DigiCo Infrastructure REIT (DGT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the DigiCo Infrastructure REIT FY '26 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. David Di Pilla, DigiCo's Non-Executive Director. Please go ahead.

Good morning, and thank you for joining us for DigiCo's Financial Year '26 Full Year Results. Before turning to the results, I'm pleased to be here today to provide an update on DigiCo's management structure and an update on why the group is so excited about the outlook for the entity. I'm pleased to confirm the Board's appointment of Simon Mitchell and Ralph Goninan as Co-Heads of DigiCo effective today, while retaining their existing roles as Chief Financial Officer and Chief Development Officer, respectively. I'm also providing -- pleased to confirm the appointment of Damian Secen as Managing Director, Infrastructure for the HMC Group. Damian brings more than 25 years of infrastructure investment and development experience, including senior leadership roles at Macquarie Asset Management and Equis. He'll provide senior oversight across HMC's infrastructure businesses, including DigiCo and Illuma Energy. These appointments formalize a structure that is operationally working well and provides continuity as we execute on the next phase of growth. On behalf of the Board, I'd like to thank Chris Maher for his leadership as Interim CEO of DigiCo and his support through the transition process. We wish Chris every success in the future. Now turning to the result for financial year '26 and a year of delivery by the team. We delivered on the commitments we made to security holders. We completed the first 20-megawatt stage of the Sydney 1 project. We commenced, and are now well advanced, on the recycling of capital from lower-yielding U.S. assets, and we've positioned the balance sheet to fully fund our highest conviction growth opportunities in Australia. These achievements underpin our confidence in the business and support our conviction in our digital platform. Three key messages from today's result I'd like you to take away. Firstly, the remaining 52-megawatt expansion of the 88-megawatt Sydney 1 project is fully funded through existing liquidity and available debt facilities with no equity required. Second, we've secured LOIs with customers for the entire remaining 52 megawatts of capacity with high-quality counterparties. Documentation is in an advanced stage, and we expect execution in the near term. And third, the successful completion of the first 20-megawatt stage of the Sydney 1 development demonstrates our ability to execute and deliver complex projects at scale. These achievements reflect the deliberate investment we've made since IPO in our capabilities. With a team of over 100 dedicated professionals, DigiCo has genuine in-house technical expertise across data center operations, leasing, engineering and delivery. It's one of DGT's most important competitive advantages as we look into the future. Now with the combination of this capability, we move toward a clear pathway to generate an expected Australian platform stabilized EBITDA of $250 million. With that, I'll now hand over to Simon and Ralph to take you through today's presentation.

Thanks, David, and let me add my welcome to those on the call. I'm excited to be presenting this result to you today in my new role as Co-Head of DigiCo. Starting on Slide 5. DigiCo's first full year reflected strong outcomes across earnings momentum, leasing, development and capital management. Underlying EBITDA was $127 million, above the $125 million guidance, driven by strong growth in the Australian platform as new leasing revenue commenced. Distributions for FY '26 were $0.12 per security, also in line with guidance and more than covered by FFO. We are seeing unprecedented demand for high-quality capacity in the Sydney market and have signed LOIs for the remaining 52 megawatts of capacity at Sydney 1. Final binding documentation is expected to be signed in the coming weeks. We've also agreed terms to extend our leases at our remaining U.S. assets in Kansas City and Dallas for 10 years to 2036. This significantly enhances value and optionality for both assets. During the period, we made significant progress on development, which Ralph will talk more about soon. After successful completion of the Sydney 1 20-megawatt project, we are in the final stages of construction contracting for the remaining 88-megawatt project. We have been able to accelerate this time line with the first tranche of capacity expected to be online in the fourth quarter FY '27 and the remainder to be completed in FY '28. This revised schedule will result in most of the capacity being commissioned in calendar year 2027, which is highly sought after by customers. Our 15-megawatt expansion of the Adelaide 1 facility is also progressing, and we expect this to be online in FY '28. The combination of this accelerated development plan at Sydney 1 and Adelaide 1 with tangible progress on customer contracting means that we expect the Australian platform of DigiCo to generate stabilized EBITDA of around $250 million following these capacity expansions. During the year, we also significantly improved the group's balance sheet with our U.S. assets on track to be sold to reduce net debt from $1.6 billion to around $450 million. We also reached agreement with our lender syndicate to upsize our Australian senior facility by $200 million to $1.45 billion. Together, these initiatives give us $1.2 billion of pro forma liquidity, which is more than enough to fund the Sydney 1 development. I'll now hand over to Ralph to take you through our development and growth outlook.

Thank you, Simon, and good morning, everyone. I want to start by reiterating Simon's words that it is a pleasure to be here today presenting in our new capacity as Co-Heads of DigiCo. DigiCo's strategy is clear. We will build on our existing momentum by doing 3 things: First, we'll deliver; next, we'll expand; and finally, we'll scale. To achieve this strategy, I would like to outline some of our key priorities that will enable sustainable growth over the next 3 years and beyond. First is geographic focus. Following the sale of the U.S. assets, we will redeploy the capital back to the Australian market, which is both supply constrained and where our national in-house delivery and operational capability is focused. Second is focusing on delivering our current value-accretive projects. As mentioned, at SYD1, we have completed the 20-megawatt project, and we are accelerating the next 52-megawatt deployment. Third is capital management and funding. We will continue to develop SYD1 through existing balance sheet capacity and committed facilities with no further equity required. And finally, we will focus on expansion and growth. Initially, we'll focus on our adaptive brownfield developments where we'll be making use of available power to expand our existing facilities. We are also actively evaluating strategic greenfield opportunities that have access to renewable power. By focusing on these priorities and building on our established capabilities, we are well positioned to execute on our strategy, which is to deliver, expand and then scale over the next 3 years and beyond. Turning now to Page 8 to talk about Sydney 1. We are very pleased to be able to announce this morning that the remaining SYD1 capacity is substantially committed with terms agreed under LOIs executed with high-quality customers to be delivered in 10-megawatt tranches, which accounts for the remaining capacity at SYD1. Over the past 6 months, several critical milestones have been achieved, which positions us to successfully accelerate the delivery of SYD1's remaining capacity to meet this customer demand. We've received planning approval, completed the design and ECI, early construction works have commenced and Laing O'Rourke has been appointed as an integrated delivery partner. Delivery will be phased with the first 10-megawatt tranche targeted to be energized and income producing by the end of FY '27 and the remaining 42 megawatts targeted through FY '28 with the ability to accelerate, subject to customer requirements. Moving to Slide 9. These photos show elements of the first 20 megawatts, which have been delivered on schedule and within budget, and importantly, within a live operating data center. Some of the 20-megawatt works also enable the next phase of the 52-megawatt project, which will result in a more accelerated program. This project has allowed us to further build our in-house engineering and delivery capability while also developing key relationships with our contractors and across the broader supply chain. As a result, we are well positioned to deliver the remaining 52-megawatt expansion. Turning now to Slide 10. Aligning with our strategy to expand and then scale, Adelaide 1 15-megawatt project is another adaptive reuse development, which is underpinned by accelerating customer demand and is targeted for completion by the end of FY '28. Beyond our existing assets, we are actively evaluating greenfield opportunities targeting large-scale AI campuses, which align with the federal government's proposed new data center framework. We are currently in the planning and due diligence phase and look forward to providing further updates as we progress. On Slide 11, building on our development pipeline and to illustrate the implementation of our strategy, I would like to outline our pathway to an Australian platform stabilized EBITDA of around $250 million. Starting with the FY '25 billing capacity of 21 megawatts, we have achieved a 95% increase in FY '26 to 41 megawatts. As mentioned, we have terms agreed under LOIs with high-quality counterparties on a long-dated basis for the balance of the 52 megawatts of SYD 1. We expect this to start converting to billing capacity from the end of FY '27 and be fully online by the end of FY '28. Next is the 15-megawatt brownfield expansion at Adelaide 1, which we have unlocked from within our existing footprint. This development opportunity is targeted to be online and billing by the end of FY '28. Together, these developments would result in 108 megawatts of Australian billing capacity, which is a 123% increase on our current FY '26 billing capacity. Delivery of the additional 67 megawatts is expected to require approximately $1.2 billion of incremental CapEx over the next 2 years. These developments underpin the pathway to a stabilized EBITDA of around $250 million across the Australian platform. So the strategy is clear. The demand is there and accelerating, the development is funded and we have a clear pathway to around $250 million of stabilized EBITDA across the Australian platform with meaningful upside beyond it. I'll now hand back to Simon to run through the FY '26 financial results.

Thank you, Ralph. Turning now to Slide 13, where we show earnings and FFO results for the 12-month period to 30 June 2026. The comparable period is from 1 November '24 to 30 June '25, which only includes 6.5 months of trading, meaning the numbers are not directly comparable. Revenue for the year was $239 million, representing a 21% increase for the second half versus the first half. This growth largely came from increased billings in the Australian business and a full year -- half year contribution from the first 2 phases of the Chicago data center, partly offset by some foreign currency headwinds. Underlying EBITDA was $127 million, slightly ahead of guidance. EBITDA showed strong progression through the year, growing by 21% second half on the first half, which was in line with the revenue growth. Net interest for the year was $58 million, which was higher in the second half, reflecting the phased delivery of Chicago and investment in the Sydney 1 20-megawatt project. Deducting this interest expense and after adjusting for the management fees settled in scrip results in adjusted FFO of $71 million. Out of this, we declared a $0.12 distribution for the year, which amounted to a 94% payout of FFO. Consistent with our treatment in the first half, pre-completion rent received of $37 million relating to Chicago and Sydney 1 has been included in revenue and underlying EBITDA. Also consistent with the prior period, $13 million of pre-completion interest expense attributable to this rental income has been included in adjusted FFO. Moving to Slide 14 and balance sheet. DigiCo ended the period with cash of $206 million and net debt of $1.6 billion. Net assets were $2.3 billion, which equates to a net asset value per security of $4.13. The 9% decline in NAV over the period largely reflects the adverse foreign currency impact on the U.S. dollar-denominated assets and ongoing depreciation of the Australian asset base. The independently valued gross asset value was $4.1 billion, reflecting an adjusted NAV per security of $4.47, which was largely flat during the year. Pleasingly, the Australian portfolio valuation rose by 7% to $2.5 billion, but this was largely offset by adverse foreign currency movements on the U.S. assets. Capital expenditure amounted to just under $180 million, predominantly driven by the 20-megawatt project at Sydney 1 and early development work for the 88-megawatt project. After entering into contracts for sale in Chicago and Los Angeles, these assets have been moved to assets classified as held for sale at $1.2 billion. The remaining $386 million of investment properties represents the Kansas City and Dallas assets. Turning to Slide 15, capital management and funding. We ended the period with a strong liquidity position of $708 million, which includes the upsizing of our Australian senior facility by $200 million. Post this upsize, we now have $500 million of undrawn debt facilities. Based on our announced U.S. asset sales, we expect to receive $470 million of net equity proceeds in the first half of FY '27, which will result in $1.2 billion of pro forma liquidity. This provides more than enough funding for the full expansion of Sydney 1. Gearing was 39%, close to the middle of the 35% to 45% target range. All interest rate exposure remains hedged to maturity at an effective all-in cost of 6%. The weighted average debt tenor is 2.6 years with no maturities before FY '29. Overall, the balance sheet remains robust, liquid and well positioned to fund our development projects. Now turning to an update on our U.S. assets on Slide 16. We continue to make strong progress in releasing capital from our U.S. asset portfolio to redeploy into our higher-return Australian development projects. Before the end of the financial year, the Chicago project reached substantial completion with the tenant now occupying and paying rent on all phases of the project. Completion of this sale is expected by the end of the first quarter of FY '27. The property sales in Los Angeles are undergoing final due diligence, and we expect completion to occur in the second quarter of FY '27. After the end of the period, we reached agreement with the enterprise tenant of our Kansas City and Dallas data centers for a 5-year lease extension. This extends the current lease term to a total of 10 years expiring in 2036. These assets continue to provide high-quality cash flow for the group, and their role in the portfolio will continue to be assessed in the context of overall group capital needs. Moving now to outlook and guidance on Slide 19. FY '27 underlying EBITDA is expected to be $120 million to $125 million, inclusive of 2 months of Chicago 1 EBITDA. Excluding Chicago, FY '27 underlying EBITDA is expected to be between $110 million and $115 million, representing 15% to 21% growth on an FY '26 like-for-like basis. This guidance incorporates minimal contribution from the 52 megawatts expansion at Sydney 1 with the first 10 megawatts expected to be operational in late fourth quarter FY '27. CapEx in FY '27 is expected to be between $300 million to $500 million, largely driven by the Sydney 1 capacity expansion and expected to be second half weighted. This CapEx is expected to be funded from existing cash reserves and undrawn debt facilities. Distributions in FY '27 are expected to total $0.15 per security, representing 25% growth on FY '26. Over the medium term, DigiCo expects to maintain its distribution policy of paying out 90% to 100% of FFO. With that, I will now hand back the call to the operator for questions.

[Operator Instructions] Your first question comes from Richard Jones with JPMorgan.

Just wondering if you could provide what return on costs you're anticipating out of the Adelaide expansion.

So Richard, we've talked about an overall CapEx forecast or guidance for the full Sydney 1 development and Adelaide together, and that's the $1.2 billion. We had previously talked about a yield on cost of around 15% on our development project at Sydney 1. Across the whole of Sydney 1 and Adelaide 1, we're expecting to get close to that 15%. But just given recent cost escalations for trades and also for equipment, we think we will be slightly below 15%, but pretty close.

So just to confirm, 15% you're still calling on SYD1, but combined with Adelaide is slightly below, is it?

Pretty much, yes.

Okay. Just on Dallas and Kansas, can you talk about how the lease extensions came about and whether you see those as core holdings moving forward?

So the lease extensions that we've negotiated on those 2 facilities were really just to give the tenant more certainty and visibility on the assets. And it's a very good outcome for the group to be able to extend the full lease term to 10 years. And I think that's a proactive measure by us to extend those and also to enhance the value of the assets.

And have they been valued post that extension?

No, they haven't. So the valuation that you see, well, the $4.1 billion gross asset valuation that we just talked about today is pre those lease extensions.

Okay. Good one. And then just on the final question, sorry, the greenfield opportunities, are they -- there's nothing that you have your hands on from a land perspective at the moment, right? You're just investigating opportunities. Is that how we read that?

Richard, I'll take that question. It's David. DGT is working with HMC on a couple of opportunities and we're not going to get into too much detail on the call today, but we have got a number of opportunities under evaluation and have got options in place over land.

Your next question comes from Tim Plumbe with UBS.

Just 2 questions from me, if possible, please. Simon, just on the 52 megawatts LOIs, can you maybe give us a little bit of color in terms of how many counterparties that's with or maybe like a bit of a broad mix of customers, like 2/3 hyperscalers, 1/3 Neo cloud? Presumably there's no enterprise within that. But if you can give any color to that, that would be great. That's question one. And then just the second one around BNE3. Previously, you guys were talking about that as a potential opportunity. It's no longer in the pack. Should we assume that, that is no longer an opportunity?

Yes. Thanks, Tim. Let me just cover off on the 52-megawatt LOIs. So as we discussed, we're able to bring online, we think, quite a unique amount of capacity in calendar year '27, which is highly sought after by customers at the moment. So that's enabled us to agree to LOIs with multiple parties that we're very happy with. These are high-quality counterparties. We believe they will be accretive to -- significantly accretive to average lease term for the asset. It's obviously very difficult for us to go into any more detail about who those parties might be but we are very confident that we will reach buying documentation stage in the coming weeks.

And thanks for the second question, Tim, it's Ralph here. So consistent with our strategy for growth, we are focusing on our existing assets in the short term, predominantly in Adelaide. We think this is the most accretive use of our capital. We're leveraging off an existing asset and expanding some available power. BNE continues to remain as an option, but we're focusing on Adelaide in the short term.

Your next question comes from David Pobucky with Macquarie Group.

Just following up on the last question around customer demand. If you could more broadly talk about how that has evolved over the past 12 months? And again, more broadly, what are you seeing in terms of pricing discussions and leasing negotiations?

Yes, sure, David. So as I mentioned, we see ourselves in quite a strong position because we're able to bring on capacity over the next 18 months. And we're seeing very tight conditions across the market for anything that's available over the next 18 months, especially in Sydney. So, in terms of the customers that we are talking to and the capacity requirements that they're looking for, we're seeing very favorable conditions in terms of pricing.

Just the second question for me on capital management. Just curious to know how you're thinking about weighing up capital returns to shareholders. Clearly, the distribution guidance for FY '27 is strong versus investment in kind of further developments as well as kind of how you're thinking about the balance sheet post the CapEx that you need to spend on SYD1 and Adelaide.

Sure. So in terms of balance sheet and capital management, we've talked about the strong pro forma liquidity position we will have post the U.S. asset sales of $1.2 billion. And we've talked about the $0.15 distribution for FY '27. We're expecting that distribution to be mostly covered by FFO, but there was an intention by the Board to return a little bit more to shareholders than the likely FFO generation. And we can see a pathway to that dividend obviously growing from the $0.15. It's obvious with the $250 million stabilized EBITDA number that we talked about today that we have plenty of potential to raise that distribution over time.

Your next question comes from Ben Brayshaw with Barrenjoey.