Dexus Industria REIT (DXI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dexus Industrial REIT HY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Jason Weate, Fund Manager. Please go ahead.

Good morning. I'm Jason Weate, Fund Manager of Dexus Industrial REIT, and I'm pleased to present DXI's first half '26 result. I would 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 will discuss DXI's investment proposition, key highlights for the period and our first half '26 financial results. I will also share insight into our portfolio's performance, recent acquisitions and development pipeline before opening for Q&A. DXI provides investors with high-quality, strategically located industrial assets, featuring significant diversity of over 88 assets valued at $1.4 billion, access to 80% of the population within 60 minutes of our asset base and strong exposure to the infill market. In addition, our portfolio has a significant development pipeline at ASCEND at Jandakot. DXI's investment proposition is to generate strong risk-adjusted returns from Australian industrial real estate. We achieved this by focusing on 3 key objectives: firstly, through owning a strategic portfolio that is attractive to a diverse range of tenants and capable of delivering secure and growing income. Second, we take an active approach to portfolio management to maximize value-adding opportunities. And finally, we practice prudent balance sheet management, providing us with flexibility to invest opportunistically through the cycle. Turning to the highlights for the period. We are pleased to provide slightly upgraded FFO guidance of $0.174 and distributions of $0.166 per security, driven by our high-performing portfolio and secured pre-leasing at Glendenning. For the half, funds from operations were $0.089 per security with distributions at $0.083 per security. Portfolio like-for-like income growth was 7.4%, supported by embedded rental escalations and significant leasing and high occupancy. We continue to deliver positive momentum across our development book with over 24,000 square meters of completions at Jandakot, with further projects progressing as planned. We've now fully redeployed proceeds from the divestment of BTP in Queensland into acquisitions across 3 high-quality urban infill locations. Our balance sheet remains strong with look-through gearing of 26.2% at 31 December, remaining below our target range and providing us with capital deployment flexibility. Our portfolio continues to deliver positive valuation momentum with $15 million of gains contributing to a 1.5% increase in our NTA. The DXI portfolio delivers an attractive and differentiated mix of income security with embedded rental growth drivers and a development pipeline of scale that provides an additional layer of growth for investors. Our income security is supported by high occupancy of 99.7%, and we are well placed to manage near-term expiries, with potential to unlock, under-renting opportunities over the medium term. We are exposed to a diverse tenant base with approximately 87% of income subject to contracted rental increases above 3%. And our scale development pipeline provides the vehicle with opportunity to drive outsized returns for investors and enhance FFO growth over the medium term. DXI remains committed to delivering sustainability outcomes that generate both environmental and financial benefits. Our sustainability initiatives include solar installations, recycling or reusing materials and EV charging capability for trucks, which not only reduce environmental impact, but also enhance asset appeal and long-term value. Turning to our financial results. For the period, DXI delivered funds from operations of $28.2 million or $0.089 per security. Distributions were $0.083. At the property line, strong like-for-like income growth and leasing outcomes more than offset reduced income from the sale of BTP. Net finance costs increased over the period, driven primarily by higher cost of debt from increasing hedge rates and floating rates. Together, these factors resulted in a marginal decline in FFO per security compared to the prior period. Look-through gearing remained low at 26.2% and is expected to increase by approximately 2.3% following the Moorebank acquisition. Even if we fully debt fund our current development pipeline, gearing would remain within our target range, underscoring the strength and capacity of our balance sheet. During the period, we refinanced and extended $150 million of debt on more attractive margins while eliminating short-term refinancing risk with no maturities until FY '28. DXI reported a positive valuation uplift of $14.8 million over the half or a 1% increase on prior book values, driven by strong leasing outcomes and development progress at Jandakot. Cap rate expansion slowed to 3 basis points across the industrial portfolio compared to 11 basis points in FY '25, which reflects stabilizing market conditions and continued investor demand for industrial assets. Our portfolio continues to deliver strong operating performance -- in the stabilized portfolio, we secured 13,500 square meters of leasing with renewal incentives below market and occupancy remaining high at 99.7%. Like-for-like income growth of 7.4% was up from 5.9% in FY '25 and was supported by positive lease spreads on renewals of 7.6% and average rent reviews of 3.3% across the portfolio. We have acquired 4 high-quality assets located at Glendenning, 2 in Dandenong South and as released to the market yesterday, the acquisition of our remaining 50% interest in Moorebank. We've now redeployed the entirety of BTP sale proceeds into acquisitions with a distinct investment thesis. Glendenning is a repositioning opportunity. We've acquired an older asset in a land-constrained Northwest Sydney precinct with strong occupier demand. As such, we've taken the opportunity to bring forward the lease-up of that asset, requiring only minor refurbishments. We will preserve the option for a full repositioning into a modern multiunit facility with a secured DA that we will keep in place. Dandenong South is a reversion play. We're acquiring at a 6% cap rate with approximately 20% under renting, a portion of which we have the opportunity to unlock in a 2 years' time from now. And at Moorebank, the opportunity allows us to lift our Sydney weighting from 6% to 10%, a segment we think will be additive to the portfolio's rent growth profile over time. The recently completed development has material valuation upside potential upon full lease-up of the asset. These acquisitions collectively enhance portfolio quality by deploying capital into supply-constrained markets with embedded rental growth. Turning to our development pipeline at Jandakot, which represents a $225 million investment opportunity and is an important driver of future earnings growth. Since we acquired Jandakot, South Perth rents have grown at over 14% per annum and well ahead of construction costs. And this spread is what underpins our development returns. The chart on the right shows the result and importantly, it shows momentum. Yields on costs have improved from circa 5% when we started to approximately 6.6% that we expect to deliver on our committed pipeline. Overall, the development pipeline is well positioned to provide the fund with an ongoing source of earnings accretion into the future. More specifically, on first half '26 completions at 19 and 21 Pilatus, we delivered a fully leased yield on cost of 7.4% and 7.1%, respectively. Our committed pipeline spans across projects at Jandakot with 77% of income already pre-leased. Moving on to market fundamentals. Notwithstanding the period of normalization in net absorption, which has been influenced by material supply, the outlook is set to rebound. The development economics in Sydney and Melbourne are significantly challenged with rents needing to rise within a range of 10% to 36% in key submarkets before new development becomes viable. Market forecasts assume that all development approved projects proceed, but feasibility constraints suggest that many won't. The third chart on the right projects how this may play out in relation to speculative completions, which are expected to decline by some 44% over 2026 and 2027. These market dynamics position us well for rental growth over the medium term. In summary, we are well placed to continue delivering long-term value for investors, supported by a resilient earnings profile and strong flexible balance sheet. DXI's momentum in activating high-quality developments continues to enhance portfolio quality and drive long-term growth. 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, barring unforeseen circumstances, DXI has upgraded its guidance to deliver FFO of $0.174 per security and distributions of $0.166 for FY '26. Thank you for joining the call, and I will now hand back to the moderator for questions.

[Operator Instructions] Your first question comes from Andy MacFarlane from Bell Potter.

First question for me, if I may. Can you talk about the moving parts that might sit in guidance for FY '26 that's now been upgraded?

Yes. Thanks, Andy. And I think we've called out that the primary driver for the slight upgrade is that relates to the secured pre-leasing that we've done at Glendenning. I guess, there are -- there's always a few additional drivers. So in addition to that, we've done a little bit of extra leasing at Moorebank. The second tranche of the sale of BTP was delayed a little bit. So that will be another positive driver. And I guess all the combination of those things will more than offset roughly a 60 basis point increase in second half floating rates since we set guidance.

Makes sense. Just in terms of Glendenning, can you just talk maybe a little bit about what's changed in terms of the approach there with the asset?

Yes. So what's happened at Glendenning is we've had an opportunity to secure a 3PL tenant that specializes in last mile. They're attracted to the site, given its proximity to the M7, they'll relocate from Smithfield. And I guess, given the certainty that, that offer provides us, we've taken the opportunity to bring forward that income whilst retaining optionality to undertake extensive works for a multiunit facility for which we have a DA secured and that we'll keep on foot and look to utilize potentially the next rental cycle. But that's what's happened with the asset and that security of income has influenced the yield on cost that we are now buying on. But obviously, we have future development profits as a source of upside.

Makes sense. Final one for me, if I may. Just on Moorebank. If you can just talk through the rationale, I guess, for you increasing your stake that you didn't already own and how you're thinking about leasing from here on that asset?

Yes. So firstly, on the acquisition side of things, I mean, obviously, we -- the key one is we get to consolidate ownership in a brand-new asset that we know really well. There's value attached to that. We have a rent guarantee that will protect us in protect our FY '26 earnings piece as we further look to lease up. And we're confident that there's valuation upside once that asset is fully leased, which we hope will translate to an attractive IRR profile for the acquisition. And it's also just really difficult to replicate that kind of prime product in Sydney. As it relates to leasing, we think the platform is making some progress steadily. We've got 4 of the 6 units in total that are now leased. We've got a strong amount of inquiry on the remaining couple of units. Importantly, we're not seeing us lose out to competing product. But we also do acknowledge that as part of that lease-up process that leasing decisions on the part of incoming tenants is taking longer. Landlords are offering more incentives than they previously have, and that's -- sorry, to help keep their sitting tenants in place, and that's making it at the margin harder to attract relocations than some 12 months ago. And I guess on top of that, you've got some macroeconomic uncertainty that in relation to things like interest rates, elections and tariffs and the like that is -- has weighed on and frankly, slowed tenant decision-making. But all in all, we're really happy with the levels of inquiry that we continue to get for that asset, and we're really confident about our leasing prospects going forward.

Your next question comes from David Pobucky from Macquarie Group.

Just a follow-up on Glendenning. Is all of that site pre-leased now? And how much have you had to spend on the modest kind of refurb that you've done or that you're doing now?

Yes. Thanks, David. So it currently is a 1-unit facility. So that incoming tenant will see the asset fully occupied. We do have a smallish scale of CapEx to make some minor refurbishments to the site. There'll be some forecourt works, for example. And that will cost us around about $4 million compared to the $10 million scheme that we were previously contemplating for the multiunit facility.

Just one question on guidance. I think it implies a bit of a skew to the first half, 51%, 49%. Is that normal? Or is there anything kind of one-off that needs to be called out in the first half? Or is that a reflection of the 60 basis point increase in floating rates for the second half?

Yes. Thanks, David. I think it's a couple of factors there. Floating rates ticking up is undoubtedly one of them. I think you can expect our all-in cost of debt to track or edge up slightly higher than what it was in the first half. But also, we had the benefit of BTP high-yielding income in the first half that we won't have in the second half. So that's the other area of skew -- sorry, that's driving that skew.

And just the last one from me on the refinancing that you did, the $150 million, you mentioned that you did it on more attractive margins. Are you able to specify kind of what margin? And you also mentioned no maturities until FY '28. So is there a possibility of refinancing to lock in lower debt margins that might be on offer at the moment?

Yes. So that particular refinancing attracted a saving of about 7 to 8 basis points. And we've -- in addition to that, and I guess to your point around other opportunities, with the acquisition of Moorebank, we've taken on a new debt facility. And that's coming at, again, a really attractive margin at some sort of 15 basis points inside what we feel like market is. So with the more refinancing we do, we are continuing to access cheaper margins.

Your next question comes from Murray Connellan from Moelis Australia.

First question was just on that 7.4% like-for-like growth number. I was wondering whether you could just unpack that for us a little bit. Obviously, quite a bit higher than what the embedded fixed bumps would be and probably in line with what you've been reporting in terms of leasing spreads in the past year or so. What drove that 7.4%?

Yes. Thanks, Murray. I guess the -- that headline number has benefited from what was prior period downtime at 2 Maker Place. So first half '25 had about 3 months vacancy in it for that asset. Obviously, it didn't repeat for first half '26. But in addition to that, lack of downtime, we also benefited from a 40% rent reversion on that particular lease. And so I think that's probably the key driver that's adding to some of the other leases that we've struck over the period.

Got it. And then just having a look at some of the yields on cost that are coming through on these various sheds that are being put up at Jandakot and comparing that to some of the well, basically delivering in the sort of high 6%, early 7% versus the 6.25% for the sort of more longer-term portfolio. I was wondering whether your thinking around return hurdles has shifted much in the past 6 months or so, given -- yes, first of all, it looks as if deliveries of yields on costs have been pretty strong on the more recent completions. But we've also got slightly higher funding costs that have come through in the last 3 months as well.

Yes, Murray, I mean, we haven't had a fundamental reset in terms of how we think about hurdles for Jandakot. You'll note in the pack that we still quote to 6.25% plus target for a yield on cost. And that is to reflect something of a baseline expectation that we have through the cycle. But obviously, as you can see, where yield on costs have trended up towards, we're currently cycling through yields that are better than that. But bearing in mind, it will vary depending on the size of box that we're ultimately putting down on the ground. And -- but at the moment, you can expect sort of more around the high 6%s mark into the near term on our committed segment of the pipeline. So yes, Murray, no real fundamental change in how we think about thresholds, unless, of course, you're referring to some of the other new acquisitions as well.

No, it was more just on the Jandakot development pipeline though the acquisitions are clear. But just lastly, on the balance sheet, broadly speaking, the look-through gearing still looks pretty conservative at sub-30% even when factoring in the acquisition that was announced yesterday. And you've obviously mentioned the pretty deep discount at which the shares are trading. I was wondering whether you might consider deploying a little bit of that balance sheet into a buyback given the accretion that seems to be at play there?

Yes, sure. So just starting with the gearing piece. We are currently at 26.2%. Following Moorebank, that will tick up to about 28.5%. So still some significant optionality on the table. We are comfortable taking that gearing towards the midpoint of the target range as we fund the development pipeline and continue to pursue opportunities. But that will take us on a pro forma basis to the mid-30s. And so where we take it from there will be dependent on the nature and attractiveness of deployment opportunities that are available to us, of which obviously, the buyback is one of those. It's not off the table. We continue to assess that as part of our capital allocation planning. Fundamentally, it does come down to the marginal dollar of spend and where value creation is greatest. We do have a portfolio of scale with diversification, but we are conscious of some of the negatives associated with shrinking the vehicle from where it is now. So still very much an option on the table, but there are obviously broader considerations that go into that decision-making.

[Operator Instructions] Your next question comes from Mithun Rathakrishnan from CLSA.

It seems like the broader sector conditions seem to be stabilizing despite some upward pressure. Could you just talk through how leasing conditions differ across your key markets and which submarkets you would describe as stabilizing versus under pressure? And I guess, how does the forward supply outlook differ across those markets?

Yes. So I guess in terms of how we're thinking about probably the rent side of things, I think is a more general comment. We do expect face rents to continue to grow across most submarkets, albeit the pace has normalized. Growth is becoming more varied by submarket. I think infill locations do continue to outperform non-infill, and we think that aligns well with our portfolio given close to 80% are in infill locations. And obviously, the development feasibility constraint piece in Sydney and Melbourne is supportive for can promote ongoing rental growth. But in terms of how we're thinking about some of the other markets that perhaps are attractive, we think sort of middle ring industrial precincts in supply-constrained submarkets and close to population and transport infrastructure is sort of on our radar and will remain sort of East Coast focus for Sydney and Melbourne, which are sort of our priority markets given -- existing Jandakot land holdings in Perth. But in terms of leasing across our portfolio and how that sort of contrasts with the broader market comments I've made, I mean, we've achieved 7.6% leasing spreads on our stabilized portfolio over the period, and that's across 7 deals. We are continuing to strike incentives that we think are below market, let's call it, at the 15% mark. And I think those leasing results are sort of demonstrate a balanced market more generally.

Yes. And just secondly, I know you alluded to all-in cost of debt jumping 60 bps. And I just guess on -- in terms of the second half cost of debt guidance, could you clarify what base rate assumption you're using?

Yes, sorry. So the quote I made before was a specific reference to the increase in floating rates. So we've assumed a second half floating rate of 4.1%. So that's what's jumped up 60 basis points since we first set guidance. But the way to think about in the movement of our all-in cost of debt is we're current cycling through 4.9% in the first half, and I think you can expect that to trickle up to just a touch over 5% for the full year.

Yes. And just one more, if I may. Occupancy jumped 110 basis points at the half. Are you able to just provide a bit more color in terms of the income contribution from that, whether or not it will be captured across that second half or pushed further back?

There will be most of the shift in that occupancy, I think, is mostly flowing through the portfolio. And we don't expect that to be an incremental driver over the second half, but for the fact that BTP has come out of those occupancy numbers, and that's also influencing the headline number.

There are no further questions at this time. I'll now hand back to Mr. Weate for closing remarks.

Well, I'd like to thank you all again for taking the time to join the call and hear the DXI update, and I really look forward to catching up with you all in the coming days. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.