Q4 2026 Dexus Convenience Retail REIT Earnings Call
Speaker #1: Thank you for standing by, and welcome to the Dexus Convenience Retail REIT FY26 results briefing. All participants are on listen-only mode. There will be a presentation followed by a question-and-answer session.
Speaker #1: For broker analysts that would like to ask a question, please press star 1. I would now like to hand the conference over to Mr. Pat DeMaria, Fund Manager, DXC.
Speaker #1: Please go ahead.
Speaker #2: Good morning, everyone, and thank you for joining Dexus Convenience Retail REIT's FY26 results call. I'm Pat DeMaria, Fund Manager of DXC, and I look forward to taking you through our results this morning.
Speaker #2: Before I begin, I'd like to acknowledge the traditional custodians of the lands on which our business and assets operate, and pay my respects to Elders past and present.
Speaker #2: This morning I'll take you through our four-year highlights, the financial result, portfolio performance, and market dynamics, and finally our outlook and FY27 guidance. I'll start with the portfolio and the key themes for the year.
Speaker #2: DXC provides investors with exposure to a strategic national network of 91 assets, with a strong East Coast weighting. The network is deliberately focused on high-traffic locations, with around 1.9 million vehicles passing our sites each day, and 2.6 million people located within 3 km of our assets.
Speaker #2: Importantly, these are strategic land holdings that can support convenience retail, food and beverage, and alternative transport trends over time. DXC's investment proposition is built on three pillars: defensive income, active portfolio management, and a prudent capital structure.
Speaker #2: We have consistently delivered across these areas, with occupancy maintained above 99%. Guidance has been met or exceeded since IPO, and since the current interest rate environment first escalated in.
Speaker #1: Escalators. These income growth attributes have assisted valuation growth over the period, driving a 6% increase in NTA. We improved portfolio quality while delivering strong returns with the completion of Glasshouse Mountains Northbound, now fully open and trading.
Speaker #1: A major milestone, which I'll cover shortly. Capital allocation remained disciplined, with a clear focus on directing capital to the most value-accretive opportunities. In recognition of the disconnect between direct property values and listed market pricing, we have prudently divested three assets above book value for redeployment into our upsized 5% on-market securities buyback, which is an FFO- and value-accretive use of capital while DXC continues to trade at a discounted NTA.
Speaker #1: Overall, the results highlight a portfolio generating resilient income, improving in quality and supporting long-term value. The foundation of these outcomes is our contracted rental stream.
Speaker #1: Our income is supported by a 7.6-year WALE, more than 99% occupancy, high-quality tenant covenants, and contracted rental growth. Together, these provide strong income visibility, reinforced by a metro and highway weighting.
Speaker #1: DXC's tenant base stands out for both its breadth and quality. Ninety-five percent of fuel operator income comes from large-cap operators with around $250 billion in combined market capitalization. This depth of covenant is unique across Australian fuel and convenience retail funds of scale and underpins our strong income quality.
Speaker #1: Our sustainability approach aligns with the broader Dexus strategy. In FY26, we maintain net zero on scope 1 and 2 emissions, and 100% renewable electricity purchasing across the managed portfolio.
Speaker #1: Glasshouse Mountains Northbound shows how sustainability is embedded in new developments, with these initiatives improving asset resilience and supporting tenant and customer needs. Moving to the financials: FY26 saw DXC deliver FFO and distributions of 20.9 cents per security.
Speaker #1: This was underpinned by 3% like-for-like income growth, partially offset by higher interest costs and the impact of FY25 divestments. While interest rates remain a headwind, our contracted income stream remains strong.
Speaker #1: And that top-line resilience will support FFO growth over the medium term. DXC's balance sheet remains strong, with gearing of 30.6%, toward the lower end of our target range, and no debt expiries until FY28.
Speaker #1: Interest rates have increased since the half-year, and our focus remains on increasing certainty and reducing the impact of macro volatility. During the year, we extended and increased $145 million of facilities and added approximately $200 million of interest rate hedging.
Speaker #1: These actions enhance earnings visibility and ensure liquidity to support continued capital allocation, such as the buyback, while retaining capacity for the committed developments. Seventy percent of the portfolio was independently valued during the year, resulting in a $27.4 million uplift, with cap rates tightening 14 basis points.
Speaker #1: The uplift was supported by contracted rental growth, the completion of Glasshouse Mountains Northbound, and continued liquidity in the direct market, including our recent asset sales above book value.
Speaker #1: Importantly, the portfolio cap rate of 6.18% remains above our marginal cost of debt, supporting confidence in current values. Moving to portfolio performance and our market dynamics: EV adoption is rising, but fuel-aligned vehicles still dominate Australia's car fleet, with EVs representing only around 2% of vehicles on the road today.
Speaker #1: Recent fuel price volatility and tax incentives have supported this EV momentum, but regardless of the pace of EV adoption, our metro and highway focus—which is premised on high traffic volumes and alternative land use—provides flexibility to diversify income and capture future growth opportunities over time.
Speaker #1: Our major tenants are responding to this transition in a meaningful way. They are actively investing in their network to diversify earnings. This is driving site revenues, improving amenities, and broadening earnings beyond fuel.
Speaker #1: For DXC, it supports visitation, shop sales, and durability of our income. The examples on this slide show a structural, sector-wide shift, not a short-term trend.
Speaker #1: This supports our strategy of owning high-traffic sites with flexible land holdings that can evolve with customer demand over time. The direct property market continues to align with our confidence in the sector.
Speaker #1: We divest, with appetite remaining strong. Transaction volumes are broadly in line with last year, despite higher rates, and capitalization rates have held steady since the half-year.
Speaker #1: Modern QSR-anchored assets continue to command strong pricing, supporting both our valuations and the rationale behind our development pipeline. Glasshouse Mountains Northbound is now fully open and trading, a genuine milestone for DXC.
Speaker #1: The development achieved a 17% development project IRR, a 5.8% year-on-cost, and provides an 18-year WALE with 43% of income from QSR tenants. Quality assets like this are rarely available in the direct market, making our development capability a key advantage in being able to gain access to assets with the right tenant mix, secure long-term income, and deliver attractive investor returns.
Speaker #1: With Northbound now complete, the development pipeline comprises three projects in New South Wales and Queensland. Each project strengthens our metro and highway exposure, delivers long lease tenure, and includes meaningful QSR income.
Speaker #1: We assess opportunity through the lens of year-on-cost and development project IRR, with Northbound demonstrating what the pipeline can deliver. Returns are targeted above DXC's cost of capital, underpinned by the same disciplined approach that delivered Northbound.
Speaker #1: The numbers on this slide tell the story of deliberate, cumulative improvement. Since FY22, we have released $108 million of assets, with partial redeployment into initiatives that improve long-term portfolio quality and support disciplined capital allocation.
Speaker #1: This has increased metro and highway exposure, improved average traffic volumes, increased convenience retail income, and reduced the average asset age. The portfolio is now more resilient, diversified, and better aligned to locations and formats that operators are investing in and the market values.
Speaker #1: On completion of the development pipeline, around 90% of the portfolio will comprise metro and highway assets. These are not just high-traffic locations; they offer flexible land use, scale, and the ability to diversify site revenue as customer needs and energy preferences evolve over time.
Speaker #1: It is a portfolio built for today's income and tomorrow's optionality. In summary, the investment case for DXC remains clear: we offer a highly compelling annual 7.8% distribution, which is paid quarterly.
Speaker #1: This is attractive in both absolute and sector-relative terms. Underpinning that yield is the secure and resilient income, backed by long leases and very high-quality tenant covenants.
Speaker #1: With DXC currently trading at a 30% discount to NTA, investors can access that income at a compelling entry point, backed by quality real estate in a liquid direct property market.
Speaker #1: DXC enters FY27 with positive momentum and a clear focus on execution. The outlook is supported by contracted rental growth, limited near-term expiries, a strong balance sheet, and continued discipline on capital allocation.
Speaker #1: In the near term, our focus remains on the continued execution of the on-market buyback, while preserving flexibility for selective development opportunities to drive long-term growth.
Speaker #1: Barring unforeseen circumstances, we expect to maintain FY27 distributions at 20.9 cents per security, which will sit marginally above FFO. This is expected to normalize as contracted income growth is delivered.
Speaker #1: Thank you for your continued support. I'll now hand back to the moderator for Q&A.
Speaker #2: Thank you. For broker analysts who would like 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 2. And if you're on a speakerphone, please pick up the handset to ask your question.
Speaker #2: Your first question comes from Michael Armstrong from Bell Potter. Please go ahead.
Speaker #3: Hi, Pat. So, you haven't provided explicit FY27 earnings guidance. Can you please talk about why that is, and what the components are for FY27?
Speaker #4: Sure. Thanks, Michael, for the question. As an income-focused fund, distributions are a core metric that underline the income property can support. In the near term, the payout is marginally above 100% of FFO, and it's temporary.
Speaker #4: And this is due to the cost of debt transition, and it's not a structural issue. We're confident in our top-line growth credentials to support FFO growing back into distributions.
Speaker #4: And happy to talk about FFO, but we expect FY27 FFO to be approximately 3% to 4% down on FY26. So from a payout ratio perspective, that's looking at about 100% and 104%.
Speaker #4: The key drivers behind that, as I mentioned, are likely income growth, similar to other periods. But if you're adopting the current interest rate curve, you'd see the all-in cost of debt rising about 70 basis points, from 4.8% to 5.5%, all else being equal.
Speaker #4: So the net impact of that more than offsets the property income growth for the year.
Speaker #3: Okay, thank you. And then, can you just clarify what 'temporary' means? Yeah.
Speaker #4: Yeah, sure. So, the payout ratio is expected to normalize as contracted income growth is delivered, and the earnings impacts from the interest rate transition moderate.
Speaker #4: So the timing primarily depends on floating interest rates from here, but the direction is clear that the rental growth should progressively rebuild. FFO coverage with the buyback is an additional positive driver behind that.
Speaker #3: Okay, thank you. And then, you've done a fair bit of hedging during the period. Can you just remind me what the hedging policy and approach is, and also what the rationale behind the extra hedging during the period was?
Speaker #4: Yeah, sure. So, we're an income-focused fund, and we have a programmatic approach to hedging. This provides a degree of certainty of costs and visibility to the market.
Speaker #4: The shape of the curve has changed over the past six months. And look, we acknowledge that shifts in rates can impact earnings, but they don't impact the consistency of income growth at the property level, which will support that earnings growth flowing back into the distributions in the near term.
Speaker #2: Thank you. Your next question comes from Murray Connolan from Mollis Australia. Please go ahead.
Speaker #4: Good morning, Pat. Just wanted to which is a quick follow-up on the discussion around FFO, please. Would it be the would it be fair to say that the fund's intention is to effectively hold the distribution flat until FFO catches up?
Speaker #4: G'day, Murray. Thanks for the question. Yes, effectively, that's what we're saying at the moment. Again, this is just a temporary measure; it's not a structural thing.
Speaker #4: And at the moment, we've decided that we're holding it flat for the FY27 period. Got it. And then, just a question on the timing of the southbound Glasshouse Mountains development.
Speaker #4: Noting that it looks like the guidance is for that to effectively kick off towards the tail end of FY26, but it doesn't look like it's yet been committed.
Speaker #4: Would you be able to give an update on the discussions with the tenant from here? And I guess what that timing and commitment would be contingent on?
Speaker #4: Sure. So I suppose, firstly, the key thing here is that for the tenants on that site, it was important that Northbound opened first. So now that that's open, there are a number of incremental pad sites that we expect to have on that site.
Speaker #4: But we're talking through the lease negotiations with the prospective tenants now, and the key focus was on opening the northbound first before we sort of turn the attention to southbound.
Speaker #4: So we continue to progress that, Murray, and hopefully can provide some further updates at a later stage. Got it. And then maybe just looking at the balance sheet and opportunities more broadly—you've obviously got the buyback on, but are you looking at any other prospective sales or acquisitions?
Speaker #4: I guess, how are you thinking about the portfolio strategically at the moment? Yeah, sure. So, with our portfolio at the moment, we're quite comfortable with our development pipeline.
Speaker #4: In regards to that sort of gearing and balance sheet of where we’re at, we’re at 30% at the moment. Delivering the development pipeline, you’re probably looking at that being in that sort of mid-30% range.
Speaker #4: Under most deployment scenarios, we expect gearing to be around that level, all else being equal. But we do have a handful of asset sales that would be a good incremental source of funding for development options, or we’ll try and manage it to that 30 to 35 percent range.
Speaker #4: And we've got—we'll look at that over the next sort of 12 months in what remains a liquid, direct transaction market. Got it. Thank you, Pat.
Speaker #4: All right.
Speaker #2: Thank you. I'll now hand back to Mr. Demira for any closing remarks.
Speaker #4: Thank you, everyone, for your time today. I look forward to engaging with many of you over the coming days, and enjoy the rest of your day.
