Dexus Convenience Retail REIT (DXC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dexus Convenience Retail REIT 2025 Half Year Results Conference. [Operator Instructions] I would now like to hand the conference over to Mr. Jason Weate, Fund Manager. Please go ahead.

Thank you, and good morning, everyone, joining on the call. I'm Jason Weate, Fund Manager of Dexus Convenience Retail REIT, and I'm pleased to be delivering the 2025 half year results. I would like to begin today by acknowledging the traditional custodians of the lands and waterways on which we meet today, the Gadigal people of the Eora Nation and pay our respects to elders past and present. Today, I will touch on DXC's investment proposition, key highlights for the period, the financial outcomes as well as trends we are seeing in the broader market. Moving to Slide 5. DXC's investment proposition is to provide investors with defensive income with embedded growth through the cycle. We deliver this, firstly, by delivering portfolio metrics that deliver high income certainty and growth. Secondly, we maintain a prudent capital structure that has regard to shifts in the broader macroeconomic environment. And thirdly, we take an active but disciplined approach to real estate portfolio management, including portfolio curation and asset recycling into strategic growth opportunities that may include industry exposure beyond fuel and convenience. Supporting us in executing these pillars is an aligned manager with Dexus. Turning to the highlights for the period. We delivered FFO of $0.104 and distributions of $0.103 per security and are on track to deliver our FY '25 guidance as our portfolio continues to deliver a resilient income stream backed by high-quality tenant covenants. We executed $38.8 million of divestments, improving overall portfolio quality and providing capacity for future growth as our gearing of 28.7% now sits at the low end of our target gearing range. We commenced our fully pre-leased redevelopment of the Northbound site at Glass House Mountains, which is expected to generate attractive returns above DXC's cost of capital. And our NTA has stabilized this period, growing by 0.3% as a result of positive revaluations. The DXC portfolio reflects a high-yielding valuable land bank with the majority weighting to metro and highway locations. These sites will play a critical role in supporting transport and long-haul travel over the long term with the domestic fuel reliant vehicle fleet continuing to show positive growth. We are well placed to support tenants evolve their site offerings in line with the shift in energy mix with over 85% of our portfolio zone to commercial, industrial, residential and mixed uses. We continue to explore broader alternate use and latent development opportunities for the medium to long term whilst also looking to restock our development pipeline beyond Glass House Mountains. Our income base is diverse and is backed by some of the highest quality tenant covenants in the market with 95% of income derived from a wide variety of experienced national and international operators with a number of those operators having recently committed to long-term reinvestments of their networks, including material enhancement to the convenience retail offering. Turning to sustainability. Our approach aligns to the Dexus sustainability strategy, which includes 3 priority areas being customer prosperity, climate action and enhancing communities. We continue to source 100% renewable electricity and maintain a carbon-neutral position across our controlled asset base. We also actively engage with tenants to support their varied ESG objectives and are in the final stages of discussions across 5 sites for the installation of solar and electric vehicle charging across an additional 22 bays in our network. Environmental initiatives are a core part of our approach to development with Stage 1 of the Glass House Mountains redevelopment to include EV charging bays, rooftop solar, rainwater harvesting, gray water reuse and new fuel tank technology. Turning to the financials. Our FFO and distributions per security were 1% below the prior corresponding half as a result of a 60 basis point increase in our average cost of debt as well as moderate dilution from asset divestments, partly offset by solid like-for-like income growth, and we remain on track to deliver FY '25 guidance. NTA per security stabilized, up 0.3% to $3.57 as a result of net property valuation increases. As I touched on earlier, divestments during the half have reduced gearing to below the midpoint of our target range. This positions us well to consider various strategic capital deployment options above and beyond the current development at Glass House Mountains. We also enhanced our debt book during the year, having executed $46.3 million of facility cancellations to deliver incremental savings in the future. Independent valuations were undertaken across 38 assets in the portfolio with internal valuations undertaken across the balance which incorporated assumptions aligned with external valuations. Overall, property valuations increased for the first time since 2021, increasing by 0.5% on prior book values, driven by the impact of fixed rental escalations more than offsetting 6 basis points of cap rate expansion. The portfolio capitalization rate of 6.41% is supported by significant transaction volumes in the market, which have improved to in line with historical averages and remains above the marginal cost of debt, which has appealed to a broad direct investor base. Despite a higher interest rate environment in 2024, fuel and convenience transaction volumes demonstrated a solid recovery, allowing for material price discovery to inform DXC asset valuations and NTA. We are seeing increasingly strong pricing for assets with QSR retailing attached in line with the Glass House Mountains redevelopment, providing indicative valuation support for the asset on completion. Investors in the direct market continue to take a long-term view on underlying land value growth and tenant lease renewal potential. This is in stark contrast to the discount currently implied in DXC's listed market pricing. Capital recycling over the period and indeed over the last 2.5 years since the escalation of the current interest rate environment has delivered strong outcomes that increase the portfolio's overall investment resilience whilst providing the vehicle with redeployment growth options. Overall, through 22 asset divestments totaling over $100 million of capital release, we have materially enhanced the portfolio in a way that provides increased weighting to highway and metro locations, greater exposure to traffic volumes, higher underlying land values that support overall valuation whilst also modernizing the portfolio with new build assets. Our approach to active capital and portfolio management provides the fund with balance sheet capacity to fund meaningful growth opportunities. The Glass House Mountains project presents an opportunity to significantly enhance overall portfolio quality whilst delivering strong returns for unitholders. We recently commenced construction at the Northbound site, which will include a new expanded On The Run Viva Energy convenience retail offering which will be focused on food on-the-go, grocery convenience and includes an internal Hungry Jacks restaurant. In addition to 3 quick service restaurant pad sites with McDonald's, GYG and KFC in the form of direct leases with DXC. The project is expected to complete in early 2026. And as the project is a fund through, this has no financial impact to DXC's FFO during the development period. And we continue to expect development returns that comfortably exceed DXC's cost of capital whilst also boosting average portfolio value. In summary, we are well placed to deliver defensive and growing property income and we'll retain our focus on enhancing portfolio attributes that deliver certainty and growth of income, preserving balance sheet strength, executing portfolio optimization initiatives, including the Glass House Mountains redevelopment and other potential growth opportunities, including development pipeline restocking. And in relation to FY '25 guidance, we reiterate our expectation to deliver FFO and distributions per security of $0.206. Our FY '25 guidance reflects an attractive distribution yield of over 7% for investors backed by strong income visibility. Thank you for joining the presentation today. And with that, I'll hand back over to the moderator for Q&A.

[Operator Instructions] Your first question today comes from Murray Connellan from Moelis Australia.

Just noting the CapEx or the anticipated total capital cost of Glass House Mountains, redevelopment has increased a little bit over the last 6 months. I was wondering whether you could maybe just unpack why that was? And I guess maybe just highlight a bit more broadly what the redevelopment entails at this point?

Yes. Thanks, Murray. Look, I might just start on the Northbound side because that's no longer a moving phase with all attempts locked in, including the development spend piece. And that reflects the increase -- rather reflects an upward adjustment to rental terms that we've agreed with a major tenant which ultimately flows through to the price that we've paid. It's important to note that has no bearing on the profitability on the capital outlay for Stage 1 of the development. As it relates to Stage 2, yes, the expected expenditure has ticked up a little bit and there are a few moving parts still for that site. There's design, finalization of pad site tenancies, rental levels, et cetera. They're all things that we will need to finalize over the next 6 to 9 months, which will ultimately lock in how much or what that expenditure will ultimately look like. But based on where the product sits in the market today, even with the increased expenditure expectations, we're very comfortable with where that product sits in the market at the moment. It's a very attractive capital deployment option for us.

And then just noting that with the gearing now having a 2 handle on it, of course, that will tick up with the redevelopment coming through. But in the context of where we sit in the cycle with cap rates arguably starting to stabilize a bit more, I was wondering how you were thinking about the balance sheet? And I guess, whether you see yourselves as having capacity for a bit of deployment?

Yes. Look, I mean, our operating range for gearing is 25% to 40%, and that is to allow flexibility during various stages of the valuation cycle. In terms of where we take gearing to from here, it will be dependent on the nature and attractiveness of deployment opportunities. But regardless, we'd be managing with a comfortable buffer to the top end of that range. And if you think about our commitments at Glass House Mountain Stage 1, the potential to develop Stage 2, I'd say, we have capacity for at least another 1 to 2 development -- meaningful development sites.

Is that how you're thinking about deployment, development versus acquisition? And then also, I guess, just noting that you've got the buyback on as well, how you're thinking about that?

Sure. So look, our preference for capital allocation at this stage is for development over established acquisitions. In the current environment, the risk-adjusted returns on offer are just better in that sort of fund through development space. There's a -- and that's a function of developers having their foot on sites, but not necessarily access to the capital to unlock them. And we believe there's a window of opportunity for balance sheet operators like DXC to take advantage of that in the current environment, especially for projects with ticket sizes in the $20 million to $40 million range. As it relates to the buyback, yes, we continue to keep that on to retain flexibility. And obviously, any decision to undertake buyback activity does come down to a number of considerations, including returns on offer -- on other capital deployment options, gearing implications, but also stock liquidity and market cap relevance. And our position at this stage is that there are high returning options available in the form of fund through developments, but we will continue to take a balanced approach in terms of how we assess the attractiveness of the buyback going forward.

Your next question comes from Andy MacFarlane at Bell Potter.

Just a question around guidance you've reiterated today. The yield curve, I guess, has improved if you [indiscernible] in your favor. Yes, what will your kind of thinking be?

Thanks, Andy. I mean, you're right in highlighting that the shape of the curve now is pointing to average floating rates that are probably a little bit better than what we would have thought going back to August last year at the time of setting guidance. And in isolation, I think it's fair to say there is some marginal upside associated with that. However, what we have done over the period is cancel $46 million worth of debt facilities. And with that, we've had to write off some of the debt establishment costs associated with that. There is a net benefit of doing that, but we won't see that until there's a full period impact of that. So that's more of an FY '26 story there. So that's the offsetting driver to arguably lower floating rates than we previously anticipated.

That's helpful. On a similar vein, just in terms of hedging, haven't really done through the period. I guess, how are you thinking about hedging really at this point and where we are in the cycle?

Yes. Look, it's been a relatively quiet period for us over the first half, and that is primarily a function of the strong starting point we had. We were 78% hedged over the first half. We'll average of greater than 70% for FY '25. But that said, with the interest rate outlook where it currently stands, I think there's some good value on offering the 2- to 3-year part of the curve. And I think that presents some good incremental hedging opportunities over the second half.

Thank you. As we are showing no further questions, I'll hand back to Jason for closing remarks.

Well, thanks, everyone, for taking the time this morning to join on the call, and I look forward to catching up with many of you over the coming days and weeks. Thank you very much.

Thank you. That concludes the conference for today. You may now disconnect your lines.