexus real estate platform, approximately 70% of FUM recorded a revaluation uplift in the second half. reflecting the quality of the wider platform. Moving to capital management. Our balance sheet remains strong. with look-through gearing at the lower end of the 30% to 40% target range, providing capacity to fund committed expenditure. We have been active with refinancing resulting in a weighted average debt maturity of 4.3 years, $3 billion of headroom and manageable near-term debt maturities. 86% of our debt was hedged during the year at an average hedge rate of 2.1% and providing material interest rate protection. Looking forward, there is $1.5 billion of remaining spend on the committed development pipeline over the next 4 years with circa $700 million expected to be incurred in FY '26. For many years, we have taken an active approach to capital recycling, divesting noncore assets across both the office and industrial sectors to enhance the quality of the portfolio and the strength of the balance sheet. The portfolio is now heavily weighted to premium-grade office assets in core CBD markets as well as core industrial assets, placing us in a strong position to benefit as the market recovers. Our divestment program, together with the completion of committed developments will further enhance the quality of the portfolio while maintaining a prudent level of gearing. Thank you, and I'll now hand over to Andy.

Thanks, Keir, and good morning, everyone. Our $9.7 billion office portfolio continues to demonstrate resilient fundamentals. We maintained occupancy of 92.3% and which remains well above market average of 85.7%. Average incentives were 26.8% below market and lower than in FY '24, reflecting the quality of our portfolio and our focus on maximizing long-term value rather than buying occupancy at any cost. We achieved like-for-like income growth of 2%, impacted by downtime and amortization effects -- on a face basis, we delivered like-for-like growth of 2.3%. We listed 107,000 square meters across 248 transactions during the year, and our weighted average lease expiry remains healthy at 4.2 years. Looking at our expiry profile, we aim to have no more than 13% of the portfolio expired in any single year. For FY '26, we're well positioned at 8%. We have leased more than 11,000 square meters at Australia Square during the year, evidencing strong small tenant demand. Much of our near-term expiry sits in assets that are well positioned in their markets, including 25 Martin Place in Sydney and 240 St. Georges Terrace in Perth. Our vacancy challenges are concentrated in a small number of assets the key vacancies we're focused on, a 30 Hickson Road in Sydney's Western Corridor at 2% of income and 80 Collins Street in Melbourne at 1.9% of income. Our committed office development pipeline continues to enhance portfolio quality. Construction is progressing at Atlassian Central and Sydney with completion on schedule for late 2026. At Waterfront Brisbane, Stage 1 practical completion is now forecast for late 2028, following prolonged adverse weather conditions and complexities with certain in-ground construction works which are now nearing completion. We're working closely with our construction partner and customers to mitigate the impact of this delay, while the outlook for the Brisbane premium market continues to improve. Atlassian Central is 100% pre-leased with a 15-year lease and 4% annual increases. Waterfront is 52% preleased, with 3.4% average annual increases. All committed projects are delivered through fixed price contracts with Tier 1 contractors, providing construction cost confidence and various protections in the case of delay. The office outlook shows encouraging signs that we've moved through the bottom of the cycle. All 4 major CBDs recorded positive net absorption over the past quarter with Sydney CBD recording 92,500 square meters, the highest in 9 years. Sublease space has continued to decrease and is now close to average levels. Upcoming office supply remains low relative to long-term averages, providing scope for vacancy rates to fall and rents to grow. Office demand is gaining momentum, driven by employment growth, return to work trends and companies centralizing operations. Importantly, positive net absorption is strongest in premium assets. We expect solid effective rent growth across the key CBD markets over the next 3 years, the strongest being in Sydney premium assets where we have good exposure. Our portfolio is well positioned to benefit from this recovery. Around 76% is located in core CBDs, where occupancy and incentives continue to outperform the wider market. We've built strong customer diversification. Our top 10 customers account for around 20% of office income, significantly less than comparable peer portfolios. Our average tenancy size is around 1,000 square meters and these smaller tenancies generate higher returns with lower volatility. Our portfolio occupancy has consistently outperformed the wider market with average incentives well below market rates across each of the major CBDs. In summary, we own and manage 1 of Australia's highest quality office portfolios that performs above market benchmarks. While we faced some challenges with select vacancies and development timing, the portfolio fundamentals remain sound, and our portfolio is well balanced. The Sydney CBD premium market, where we have the strongest exposure shows encouraging signs of recovery, which creates opportunity for our well-positioned assets as the cycle progresses. Thank you, and I'll now hand you over to Chris.

Thanks, Andy, and good morning, everyone. The premium assets in our industrial portfolio continued to perform well with record leasing volumes achieved across the stabilized portfolio. Occupancy declined this year due to vacancy at select assets such as Kings Park, which is now leased. As anticipated, leasing for lower-grade assets has taken time to materialize. Occupancy by income finished the year at $96.2 million Occupancy by area is above market at 97.4% and WALE has improved to 4.5 years. While downtime at vacancies impacted like-for-like income during the year, we expect strong like-for-like growth in FY '26 on the back of this year's robust leasing activity and the circa 25% re-leasing spreads achieved across the stabilized portfolio. The portfolio remains under rented at 11.7%, presenting a significant opportunity to grow income. Approximately 25% of leases are due to expire by FY '27 and allowing rents to be reset in line with market. With a focus on improving portfolio quality, we continue to deliver premium industrial spaces across New South Wales, Victoria and WA. The staged pipeline is active with 10 projects progressing across 190,000 square meters. Looking at our expiry profile, we have derisked FY '16 expiries to 7.4% from 14.1% a year ago. We are focused on resolving key vacancies at older stock at Matraville, Greystanes and Lakes Business Park. Much of our vacancy and near-term expiry are concentrated in prime located assets in areas that represent strategic value-add opportunities that warrant targeted capital investment to enhance leasability and unlock the next phase of growth. Taking a closer look at our portfolio. The industrial portfolio is located in well-connected logistics hubs across Australia positioning us to meet the evolving needs of our customers. The majority of our relationships are held directly with high-value customers with businesses that are growing or aspire to grow. We work closely with them to solve supply chain challenges through data-led analytics, market insights and tailored solutions. Around half of our portfolio is concentrated in large-scale master-planned precincts that Dexus has developed, enabling operational and development scale benefits. Within these precincts, the rise of e-commerce is driving demand for smaller format last-mile delivery facilities, which complement the larger format assets we develop for major customers. Our assets are designed and delivered for long-term flexibility and operational efficiency, incorporating market-leading sustainability features such as battery infrastructure to support rooftop solar. This approach has enabled us to capture a repeat business with leading organizations, including Wesfarmers, Kmart and Amazon. Turning to the industrial outlook. Underlying market fundamentals remain supportive, with demand holding firm amid constrained supply. We have seen a shift from speculative to pre-lease development strategies as elevated project costs and planning delays continue to impact feasibility and extend delivery time lines. Retail spending is firming and online sales are once again trending upward, driving renewed demand for retailers and logistics providers. These dynamics are expected to support leasing activity in the year ahead. As the market begins to diverge by location and asset quality, our national portfolio is well positioned -- the majority of our assets are in sought-after locations and have been developed by DEXUS, giving us a strategic advantage through a portfolio of primarily first-generation assets. Thank you. I'll now hand over to Michael.

Thanks, Chris, and good morning, everyone. Our $35.6 billion funds management business has scale and is diversified across sectors and investor type. We have a proven track record of delivering performance for our clients, which underpins the deep relationships we have with more than 150 institutional investors. In recent years, we've been working through elevated redemptions as some investors adjust their strategies and seek liquidity against a challenged macroeconomic environment, particularly across core products. We have actively divested assets on behalf of our clients to facilitate redemption requests and maintain prudent gearing levels while enhancing portfolios. The market for capital raising globally remains challenged, but there is a cyclical element to this. And the recent improvement in unlisted wholesale fund returns is driving improving sentiment. Having access to diverse pools of capital positions us well as the cycle turns. Turning to funds highlights for the year. As Ross mentioned earlier, our flagship funds continued to outperform their benchmarks. Notably, the $13 billion diversified wholesale fund and the Shopping Center Fund both materially outperformed for the 12-month period. Following the sale of DWSF's stake in Macquarie Center, we leveraged our long-standing relationship with Center Group to secure a 25% interest in Westfield Chermside, 1 of Australia's best retail assets in an off-market transaction, delivering an immediate performance uplift with growth potential. Despite a subdued capital raising environment, we continue to tap into investor appetite for growth-focused strategies, raising funds for DRAP 2 and deploying capital across DRAP 1 and 2. We also acquired a further 9% interest in Powerco on behalf of a client, increasing our managed stake to 51%. We Several funds and investments also gained recognition for ESG achievements in line with the platform's focus on sustainable outcomes. The leadership team we have put in place is focused on driving performance and fundraising. And over the year, we closed 2 subscale funds, and we are working through fund specific matters, including redemptions with APAC litigation underway and a court hearing scheduled for November this year. We continue to explore potential new product launches in line with client demand. and with real estate markets rebounding and domestic superannuation sector expected to double over the next decade to more than $8 trillion. The funds business is well positioned with high-quality assets in markets which are expected to outperform. Thank you. I'll now hand you back to Ross.

Thanks, Michael. Looking at FY '26, we've refreshed our medium-term goals to maintain momentum against our strategic priority areas. To transition the balance sheet, we intend to deliver key milestones on our committed developments, continue our recycling program with about $1 billion remaining and continued co-investing alongside clients into sectors with tailwinds. To maximize the contribution of funds, we'll continue to execute the opportunity fund strategy, including the final close of DRP 2 resolve fund specific matters and position the product offering for growth as the cycle turns and pursuing new products and opportunities that will align with client demand. And finally, to unlock our deep sector expertise, we'll focus on delivering strong investment performance across all sectors while maintaining high customer satisfaction and enhancing our talent and capabilities to unlock the full potential of our people. We invest for the long term and despite the market challenges over the past few years, we are now past the inflection point with valuations turning positive in the second half. now is an attractive time to be investing in real assets. We expect the next phase of the cycle to be driven by fundamentals and our platform of high-quality assets and deep expertise positions us well to deliver for our security holders and our clients. Barring unforeseen circumstances for the 12 months ending 30 June 2026. DexS expects AFFO of $445 to $0.455 per security and distributions of $0.37 per security. Thank you. That ends today's formal part of the presentation. We'll now pass to any questions that you may have.

[Operator Instructions] The first question today comes from Howard Penny from Citi.

Congrats on the results. And I just wanted to ask a question on the outlook for office developments, the rhetoric seems to be becoming more positive on the inflection point. I was just wondering when you see investors starting to think about the next development phase.

I want to provide a general comment and then Andy can give you his insights. Look, I think development in office is still challenged just on the basic economics of construction costs. That being said, I think what we have been pleased on the upside is this bifurcation that we're seeing in the market for the very good projects in that very tight part of any given market, clients and customers are prepared to pay pretty much record rents, and we're seeing that with the resetting of rent and things like waterfront. We're even seeing that in our core investment portfolio when you think about the high level of occupancy we have in the prime part of the market here in Sydney, we're at 97.7%. So I think at the top end of the market, if you can get the rent, it may be possible, but the economics are still challenged on construction costs. Andy?

I think -- Howard, good question. So I think that demand that you -- or that dynamic you're seeing where given the constrained supply outlook in the key markets, it does change the viability potentially of future office developments. I think the first order impact of that will be that it provides tailwinds to the completion of the developments that are already underway. And then I think -- so that's going to help us at Waterfront Place. And I think beyond that, getting out into 2030, the early 2030s, I think that there will be very focused demand on the next generation of office developments. And I think whilst it's sort of easy to say, look, we might get a big but of developments coming in 2030. I just don't think that's going to happen for the reasons that Ross has outlined. Crossing the economic viability of the development, I think, will require some pretty significant growth in office rents and contraction in incentives. So there will be development, but I think we need to see the fundamentals in the market play out to a greater extent and materialize before people dust off their feasibilities.

I think the pleasing thing for us, if you think about how our portfolio is set up today is we're going to get all the benefit of that through the further leasing we're going to do with projects like Waterfront. So we really kind of have our construction price. And so those really strong market conditions at the top end of town and particularly in the market like Brisbane when we get to access all of that through the future leasing we're going to do over the next couple of I think we're well positioned. And to the extent the projects start, they're probably going to be the best projects in town. They're going to be those ones in those best locations, we feel reasonably optimistic about things like ST CommonStreet.

And then just maybe a second question just on third-party capital demand. As far as you can comment you -- where are the areas that investors see most interested to are you seeing at mats?

Thanks, Howard. We're seeing a general interest, I guess, across the board. The higher returning strategies are obviously in demand and they have been. But with reducing interest rates -- the core strategies are now coming back into focus. And the funds business, we've seen really positive returns, well, for the last half, but the funds -- our funds, in particular, are starting to outperform very significantly. The flagship fund DWPF outperformed by 4.4% over the year. So that has generated quite a lot of interest and secondary unit sales were up quite significantly as well.

The next question comes from Lou Pirenc from Jarden.

Two follow-ups to Harald's questions. I mean first of all, where does the redemption queue sit right now?

It's consistent with where it was at the half year around about $3 billion.

And then just on the developments, I noticed that you tightened the expected return on Atlassian Central to the bottom end of the range, but you didn't change waterfront despite the delay. So can you maybe talk through each of those?

Yes. Sure. So on Atlassian, the yield on cost range that we provided was based on potential outcomes on a series of preventional some items of provisional some items. Now as we approach PC, we can provide a tighter range as those provisional sum items are resolved. And so that's the difference in that on cost. And we haven't changed the yield on cost at order front place despite the delays, because we do have some contractual protections in place. And as the earlier conversation touched on, the leasing market in Brisbane is improving solidly. And so delivering that project at a later point in time could actually help with the project economics.

The next question comes from Simon Chan from Morgan Stanley.

Can you give us some insight as to what you think leasing incentives and maintenance CapEx could end up in FY '26. I noticed that it increased moderately in '25 to about $190 million -- just how should we be thinking about it for next year?

Simon, thanks for the question. We're expecting for FY '26 that maintenance and leasing CapEx will be broadly in line with where it sits for FY '25. Within that, there may be a change in the composition with a lower contribution from office given the divestments that we have made and a higher contribution from industrial given the volume of leasing commencements in FY '20.

Great. My second question is just in relation to -- just a follow-up on the previous one. I think on Alain, you mentioned the yield on costs came down because of a series of provisional some items. Can you just elaborate on it? Because you on cost is a pretty simple calculation. Is it at a headline level, it is rent divided by cost. Your cost hasn't gone up per your preso, is still $1.4 billion. Your rent was locked in, was when you signed a lease a couple of years ago. So what has actually changed?

Thanks, Simon. So what's changed is that the initial -- so your description is right. But given the provisional some items, and you might recall, we did describe that with this development, we have more provisional sums than we typically do for development given that it is so innovative -- and so with that sort of large bucket of provisional sums at the outset, we provided a yield on cost range that considered a range of potential outcomes on those actual provisional sums. And so 1 way to think about it is that we're resolving the costs of those provisional sums at the upper end of the earlier range, which pushes the yield on cost down to the lower end of the earlier range. And the total cost would be including the full amount of the provisional sums.

Right. Okay. So is that -- and it's got nothing to do with rental income?

No, no. So I mean, this groundbreaking development is fully let to Atlassian for 15 years with fixed increases. Also worth noting -- I mean talking about yield on costs. So the yield on cost is calculated on actual costs -- but we've already written down the asset, which is reflected in NTA. So if you were to think about the yield on completion value, that's going to be more like 5% to 6%, and that would make a really attractive risk-adjusted investment considering those 4% fixed bumps for 15 years.

The next question comes from Tom Bodor from UBS.

I'd just be interested in -- I'm sorry to keep going back to a bit waterfront where there are delays and there's no productivity issues in the Queensland market. I'm just interested in understanding within that development, 2 things. Is the builder seeking material variations given those delays as the first thing. And secondly, who's on the hook for the lease tails there?

Tom. So look, yes, we have had delays, obviously, as I said, due to adverse weather conditions, we've had 1.4x the average annual rainfall in the past 12 months. There have also been some complexities in the ground. Now John Harman is doing a terrific job in overcoming those complexities and making up for lost time. And you can see on site that the vertical structure is starting to come out of the ground. And as I said in the presentation, we're working with them and with our customers to mitigate the impact of the delay. So 1 potential lever there, just to illustrate what can be done is that by integrating the delivery of a fit-out development, you can save time. So where previously a customer had anticipated doing their own fit out post PC. If you integrate that fit up with base building construction, we can reclaim that period of time, which, in some cases, can be 10 to 12 months. But I think it's important to note that we're not the builder. So we selected John Holland as they had contracted because of its technical expertise with this complex build and its strong capital backing. They're doing a great job, not just in moving the program forward, but they're also setting a new standard for sustainable construction. I'm sorry if you can hear that both in the background. And look, you can definitely expect that for a project like this, we would have negotiated strong contractual protections before the start of the project, and that's exactly what we did. We're not going to go into those in this conversation that would be unfair to John Holland. But this -- delivering the project in an improving market could actually improve project economics. So this is going to be Australia's best office development. It's going to reshape Brisbane's office Skyline, and we're really excited about it. That's why we've sort of been pacing the let up. We're still at 52% pre-let.

But just on the concept of variations in the contract, are they seeking variations given the various issues that you've encountered?

So there are no extensions of time under the contract for Rain.

Not at all?

No, not unless it's made a certain classification the weather that we have, this is just -- this is an ordinary day.

And are the variations are they seeking other variations given I don't know, industrial relations or other issues?

Look, apart from weather and apart from the complexities in the ground, the program is materially on track, budget is on track. They John Holland is doing an exceptional job of boosting productivity at that site to the point where they have been working double shifts and working the occasional Saturday. So they're as keen as we are to make up for lost time.