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

Thank you for standing by, and welcome to the Dexus Convenience Retail REIT FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Pat De Maria, Fund Manager, DXC. Please go ahead.

Good morning, everyone, and thank you for joining Dexus Convenience Retail REIT's FY '26 Results Call. I'm Pat De Maria, Fund Manager of DXC, and I look forward to taking you through our results this morning. Before I begin, I'd like to acknowledge the traditional custodians of the lands on which our business and assets operate and pay my respects to elders past and present. This morning, I'll take you through our full year highlights, the financial result portfolio performance market dynamics. And finally, our outlook and FY '27 guidance. I'll start with the portfolio and the key themes for the year. DXC provides investors with exposure to a strategic national network of 91 assets with a strong East Coast weighting. The network is deliberately focused on high-traffic locations, with around 1.9 million vehicles passing our sites each day and 2.6 million people located within 3 kilometers of our assets. Importantly, these are strategic land holdings that can support convenience retail, food and beverage and alternative transport trends over time. DXC's investment proposition is built on 3 pillars: defensive income, active portfolio management and a prudent capital structure. We have consistently delivered across these areas with occupancy maintained above 99%. Guidance has been met or exceeded since IPO, and since the current interest rate environment, first escalated in 2022, we have released approximately $108 million of capital for redeployment into higher-returning opportunities and debt retirement. This has provided our balance sheet with the flexibility to continually allocate capital with discipline, directing it to the most value-accretive opportunities today, such as the buyback and high-returning developments that drive long-term value. FY '26 was a year of delivery across each of our key priorities. We delivered FFO and distributions in line with guidance at $0.209 per security supported by a 3% like-for-like income growth from our contracted rental escalators. These income growth attributes have assisted valuation growth over the period, driving a 6% increase in NTA. We improved portfolio quality while delivering strong returns with the completion of Glass House Mountains Northbound, now fully open and trading, a major milestone, which I'll cover shortly. Capital allocation remained disciplined with a clear focus on directing capital to the most value-accretive opportunities. In recognition of the disconnect between direct property values and listed market pricing, we have prudently divested 3 assets above book value for redeployment into our upsized 5% on market securities buyback, which is an FFO and value accretive use of capital, while DXC continues to trade at a discount to NTA. Overall, the results highlight our portfolio generating resilient income, improving in quality and supporting long-term value. The foundation of these outcomes is our contracted rental stream. Our income is supported by a 7.6-year WALE, more than 99% occupancy, high-quality tenant covenants and contracted rental growth. Together, these provide strong income visibility reinforced by a metro and highway weighting. DXC's tenant base stands out for both its breadth and quality. 95% of fuel operator income comes from large cap operators with around $250 billion in combined market capitalization. This depth of covenant is unique across Australian fuel and convenience retail funds of scale, and underpins our strong income quality. Our sustainability approach aligns with the broader Dexus strategy, in FY '26, we maintained net 0 on Scope 1 and 2 emissions and 100% renewable electricity purchasing across the managed portfolio. Glass House Mountains Northbound shows how sustainability is embedded in new developments with these initiatives improving asset resilience and supporting tenant and customer needs. Moving to the financials. FY '26, saw DXC deliver FFO and distributions of $0.209 per security. This was underpinned by 3% like-for-like income growth, partially offset by higher interest costs and the impact of FY '25 divestments. While interest rates remain a headwind, our contracted income stream remains strong, and that top line resilience will support FFO growth over the medium term. DXC's balance sheet remains strong with gearing of 30.6% toward the lower end of our target range and no debt expiries until FY '28. Interest rates have increased since the half year, and our focus remains on increasing certainty and reducing the impact of macro volatility. During the year, we extended and increased $145 million of facilities and added approximately $200 million of interest rate hedging. These actions enhance earnings visibility and ensure liquidity to support continued capital allocation, such as the buyback while retaining capacity for the committed developments. 70% of the portfolio was independently valued during the year, resulting in a $27.4 million uplift with cap rates tightening 14 basis points. The uplift was supported by contracted rental growth, the completion of Glass House Mountains Northbound and continued liquidity in the direct market including our recent asset sales above book value. Importantly, the portfolio cap rate of 6.18% remains above our marginal cost of debt, supporting confidence in current values. Moving to portfolio performance and market dynamics. EV adoption is rising, but fuel reliant vehicles still dominate Australia's car fleet with EVs representing only around 2% of vehicles on the road today. Recent fuel price volatility and tax incentives have supported this EV momentum, but regardless of the pace of EV adoption, our metro and highway focus, which is premised on high traffic volumes and alternative land use provides flexibility to diversify income and capture future growth opportunities over time. Our major tenants are responding to this transition in a meaningful way. They are actively investing in their networks to diversify earnings. This is driving site revenues, improving amenities and broadening earnings beyond fuel. For DXC, it supports visitation, shop sales and durability of our income. The examples on this slide shows structural sector-wide shift, not a short-term trend. This supports our strategy of owning high-traffic sites with flexible land holdings that can evolve with customer demand over time. The direct property market continues to align with our confidence in the sector with investor appetite remaining strong. Transaction volumes are broadly in line with last year despite higher rates and capitalization rates have held steady since the half year. Modern QSR anchored assets continue to command strong pricing, supporting both our valuations and the rationale behind our development pipeline. Glass House Mountains Northbound is now fully open and trading. a genuine milestone for DXC. The development achieved a 17% development project IRR, 5.8% yield on cost and provides an 18-year WALE with 43% of income from QSR tenants. Quality assets like this are rarely available in the direct market, making our development capability, a key advantage in being able to gain access to assets with the right tenant mix, secure long-term income and delivering attractive investor returns. With North Bound now complete, the development pipeline comprises 3 projects in New South Wales and Queensland. Each project strengthens our metro and highway exposure, delivers long lease tenure and includes meaningful QSR income. We assess each opportunity through the lens of yield on cost and development project IRR with Northbound demonstrating what the pipeline can deliver. Returns are targeted above DXC's cost of capital, underpinned by the same disciplined approach that delivered North Bound. The numbers on this slide tell the story of deliberate cumulative improvement. Since FY '22, we have released $108 million of assets with partial redeployment into initiatives that improve long-term portfolio quality and support disciplined capital allocation. This has increased metro and higher exposure, improved average traffic volumes, increased convenience retail income and reduced the average asset age. The portfolio is down more resilient, diversified and better aligned to locations and formats that operators are investing in and the market values. On completion of the development pipeline, around 90% of the portfolio will comprise metro and highway assets. These are not just high traffic locations. They offer flexible land use, scale and the ability to diversify site revenue as customer needs and energy preferences evolve over time. It is a portfolio built for today's income and tomorrow's optionality. In summary, the investment case for DXC remains clear. We offer a highly compelling annual 7.8% distribution yield, which is paid quarterly. This is attractive in both absolute and sector relative terms. Underpinning that yield is a secure and resilient income backed by long leases and very high-quality tenant covenants. With DXC currently trading at a 30% discount to NTA, investors access that income at a compelling entry point, backed by quality real estate in our liquid direct property market. DXC enters FY '27 with positive momentum and a clear focus on execution. The outlook is supported by contracted rental growth, limited near-term expiries, a strong balance sheet and continued discipline on capital allocation. In the near term, our focus remains on the continued execution of the on-market buyback while preserving flexibility for selective development opportunities to drive long-term growth. Barring unforeseen circumstances, we expect to maintain FY '27 distributions at $0.209 per security, which will sit marginally above FFO. This is expected to normalize as contracted income growth is delivered. Thank you for your continued support. I'll now hand back to the moderator for Q&A.

[Operator Instructions] Your first question comes from Michael Armstrong from Bell Potter.

Pat, so you haven't provided explicit FY '27 earnings guidance. Can you please talk about why that is and what the components are for FY '27?

Sure. Thanks, Michael, for the question. As an income-focused fund, distributions are a core metric that underlying property income can support. In the near term, the payout is marginally above 100% of FFO, and it's temporary. And this is due to the cost of debt transition, and it's not a structural issue. We're confident of our top line growth credentials to support FFO growing back into distributions. And happy to talk about FFO. We expect FY '27 FFO to be approximately 3% to 4% down on FY '26. So from a payout ratio perspective, that's looking at around 103%, 104%. The key drivers behind that, as I mentioned, the like-for-like income growth similar to other periods. But if you're adopting the current interest rate curve, you'd see all-in cost of debt rising about 70 points from 4.8% to 5.5%, all else being equal. So the net impact of that more than offsets the property income growth for the year.

Okay. And then can you just clarify what temporary means?

Yes. Sure. So the payout ratio is expected to normalize as contracted income growth is delivered and the earnings impacts from the interest rate transition moderates. So the timing primarily depends on floating interest rates from here. But the direction is clear that the rental growth should progressively rebuild. FFO coverage with the buyback and additional positive driver behind that.

Okay. And then so you've done a fair bit of hedging during the period. Can you just remind me what the hedging policy and approach is? And also, what's sort of the rationale behind the extra hedging through the period was?

Yes, sure. So we're an income-focused funds, and we have a programmatic approach to hedging. This provides a degree of certainty of costs and visibility to the market. The shape of the curve has changed over the past 6 months. And look, we acknowledge that shifts in rates can impact earnings, but they don't impact the consistency of income growth at the property level, which will support that earnings growth going back into the distributions in the near term.

Your next question comes from Murray Connellan from Moelis Australia.