Full Year 2026 Dexus Industria REIT Earnings Call
Speaker #1: 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.
Speaker #1: Today I will cover highlights, financial results, portfolio performance, and growth drivers before moving to Q&A. DXI provides investors with access to a diversified portfolio of 90 assets valued at $1.5 billion, with 80% of the population within 60 minutes of our asset base, 77% located in infill markets, and a significant 217 million dollar development pipeline at Ascend at Jandicot.
Speaker #1: DXI's investment proposition is to generate strong risk-adjusted returns built on three core pillars of secure and growing income, active portfolio management, and prudent capital structure.
Speaker #1: Occupancy has consistently remained above 98%, supported by proactive management, forward leasing risk. We have successfully transitioned to a 100% industrial portfolio setting the stronger foundation for future performance, and development pipeline is a key differentiator that drives FFO growth and our balance sheet discipline has allowed us to pursue acquisitions fund development and execute a meaningful buyback all in parallel.
Speaker #1: Over the period, the fund delivered 17.6 cents per security above upgraded guidance, supported by strong leasing outcomes, while distributions totaled 16.6 cents per security.
Speaker #1: Like-for-like income growth of 5.3% was underpinned by strong rent reviews and positive rent reversion, with re-leasing spreads of 21.4% providing a further tailwind to future earnings.
Speaker #1: 45,200 square meters of Jandicot completions achieved a strong yield on cost of 7%. Our balance sheet strength was maintained with look-through gearing of 31.2% at the lower end of our target range.
Speaker #1: Capital was recycled into acquisitions at Glen Denning, Dandenong South, and Moorbank, and our securities buyback program is being executed at pace and has been upsized to 5%.
Speaker #1: Post-balance state, a zero-cost hedge book restructure was completed, and I'll cover this in further detail later in the presentation. DXI offers a differentiated combination of secure income embedded growth and a development pipeline of scale.
Speaker #1: Income security is supported by high occupancy of 98.8% and a proven track record of de-risking near-term expiries through forward leasing. Approximately 87% of income is subject to contracted rental increases of at least 3%, and our development pipeline provides a clear pathway to FFO accretion over the medium term.
Speaker #1: DXI remains committed to delivering sustainability outcomes that generate both environmental and financial benefits. Our sustainability initiatives include incorporating renewable energy solutions such as solar and battery storage into new developments, which not only reduce environmental impact but also enhance asset appeal and long-term value.
Speaker #1: Turning to our financial results, DXI delivered FFO of 55.7 million dollars, or 17.6 cents per security, ahead of upgraded guidance. Distributions were 16.6 cents, reflecting the payout ratio of 94.4%.
Speaker #1: The divestment of BTP drove a net reduction in overall property income, which understates the strength of underlying like-for-like property income growth of 5.3%. Notwithstanding that strength, the combined impact of a 60 basis point rise in our cost of debt and the sale of BTP were the key drivers of year-on-year reduction in FFO per security.
Speaker #1: Ultimately, FY26 was a transition year one in which the underlying industrial portfolio performed strongly. A key differentiator for DXI is its balance sheet strength, with look-through gearing of 31.2% at the lower end of our target range.
Speaker #1: During the year, we executed 358 million dollars of new and extended facilities at competitive pricing and entered into 550 million dollars of new hedging including interest rate caps to benefit should rates decline.
Speaker #1: Post-balance state, we undertook a zero-cost hedge book restructure. This brings forward higher rates to reflect mark-to-market debt costs, interest cost in FY27 will be approximately 1.4 million dollars, or 0.5 cents per security higher following the restructure.
Speaker #1: From FY27, the flatter profile allows property income growth to translate more clearly into the bottom line. DXI reported a valuation uplift of 19.1 million dollars.
Speaker #1: Or 1.3% over the year, supported by rental growth and development activity. Ascend at Jandicot remains a key driver of valuation growth potential, underpinned by tight perth market fundamentals.
Speaker #1: Turning to our portfolio performance, the portfolio delivered strong operating performance across a period of high activity. 170,000 square meters of leasing was secured across the stabilized and development portfolio, while re-leasing spreads of 21.4% reflect under-renting in the existing portfolio with key outcomes at 89 West Park Drive, Deremet, 50 Jayco Drive, Dandenong South, and Jandicot.
Speaker #1: Spreads achieved this year predominantly relate to FY27 to FY29 expiries, making them an additive driver of FFO growth over the medium term. On the four acquisitions completed during the year, we have made a strong start to executing against underwrite assumptions.
Speaker #1: At 32 Cox Place Glen Denning, we completed the repositioning of the asset which was acquired with vacant possession, we secured a five-year pre-lease across the site completely de-risking the investment while retaining future larger-scale value-add upside potential.
Speaker #1: In Dandenong South, the positive re-leasing spreads of 20.8% were above underwrite, and at 12 Church Road, Moorbank, we leased an additional unit and saw the capitalization rate tighten by 12.5 basis points contributing to a 3.1 million dollar valuation uplift.
Speaker #1: Collectively, these acquisitions demonstrate the funds' ability to drive value through active asset management. Turning to our development pipeline at Jandicot, during FY26, four projects across 45,000 square meters were completed at a total cost of 43 million dollars, importantly these completions are 100% leased compared to average pre-leases of 47% at the time of commencement and achieved a yield on cost of 7% above our 6.25% plus development target.
Speaker #1: These completions demonstrate consistent execution with momentum continuing across the pipeline. Since acquisition, South Perth Rents have grown at over 16% per annum well ahead of construction costs, a spread that directly underpins our returns.
Speaker #1: Yields on cost have improved from approximately 5% at commencement to 7% in FY26, reflecting the improving return profile over time. Looking ahead, the committed pipeline spans five sites, with the majority expected to complete over FY27 into the first half of FY28.
Speaker #1: These projects are approximately 68% pre-leased and are estimated to deliver a yield on cost of 6.6% above our target of 6.25% plus. Post-balance state, two additional pre-leases will see the activation of a further 20 million dollars of development at a yield on cost of 7.0%, which will increase overall pre-leases from 68% to 76%.
Speaker #1: In the context of impact to FFO, it is important to reiterate that every dollar spent at Jandicot going forward translates into a P&L incremental yield on cost of above 8%.
Speaker #1: This is because the land has already been acquired and fully reflected in our cost base. Through to FY30, we expect 30 to 40 million dollars of completions per annum providing a material driver of FFO accretion over that period.
Speaker #1: Industrial market backdrop is improving. Across capital cities, rents required to justify new development sit materially above prevailing market rents, making new supply difficult to justify.
Speaker #1: Developers are responding starts are down materially from the peak. Construction costs are forecast to compound well ahead of inflation through to 2028, as data centers infrastructure and Olympics related work compete for land, labor, and specialist trades.
Speaker #1: This supports tightening vacancy a pullback in incentives and ultimately rental growth. The investment case for DXI remains clear. We offer an attractive distribution yield of 6.8% paid quarterly compelling in both absolute and sector relative terms.
Speaker #1: Underpinning that yield are multiple drivers of growth, our development pipeline, embedded rental escalations, aided by our restructured hedge book. With DXI trading at a 29% discount to NTA investors can access that income and growth at a compelling price entry point backed by high quality industrial portfolio.
Speaker #1: Looking ahead, we are well positioned to continue delivering long-term value. Our focus remains on disciplined execution of the buyback program, continued build out of the development pipeline, and preserving balance sheet flexibility.
Speaker #1: The hedge book restructure reflects a deliberate resetting of FY27 allowing future property income growth to translate more clearly into the bottom line. Barring unforeseen circumstances, DXI expects to deliver FY27 FFO of 17.0 cents per security and distributions of 16.6 cents which remains in line with FY26.
Speaker #1: I'll now hand back over to the moderator for a broker analyst Q&A.
Speaker #2: Thank you for broker analyst. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced.
Speaker #2: If you wish to cancel your request, please press star then two. If you're on a speakerphone, please pick up the handset to ask your question.
Speaker #2: The first question today comes from Andy MacFarlane from Bell Potter. Please go ahead.
Speaker #3: Oh, hi Jason team. You talked about or you spoke about the hedge book restructure. Can you just walk through the rationale and what it means for FY27 and for FY28 moments?
Speaker #1: Thanks Andy. I think as I mentioned some of my final remarks in the speech there. I mean what we've done is quite deliberate. We've brought forward rates to mark to market levels to establish a flatter hedge cost profile from FY27 and we think that allows underlying property income growth to translate much more clearly into the bottom line earnings off that reset base.
Speaker #1: And it does make it clear we think the market participants like yourself to evaluate the FFO trajectory from here. A couple of points to note.
Speaker #1: The restructure that we've mentioned that does reduce FY27 FFO by 1.4 million dollars or 0.5 cents per security does account for the majority of the decline.
Speaker #1: Versus FY26, and I'd reiterate that the restructure was an MPV neutral one with zero upfront costs.
Speaker #3: Thank you. Looking at the payout ratio, it's about 94% in FY26. The guidance for 27 reflects a step up to about 98. Actually, we'd be thinking about the payout ratio going forward for me.
Speaker #1: Thanks Andy. Look, a good question and no doubt a topical one. At the moment, I'd start by talking to the fact that our FFO settings that we've provided obviously set like a new platform from which we can grow earnings.
Speaker #1: And so naturally that provides us with greater options in terms of where we want to peg distributions going forward. Strategically, we do think about distribution settings from a couple of different lenses.
Speaker #1: The first one being the underlying cash flow coverage you have to support distributions. That's a clear one. But the other one is your balance sheet settings.
Speaker #1: We know that if you run gearing lower, you naturally have greater ICR coverage. And that provides you with more flexibility in terms of how you want to run a particular distribution setting.
Speaker #1: And so I think they are the mix of things that we look at. They're definitely the mix of things that we'll take into account when we're looking at setting distributions in 12 months time from now for FY28.
Speaker #3: The final one if I may, just the leasing spreads at 21%. Can you just talk about what's driving that level?
Speaker #1: Yeah, sure. I mean, obviously it was a great result for us. The significant components really relate to forward leasing that was achieved at Deremet, which was an FY28 expiry Dandenong South as we mentioned, which also was a 28 expiry and Epping, which was an FY29 expiry.
Speaker #1: So reducing risk well ahead of expiry in the process. The standout was really Deremet. It delivered the largest uplift at about 52% above passing.
Speaker #1: And pleasantly, the rental spread at 50 JCO Drive in Dandenong South, that's our recent acquisition, achieved a 21% positive reversion which outperformed our acquisition underwrite.
Speaker #1: And I should also mention Janacot in that process. I mean, across the estate more generally, we've achieved 15% positive spreads across the stabilized segment of that estate.
Speaker #1: Supported by strong renewal and new tenant outcomes. So these deals ultimately reduce expiry risk and provide contracted income growth across FY27 to FY29.
Speaker #3: Thanks Jason.
Speaker #2: Thank you. The next question comes from David Pobucky from Macquarie Group. Please go ahead.
Speaker #4: Good morning Jason and team. Thanks for taking my questions. Just a follow-up on FY27 guidance and some of the key drivers there. So if you exclude the hedge restructure, expected FFO in 27 would have been roughly in line with FY26 despite strong leasing momentum and development completion.
Speaker #4: So if you wouldn't mind just walking through some of those other moving pieces between FY26 and 27 please.
Speaker #1: Sure thing David. Thanks for the question. So the way to think about the compositional drivers and starting with the positives, we are assuming like for like growth in there of approximately 3%.
Speaker #1: That's obviously supported by the contracted rental increases and positive leasing outcomes. But we have allowed for some prudent downtime in there, in particular at the final unit that we're looking to lease up at Moorbank and an asset called Five Compass Drive at Janacot.
Speaker #1: And so we're assuming some pretty prudent lease up timing expectations across those couple of sites that's probably pulling down like for like growth a little bit.
Speaker #1: We obviously will have continued positive contributions from completed and active developments. We are also assuming that we complete the full extent of the 5% buyback by around, let's call it, March next year.
Speaker #1: They're the positives. In terms of the offsetting drivers, there will be some ongoing full period dilution associated with the sale of BTP. And excluding the post balance state restructure, we naturally would have been stepping up our interest rate cost as well.
Speaker #1: And so that's sort of how to think about arriving back to that sort of flat outcome. Also, sorry, floating rates obviously expected to increase into next year.
Speaker #1: And I guess finally, we are assuming an all-in interest expense of 6% in FY27. That is our marginal cost of debt in the market today.
Speaker #1: And really speaks to the growth potential in underlying earnings from here with that in our base. In 27.
Speaker #4: Thanks Jason. That's really comprehensive. I appreciate that. If I could just follow up on the comment you made around completing the full 5% buyback, obviously the stock's trading at a substantial discount to NTA still.
Speaker #4: I mean, do you view the buyback as a superior use of capital to acquisitions and development activity or do you believe that you've got the balance sheet capacity to pursue all of those levers?
Speaker #1: Yeah. So I'll start with the opportunity set. In front of us. I mean, obviously we have acquisitions in the market. We have the buyback.
Speaker #1: We have continued deployment into Janacot. Of those three, the latter two, the buyback and Janacot development deployment screen obviously much more attractive. And so they are in combination are our two key areas that we'll look to continue deploying.
Speaker #1: And so that's why we're sort of confident in including that within guidance. If we assuming that current share price levels remain depressed, we will keep buying.
Speaker #1: In terms of our funding position, look, we're starting off a point of what around about 31%. And so we have plenty of we're fully funded to continue full development of Janacot and full execution of the buyback program.
Speaker #4: Just the last one. From me, just in terms of that funding position being at the lower end of your target gearing range. I mean, how do you think about where you want that level to sit, medium term or even kind of in the next 12 months as well?
Speaker #1: Yeah, good question. I mean, I think we've displayed an appetite to generally run it a little more conservative. They're not I did mention in my answer to Andy earlier before around distribution settings and the additional flexibility that running lower gearing level does provide you with.
Speaker #1: And so we run the fund with an eye to the value and optionality. And we think running balance sheet gearing or look through gearing rather at a level that's under 35% will always give you that will obviously always give you deployment optionality.
Speaker #1: And that's what we value. So I think you can expect us to continue to manage that below that level.
Speaker #4: Thank you. Appreciate it.
Speaker #1: Thank you.
Speaker #2: Thank you. The next question comes from Leanne Truong from CLSA. Please go ahead.
Speaker #5: Good morning Jason. Just a question on your development pipeline in particular, Janacot. We can see that one of the slides construction cost has gone up a bit.
Speaker #5: I guess, and I think one of page 27 as well, some of the latter projects expecting a uterine cost of 6%. So I mean, I guess post financial year 27, do you expect to maintain I guess these strong yield on costs or you expect that to fall a little bit?
Speaker #1: Thanks Leanne for the questions. I guess the slide where we've shown where net face rents have sort of moved to within that market and the associated rise in construction costs is to provide the market with an understanding of our starting point.
Speaker #1: Our starting point is strong. We think that there are well prospects for continued rental growth within Southeast Perth market can continue. And I guess we're just been obviously very open and direct about the fact that construction costs do continue to rise and that does pose a risk.
Speaker #1: But our expectation more generally is that we will continue to print yield on costs that are strong and arguably above our through the cycle target range for now.
Speaker #1: And I think that's demonstrated by the fact that the 20 million dollars that I announced in this speech of new commitments that have occurred post balance date, they are at a yield on cost of 7.0%.
Speaker #1: So I think where we sit in the market today it's still very strong.
Speaker #5: I guess and just a follow up on that. I mean, so your target 6.25, you've undertaken a project with a yield on cost of 6.
Speaker #5: I guess the rationale behind that.
Speaker #1: Sorry. Sorry, can you just repeat the question Leanne?
Speaker #5: Yeah. So you've got a target of 6.25 for a yield on cost. But it looks like 25 Centurion Place you've got a yield cost of 6%.
Speaker #5: I mean, why I guess are you going ahead with that project if it's below your target? Yeah.
Speaker #1: Yeah. Thank you Leanne. My apologies for not picking that full question up earlier. So that development is unique. It forms part of the airside part of that broader estate and the airport side of the broader industrial estate.
Speaker #1: And it does reflect a 20-year lease to the government. And so naturally the strength of that covenant, the lease duration, all do point to a rationale that aligns with a tighter yield on cost for that particular stage.
Speaker #1: It will also open up a pathway for additional development on that airside. It's a new part of the site that has is only just sort of been opened up for development.
Speaker #1: And so that's the rationale for that particular site. But I would remind you that we think about development of Janacot in aggregate terms. And so if we're doing the vast majority at 7 and we have the odd development at 6 in aggregate terms, it's still a very strong profile and the risk adjusted basis.
Speaker #5: Yeah. Thank you. And just a small question from me. Just a follow up on the payout ratio. How much of AFFO are you paying out?
Speaker #5: Well, the financial year 27 guidance early, sorry.
Speaker #1: Yeah. Look, I mean, we don't formally guide to AFFO. In the annual report on page 28, look, we do have a breakdown of the components.
Speaker #1: And I'm happy to sort of work with you offline to sort of get a feel for what that should look like. But post BTP, the capital drag on AFFO has improved.
Speaker #1: Industrial assets have always had a lower capex burden than suburban office. But yeah, look, it's just not a metric that we're providing guidance to.
Speaker #1: And I think I would bring you back to some of my comments earlier around how we think about distribution settings being a reflection of both free cash flow to support distributions, but also your balance sheet settings that provide some additional flexibility around that.
Speaker #5: Yeah. Thanks Jason.
Speaker #1: Thank you.
Speaker #2: Thank you. The next question comes from Murray Connealon from Mollis Australia. Please go ahead.
Speaker #4: Jason. You previously spoken to FY28. Murray profile having been fairly under rented. And obviously much of that under renting has come through in the leasing that you've done in the last six months.
Speaker #4: But I was wondering whether you could just give us some guidance on the remaining expiry profile and what your perception is of under renting there or what passing is versus where you think market is.
Speaker #4: And maybe just a comment on the that metric for the broader portfolio as well.
Speaker #1: Sure. So I'll start with the 28. FY28 component and obviously a lot of the positive leasing spreads that we are releasing as part of today's result did relate to FY28.
Speaker #1: So the remaining expiry is in that year. We think under rented now probably around about 6% or thereabouts. Murray, and I think we quoted around about 15% under renting at the half year.
Speaker #1: So naturally we have crystallized a lot of that. I do think across the broader portfolio, under renting now for us probably sits somewhere with 23 to 5%.
Speaker #1: And we are not sort of positioning the vehicle as a broader under renting story. For us, our growth drivers are very much more development focused.
Speaker #1: But that's not to say that there's not under renting in the portfolio and we are capturing what is there and I think what we're what we've done today and what remains all support medium-term growth profile that's very healthy when you take into account the other FFO accretive drivers that we have within our toolkit.
Speaker #4: Thanks. And then just one more on the recent leasing. Could you say what the average incentive level is on the leasing that's been done in the last six months?
Speaker #1: Yeah. Over the last six months, our average incentive level was approximately 15%.
Speaker #4: Got it. Thanks Jason.
Speaker #1: Thanks Murray.
Speaker #2: Thank you. At this time, we're showing no further questions. I'll hand back to Jason for closing remarks.
Speaker #1: Thanks everyone for joining the call this morning. Really appreciate your time. And I look forward to catching up with many of you in the coming days.
