Dexus Industria REIT (DXI.XA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dexus Industria REIT FY '25 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Gordon Korkie, Fund Manager. Please go ahead.

Good morning. I'm Gordon Korkie, Fund Manager of Dexus Industria REIT. I'm pleased to present DXI's FY '25 results and highlight how we have delivered resilient performance, repositioned our portfolio and continued to create long-term value for our investors. I'd like to begin by acknowledging the traditional custodians of the many lands on which we operate and pay our respects to elders, past and present. Today, I'll discuss DXI's investment proposition, key highlights for the year and our FY '25 financial results. I'll also share insights into our portfolio's performance and market dynamics before opening up for Q&A. DXI's investment proposition is to generate strong risk-adjusted returns for investors seeking listed industrial real estate exposure. We achieved this by focusing on 3 key objectives. First, we own a portfolio capable of delivering strong organic income growth. Our portfolio can reach 80% of the population within 60 minutes, making our properties highly attractive to a diverse range of tenants and supporting strong occupancy and resilient income growth. Second, we've take an active but disciplined approach to portfolio management to maximize value-adding opportunities while minimizing portfolio risk. And finally, we practice prudent balance sheet management, providing us with the resilience and flexibility needed to invest opportunistically throughout the economic cycle. Turning to the highlights for the period. Funds from operations were $0.182 per security for the year, up 4.6% and ahead of our upgraded May guidance, reflecting the strength of our portfolio and our disciplined execution. Distributions for the year totaled $0.164 per security with a payout ratio of 90%. Portfolio like-for-like income growth grew 5.9%, supported by embedded rental growth, high occupancy and the full year benefit of significant leasing success in FY '24. Leasing volumes doubled year-on-year with nearly 210,000 square meters of leasing secured, including 93,000 square meters of development leasing. Continuing this positive momentum, we delivered 44,000 square meters of high-quality developments across Jandakot and Moorebank with further projects progressing as planned. We have made decisive portfolio changes to support our evolution to a focused industrial REIT through the expected divestment of BTP in Queensland and the acquisition of a well-located urban logistics asset at Glendenning in New South Wales, which I'll discuss in more detail shortly. Our balance sheet remains strong with look-through gearing of 29% as at 30 June, remaining below our target range and providing us with flexibility to be opportunistic and navigate market cycles with confidence. And pleasingly, valuation uplifts contributed to a 3.1% increase in our NTA, reversing prior year declines and reflecting the strength of our leasing and development outcomes. Turning to DXI's recent transactions. In early August, we entered into an agreement to divest our remaining business park asset at Brisbane Technology Park, or BTP, for a net price of $155.5 million. The sale is structured across 2 transactions and remains subject to capital raising, with settlement expected to occur in August and by November this year. In parallel, we acquired an urban logistics warehouse at 32 Cox Place, Glendenning. This asset is located in the high-demand land-constrained industrial precinct in Sydney, providing excellent connectivity to Westlink M7 and proximity to Sydney's population growth corridors. It not only enhances our exposure to the Sydney industrial infill market but also offers attractive value-add potential. These transactions mark a milestone in DXI's evolution into a focused industrial REIT. We've sharpened our portfolio focus. On the back of BTP's recently improved performance, we are transitioning out of capital-intensive office assets and redeploying capital towards high-quality, high-growth orientated industrial assets. Post this divestment and acquisition, DXI will be 100% industrial REIT with improved portfolio metrics, including a WALE of 5.9 years and occupancy at 99.5%. This transition strengthens our cash flow resilience and positions us to capture long-term structural demand in higher-growth logistics markets. Furthermore, these transactions improved our funding capacity, with look-through gearing expected to reduce by approximately 5 percentage points to circa 24%. Looking more closely at the fundamentals of our investment proposition. At 30 June, our portfolio of 97 assets was valued at $1.5 billion, offering scale and exposure to Australia's key industrial markets through a diversified tenant base. It delivers an attractive and resilient income stream with approximately 84% of income subject to fixed rental increases that averaged 3.3% while also retaining upside to CPI as evidenced by our portfolio's average rent review of 3.5% for the year. We are actively positioning DXI to capture long-term growth in the industrial sector, balancing stable income with development-led upside that supports ongoing earnings and valuation growth. Turning to our FY '25 financial results. For the year, DXI delivered funds from operations of -- or FFO of $57.9 million or $0.182 per security, up 4.6% on the prior period. Like-for-like income growth of 5.9% was supported by average rent reviews and strong leasing outcomes. Development completions contributed positively to earnings, reinforcing the value of our pipeline and supporting future growth. While prior divestments reduced property income, they also lowered net finance costs, helping offset higher interest rates and preserving earnings. Distributions were $0.164 per security, reflecting a payout ratio of 90%. Our NTA grew 3.1% to $3.34 driven by net property valuation uplifts. These results demonstrate the strength of DXI's operating platform and our ability to deliver through changing market conditions. Turning to the balance sheet. Look-through gearing remained low at 29% and as mentioned earlier, is expected to reduce to approximately 24% following recent transactions, providing significant reinvestment capacity. Even if we fully debt fund our current development pipeline, gearing would remain below the top end of our target range, underscoring the strength and capacity of our balance sheet. During the period, we executed $65 million of new facilities and refinanced $199 million of debt, eliminating short-term refinancing risk with no maturities due until FY '27. Hedged debt averaged 70% during the year. I'm pleased to report a positive valuation outcome for FY '25, our first since 2022, potentially a turning point in the portfolio valuation trajectory given further interest rate cuts are projected. We recorded a $37.6 million valuation uplift or 2.6% increase on prior book values, driven by strong leasing outcomes and development progress, particularly at Moorebank and Jandakot, partly offset by the expected sale of BTP at a 4.1% discount to its June external valuation with the sale proceeds reflected in our NTA. Cap rate expansion slowed to 11 basis points across the industrial portfolio compared to 63 basis points in FY '24, reflecting stabilizing market conditions and continued investment demand for industrial assets. Turning to our portfolio performance and market dynamics. Our industrial portfolio continues to deliver strong operating performance. Like-for-like growth of 4.6% was supported by average rent reviews of 3.5% across the portfolio and the impact of strong leasing outcomes delivered in the prior year. We secured 110,000 square meters of stabilized leasing with renewal incentives below market and occupancy remaining high at 99.5%. A highlight was the early renewal of 2 of the largest tenants at Jandakot covering over 73,000 square meters, materially derisking our near-term lease expiry by extending leases to FY '31 and beyond. Our tenants include some of the world's most recognizable brands across a diverse mix of sectors that continue to perform well. This high quality and diversity enhances income resilience, reduces concentration risk and provides exposure to a broad range of economic drivers. Our top tenant is WesTrac, representing 18% of total income, with approximately 9 years remaining on the lease. WesTrac's long-term commitment is reflected in the investment in Tomago, a flagship facility integrating large-scale solar and automation to enhance operational efficiency and support sustainability. DXI's development pipeline at Jandakot in Perth represents a $230 million investment spanning over 260,000 square meters. We are targeting yields on cost above 6.25% across the pipeline with potential to achieve incremental returns exceeding 8%. These projects are tailored to meet evolving needs of modern occupiers with high-spec design, sustainability features and flexible layouts to support long-term leasing demand and improved portfolio quality. Our recent development completions include 644 Karel Avenue in Jandakot, which is fully leased at a 6.5% yield on cost; and Moorebank, where 4 of the 6 units are now leased. We currently have 6 projects in active development at Jandakot with 76% of income already pre-leased at strong rent levels targeting average yield on costs of approximately 6.7%. DXI remains committed to delivering meaningful sustainability outcomes that generate both environmental and financial benefits. We maintain our carbon-neutral position for Scope 1, 2 and some Scope 3 emissions supported by renewable energy sourcing and target offset programs. Our sustainability initiatives include rooftop solar, battery storage and high NABERS ratings, which not only reduce environmental impacts but also enhance asset appeal and long-term value. Industrial market fundamentals remain favorable despite a moderation in demand from the exceptional highs of recent years. Population growth and rising e-commerce penetration are expected to drive incremental annual warehouse take-up of approximately 2.5 million square meters per annum, requiring over 12 million square meters by 2030. Online market share is forecast to grow from 14% to 19% by 2030, with expansion of same-day delivery services further boosting demand for well-located modern logistics space. Elevated land and construction costs, coupled with planning delays are constraining new supply. Forecast supply for calendar year 2025 has been revised down by nearly 900,000 square meters, reflecting a broader slowdown in development activity. Developers are responding rationally to market conditions, shifting away from speculative builds towards pre-committed projects. This disciplined supply response is expected to underpin continued favorable conditions moving forward. Vacancy rates across Australia's major cities remain very low by global standards, attracting interest from foreign capital who remain attracted by the fundamentals of the Australian industrial sector. In addition, the pace of capitalization rate expansion has moderated, a trend reflected in DXI's own valuation outcomes. These dynamics are supporting stronger asset price discovery and reinforcing investor confidence in high-quality industrial assets. With exposure to core Australian markets and modern income-generating assets, DXI is well positioned to benefit. In summary, we are well placed to continue delivering long-term value for investors, supported by a resilient earnings profile and a strong flexible balance sheet. DXI's momentum in activating high-quality developments continues to enhance portfolio quality and drive long-term growth. Our positive leverage to lower interest rates should support growth in earnings and NTA moving forward. Despite these strong fundamentals, DXI is currently trading at a significant discount to our NTA and as such, presents a compelling investment opportunity to access embedded value and future growth. Looking to FY '26. Bearing unforeseen circumstances and factoring in the expected divestment of BTP, DXI expects to deliver FFO of $0.173 per security and distributions of $0.166 per security for FY '26. Thank you for joining the call. I'll now hand back to the moderator for questions.

[Operator Instructions] Your first question today comes from David Pobucky from Macquarie Group.

Just the first one on your FFO delivery of $0.182. You modestly beat guidance at $0.181, which you upgraded in May. So I just wanted to ask what drove that modest beat to guidance, please.

Thanks for the question. Look, part of it was driven by lower net financing costs. We did commit to some new precommitments late in the year and so had the ability to capitalize interest on the land that was previously uncommitted. And then there was also some -- I guess, a beat against -- well, coming out of Jandakot through the operating business.

And second question on guidance. Consensus obviously hasn't factored in the BTP divestment, so guidance obviously came in below where consensus was sitting. So I just wanted to ask what your estimate of the FFO per share impact is from the divestment, please.

Look, I think, first of all, let's just recognize that we just achieved 4.6%, which was a very strong outcome. And BTP, as I think you're rightly alluding to, is a very high-yielding asset, and it was obviously a very strategic decision for us to sell that asset as we look to focus on becoming a focused industrial REIT and ultimately delivering a stronger growth profile moving forward in probably a less challenged subsector. But BTP in itself would have been diluted by somewhere between 5% to 6%, and if you were to adjust for that, you'd be broadly neutral on the prior period.

And then last question for me. How should we think about the divestment on a cash basis? So how do we think about the cash impact post incentives and leasing costs, which is quite important and I would say, more important than the FFO impact?

Well, I think you just hit the nail on the head, which is a really big driver in terms of the way we thought about the divestment and why we were willing to wear, I guess, a one-off hit to our earnings yield. On a cash basis, we did mention it within our ASX release. It's broadly neutral. And over the medium term, we expect it to be AFFO accretive having divested the asset.