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

Thank you for standing by, and welcome to the Dexus Convenience Retail REIT FY '25 Results Briefing. [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 full year result. I'd like to begin 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 talk to key highlights for the FY '25 period, financial outcomes, trends we're seeing in the broader market and the outlook for FY '26. Moving to Slide 5. DXC provides investors with access to a high-quality, strategic national network of convenience retail assets with significant diversity of over 90 assets valued at over $700 million, strong exposure to the Aussie car fleet daily and 2.6 million people living within a 3-kilometer radius of our asset base. These attributes are of high value to our fuel and convenience retail customer base. We also have a significant amount of land, over 600,000 square meters with circa 90% zone to high-value uses of commercial, industrial, mixed-use and retail, providing investors with access to a high-yielding land bank with alternative use options over time. That yield is underpinned by defensive income attributes with embedded growth. We have lease certainty reflected by a long WALE of 7.9 years and close to 100% occupancy, exposure to strong tenant credit quality with 95% of tenants being either major national or international brands and consistency of growth reflected by a balanced exposure of fixed and CPI-linked escalators currently generating over 3% growth per annum. Our portfolio is skewed towards metro and highway locations on major roads with strong traffic volumes, and this means our sites will play a critical role in supporting commuters, transport and long-haul travel over the long term. Our development of Glasshouse Mountains will further increase our exposure to highway sites, which benefit from higher traffic volumes and large land sizes that allow for evolution of the overall offering over time. As a manager, we deliver on our investment proposition by continually providing investors with a portfolio that generates defensive income with embedded growth. We take an active but disciplined approach to real estate portfolio management, including portfolio curation and asset recycling into strategic growth opportunities, and we actively manage a prudent capital structure that has regard to shifts in the broader macroeconomic environment. Now turning to highlights for the period. We delivered FFO and EPS of $0.207 per security, slightly above guidance. Our portfolio continues to deliver resilient income with like-for-like income growth of 2.9%, edging up on the back of increased occupancy over the period to 99.9%. We executed $38.8 million of divestments over the first half, which has improved portfolio quality and provided balance sheet capacity for future growth. Gearing of 29.4% sits at the lower end of our target range, which will increase as we continue to deploy capital into growth opportunities. We commenced our fully pre-leased redevelopment of the Northbound site at Glasshouse Mountains, which is expected to generate attractive returns above DXC's cost of capital. We continue to progress planning and lease negotiations at the Southbound site and are actively pursuing opportunities to restock the development pipeline beyond the Glasshouse Mountains project. NTA recommenced growth over the period, supported by underlying rental growth and cap rate compression informed by continued liquidity in the underlying direct market. DXC's income base is diverse and is backed by some of the highest quality national and international tenant covenants in the market. The majority of operators in DXC have committed to long-term reinvestment of their networks, including material enhancement of the convenience retail offering. Turning to sustainability. Our approach aligns to the Dexus Sustainability Strategy. We continue to source 100% renewable electricity and maintain a carbon-neutral position across our controlled assets. We also actively engaged with tenants to support their varied ESG objectives such as solar installation and electric vehicle charging. Environmental initiatives are a core part of our approach to development with Stage 1 of the Glasshouse Mountains redevelopment to include EV charging bays, rooftop solar, rainwater harvesting, grey water reuse and new fuel tank technology. Turning to the financials. FFO and distributions of $0.207 per security was slightly above guidance of $0.206 due to lower-than-expected floating rates over the second half. The FFO result was 1.5% below the prior period, primarily due to a 30 basis point increase in our average cost of debt and moderate dilution from asset divestments, which was partly offset by a solid like-for-like income growth of 2.9%. NTA per security has grown by $0.08 or 2.2% to $3.64. Over the year, we've taken a proactive approach to managing our capital position. We extended $189 million of facilities on improved margins, demonstrating lender appetite for the asset class and the strength of Dexus' platform relationships with lenders. We undertook $66 million of additional hedging at attractive rates, providing greater interest cost certainty beyond FY '26. Our low gearing positions us well for capital deployment options above and beyond the current development at Glasshouse Mountains. 98% of the portfolio was independently valued during the year. Property valuations increased by 2.3%, driven by rental growth and cap rate compression of 8 basis points. Shifts in the headline cap rate across our highway portfolio partly reflects the removal of Glasshouse Mountains Northbound for the June calculation while the site is under construction. It will be included post-completion ahead of the FY '26 result. The portfolio capitalization rate of 6.32% is supported by continued strength in the underlying transaction market and remains comfortably above the marginal cost of debt, which we believe will provide ongoing support to valuations. Transaction markets showed strong levels of liquidity during the year. The strong momentum seen in the first half slowed as we approach the federal election in May. Post-election, there has been a strong increase in volumes, and moderate levels of cap rate compression are evident within the asset class. We continue to see very strong pricing for assets with QSR retailing attached, supporting our underwrite assumptions for the redevelopment of Glasshouse Mountains Northbound. The broader Glasshouse Mountains project presents an opportunity to significantly enhance overall portfolio quality and increase our strategic weighting to highway assets. Construction at the Northbound site remains on track for completion by early 2026, which will include a new expanded On The Run convenience retail offering focused on food-on-the-go, grocery and will include an internal Hungry Jack's QSR. In addition, there will be 3 QSR pad sites with direct leases with McDonald's, GYG and KFC, which will drive additional customer traffic to the site. The Glasshouse Mountains site benefits from exposure to approximately 150,000 passing commuters and transport vehicles every day. And we are confident the position of this asset in the market will command a cap rate comfortably below the project's yield on cost, delivering an attractive return. We continue to progress planning and lease negotiations at the Southbound site and expect to commence the project post-completion of Northbound. In summary, we are well placed to continue delivering defensive and growing property income. Over FY '25, we finalized meaningful capital recycling activity that has materially enhanced portfolio quality and reset the balance sheet, allowing us to focus on growth. We are targeting the execution of growth-based portfolio initiatives, including progressing the redevelopment of Glasshouse Mountains Southbound and securing other growth opportunities, including development pipeline restocking. In relation to FY '26 guidance, we expect to deliver FFO and distributions per security of $0.209, reflecting year-on-year growth of 1.2%. Guidance reflects an attractive distribution yield of over 7% for investors backed by strong income visibility. Thank you for joining the presentation today. With that, I'll hand back over to the moderator for Q&A.

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

Just a couple of quick questions for me. Just number one, could you walk us through the bridge in the FY '26 just in terms of the key moving parts and drivers?

Sure. And maybe starting at the property line. We are assuming similar levels of like-for-like NOI growth in FY '26. That will be partly offset by a moderate increase in all-in cost of debt year-on-year, but also the full period dilution associated with asset sales that were finalized in first half FY '25. So they're probably the key moving parts that you need to think about into FY '26.

Yes. Helpful. Just in terms of capital deployment, maybe are you assuming any more capital deployment during the period?

So guidance does not assume capital deployment above and beyond Glasshouse Mountains Northbound.

Yes, yes. Makes sense. Just on the pipeline, you just mentioned restocking a little bit in your presentation. Can you just remind us what you're focused on that?

Sure thing. Look, we're primarily focused on 2 types of assets within the broader fuel and convenience segment. The first one is convenience retail hubs with multiple uses. So an example of that could be, let's say, within a residential growth corridor that may include uses like fuel with QSR attached potentially needs-based grocery retail and/or large-format retail and potentially the co-location of services such as health. The second category we're looking at is highway sites with truck stop facilities, and many operators in this space are currently under-indexed to their highway sites and are looking to increase their exposure to that segment within the asset class. So they want to do deals.

Helpful. Just on that, I guess, question from that would be how much are you willing to spend and progressed, I guess, is that kind of thinking?

Sure. I mean, obviously, we currently have gearing at below the midpoint of the target range. And so that means we are fully funded to complete Glasshouse Mountains Stages 1 and 2. And if you were to assume completion of those on a pro forma basis, that would take gearing up to about 33%, 34%. And so we think we've got another, let's call it, $50 million to $60 million worth of buying capacity while still remaining comfortably within our target gearing range. In terms of where are we in the process, we are in discussions with multiple third-party developers to restock with projects, maybe not too dissimilar in the way in which we have done Glasshouse Mountains. But a lot of the projects we're looking at are in the planning stages with discussions with anchor tenants that are ongoing. And so they take time, and there's a decent gestation period between discussions with developers to actually landing on a commitment for a site. So we'd love to be in a position where we've secured another 1 to 2 projects during FY '26.