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 2024 half year result. I'd like to start proceedings by acknowledging the traditional custodians across the many lands on which we operate across Australia. We pay our respects to their elders, past and present, and remain committed to supporting reconciliation across our business. Today, I will touch on DXC's investment proposition, key highlights for the period, the financial outcomes, as well as trends we are seeing in the broader market. Moving to slide five. DXC's investment proposition is to provide investors with defensive income, with embedded growth through the cycle. We deliver this firstly, by preserving portfolio attributes that deliver high certainty of income.
Secondly, we maintain a prudent capital structure, having regard to the broader macroeconomic environment with a target gearing range of 25%-40%. And thirdly, we take an active but disciplined approach to portfolio optimization, including the pursuit of value-enhancing investment opportunities. We leverage Dexus' capabilities across transactions, development, and asset management to execute these objectives. Turning to the highlights for the period. Notwithstanding a challenging macroeconomic environment, today's result demonstrates the continued resilience of the portfolio's ability to generate defensive and secure income, which helps support asset valuations and the strength of the fund's capital position. In terms of financial performance metrics, the portfolio delivered like-for-like income growth of 2.8%, reflecting an attractive blend of fixed and CPI-linked escalators embedded within our lease structures.
We also increased the bottom end of our FY 2024 guidance range, with FFO and distributions now expected to fall within a range of AUD 20.8-AUD 21.1 per security. Over the past 18 months, we have divested and settled on AUD 52.3 million worth of asset sales, which has served to maintain conservative gearing in line with the midpoint of our target range. We will continue to pursue additional asset sales to enhance redeployment optionality and view the stabilizing interest rate outlook as a positive catalyst for the fuel and convenience transaction market. The DXC portfolio reflects a high-yielding, valuable land bank across a network of 101 assets across Australia. Our portfolio is backed by some of the highest quality tenant covenants in the market, with 95% of income derived from major national and international tenants.
We also retain close to full occupancy across a rent roll, with long average lease tenure and less than 5% of major leases expiring prior to FY 2030. We have also diversified DXC's income streams with over 50 direct tenancies with retail operators that contribute 12% of income, up from 6% three years ago. Our portfolio benefits from high traffic flows, with 9% of the Australian car fleet passing our assets each day. We also have a majority weighting of 85% to metro and highway sites, which over the long- term will continue to provide an essential service to local communities and support long-haul travel and transport. From a tenancy exposure perspective, we have sought to diversify our tenant base over time. Our top three tenants, which generate 2/3 of portfolio income, are each continuing to reinvest in the long-term performance of their network.
Viva's recent acquisitions of Coles Express and On the Run Group, to facilitate the transformation of its Convenience Retail offering, provides a strong example of how our tenants are reinvesting in their lease operations in response to the shift in the energy mix. In addition, 7-Eleven International's acquisition of the Australian business is a positive for the sector. The investment thesis is hinged upon improving 7-Eleven Australia's food offering, which will leverage expertise gained in running various retail formats globally that are more progressed than ours. Turning to sustainability. Our approach aligns to the Dexus sustainability strategy, which includes three priority areas, being customer prosperity, climate action and enhancing communities. At a portfolio level, we seek to drive outcomes where we have operational control, which is circa 15% of our portfolio by value.
Some key achievements include sourcing 100% renewable electricity and maintaining a carbon neutral position. Where we do not have operational control, we support our tenants on their varied ESG objectives. This includes having appointed a supplier to execute the rollout of solar to 20 properties leased to Chevron and embedding ESG initiatives into the Glass House Mountains redevelopment design, such as rooftop solar, rainwater harvesting, and EV charging stations. Turning to the financials. Over the half, FFO decreased 7.1% to AUD 14.5 million, or AUD 0.105 per security. The decline reflects like-for-like income growth of 2.8%, being more than offset by the high cost of debt due to an increase in interest rates. This aligns with our expectations factored into guidance provided at the FY 2023 result in August last year.
Distributions were AUD 10.4 per security, reflecting the payout ratio of 98.7% of FFO. For the full year, our FY 2024 distribution payout ratio is expected to be in line with FY 2023, at 100% of FFO. NTA per security decreased 3.2% to AUD 3.63, the majority of which was attributable to AUD 12.6 million in asset valuation declines and AUD 4.6 million of net fair value losses on derivatives. As I touched on earlier, an active approach to asset divestments over the past 18 months has supported the balance sheet, with gearing of 32.6% at 31st of December, 2023, or 32.2% on a pro forma basis, following the sale of Lonsdale in South Australia, reflecting the midpoint of the fund's target range of 25%-40%.
These investments have resulted in approximately a AUD 40 million reduction in average debt balance, in an environment where the fund's cost of debt increased by 60 basis points over the period, driven by average floating rates increasing by 150 basis points, while our average hedge rate increased by 50 basis points. We continue to explore asset divestment opportunities to further strengthen our capital position, to increase value-enhancing redeployment optionality at this point in the cycle. During the half, hedging levels averaged 81%, which is expected to remain above 70%, despite hedges rolling off in the second half. We also continue to assess opportunistic incremental near-term hedging. We also continue to actively manage our debt book, having canceled a AUD 30 million surplus facility with no debt maturities until FY 2026.
The Glasshouse Mountains project presents an opportunity to significantly enhance the Convenience Retail offering at the 88,000 sq m dual highway site. On the northbound side, which reflects stage one of the overall project, we soon expect to have achieved all relevant approvals and finalization of lease terms that would allow us to commence redevelopment over the third quarter in FY 2024. Total costs for stage one are expected to be around AUD 20 million and to deliver a yield on cost within a range of 5.5%-6%. We also expect to deliver strong development returns in comparison to DXC's cost of capital. The commencement of stage one would reflect a 100% de-risked income position, backed by Viva and a number of high-quality quick service restaurant tenancies over a 15-year average lease term.
Post completion of the first stage, the site's income mix would reflect a balance of 45% to quick service restaurant retailers, with the Viva lease reflecting the balance, with a brand new on-the-run Convenience Retail format. Independent valuations were undertaken across 45 assets in the portfolio. The remainder was subject to internal valuations based on comparable assumptions to what informed the external process. In total, property valuations decreased 1.7% on prior book values. Valuations continue to be supported by predictable cash flows, with contracted rental growth partly offsetting the impact of cap rate expansion. Our average cap rate expanded to 6.3%, which remains above the marginal cost of debt, and in the direct property market, we are seeing this appeal to a broad range of investors seeking high-yielding opportunities.
In light of the challenging macroeconomic environment, fuel and convenience, property transaction volumes were down by over 40% in 2023. Although volumes remained relatively robust, with 53 individual transactions in total. This transaction activity has resulted in a material repricing of asset values and capitalization rates, which now sit above marginal cost of debt for the fuel and convenience segment. In the direct market, we are seeing investors take a long-term view on underlying land value growth and tenant lease renewal potential. This has supported interest in the sector, with smaller average asset sizes also appealing to investors. We expect this to support relative valuation resilience for the asset class, as well as a stabilization in the interest rate outlook, which should provide further support for transaction volumes going forward.
In summary, we are well placed to deliver on our investment proposition for security holders, and will retain our focus on enhancing portfolio attributes that deliver certainty of income, preserving balance sheet strength to support investment in growth initiatives, and leveraging Dexus's market-leading capabilities. In relation to FY 2024 guidance, we expect to deliver FFO and distributions per security of AUD 0.208-AUD 0.211, reflecting an attractive distribution yield of approximately 8% 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.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on speakerphone, please pick up the handset to ask your question. Your first question comes from Andy McFarlane from Bell Potter. Please go ahead.
Morning, Jason and team. Just a couple of quick questions from me. Just question number one, just in terms of, on Glasshouse Mountains, interested to know, I guess, if you're committed to doing it, and, and what does strong development returns mean to you guys?
Apologies for the delay there. Your first question comes from Andy McFarlane from Bell Potter. Please go ahead.
Yeah, morning, Jason and team. Just a couple of quick questions from me. Yeah, first question, just on Glasshouse Mountains. Wondering if you're committed to doing it, and what does strong development returns mean to you?
Yeah, thanks, Andy, and apologies for the technical difficulties just earlier. But as it relates to Glasshouse Mountains, I mean, we think that's a good capital deployment opportunity for us, with considerable upside through development potential. We are in the final stages of the leasing phase, and once that's complete, we'll have everything in place to commence. And I think based on where that product sits in the market today, the returns on offer, the attractive tenancy mix that we will be able to gain access to, we will be inclined to proceed with that stage. And sorry, I think your second part of the question related to, you know, strong development returns, what does that mean?
You know, for us, any capital deployment option needs to have regard to the fund's cost to capital, and any decision to proceed with Glass House Mountains is no different. We believe unlevered development IRR on the project would reflect a comfortable positive spread to both the cost to release capital in the form of asset sales, which we've been undertaking over the last 18 months, but also a positive spread to the implied unlevered IRR of DXC's asset base at the prevailing share price. So it's screening well on all cost to capital benchmarking.
No, that makes sense. I guess to follow on from that, in terms of gearing, you know, just thinking about how you're thinking and managing it at this juncture, and, you know, where you really want to be right now in relation to the target gearing, it's 25%-40%.
Yes, well, you rightly called out our range is 25%-40%, and that is to reflect an operating range for the cycle, providing flexibility to capitalize on opportunities as they arise. And at this juncture, our focus remains on maintaining balance sheet strength. So as we release and deploy capital, it will be with a view to continuing to manage at around the midpoint of the target range. And I think the fact that we've had 18 months worth of book value adjustments that have reflected transaction activity in the new higher for longer environment, provides us with confidence in that approach.
Yep, makes sense. Look, a final one just for me. Yesterday, there was a bit of press around the new fuel efficiency standards that are to be introduced. Appreciate it's only came out yesterday, but just if there's any initial observations from your end and what that might mean.
Yeah, thank you. And yes, it is. It's quite recent. We've had a little bit of time to digest that broader release. And for those on the call that are unfamiliar, I mean, that is something that is looking to commence at the beginning of 2025, whereby new cars from manufacturers will be required to reduce their average emissions per kilometer targets across their fleets in aggregate. So they'll need to reduce that by some 12% per annum over the next five years. So that doesn't mean that car manufacturers can't continue to produce 100% traditional internal combustion engine vehicles or utes for that example. But it does mean that they'll need to increase the proportion of lower emission vehicles across their sales fleet to meet the lowering emissions targets.
Importantly, the move relates to passenger and light commercial vehicles. It does not include haulage, which does form a big part of diesel volumes in the market. By way of context, in 2023, diesel volumes represented close to 50% of total fuel sales volumes. A couple of, I guess, other observations from a landlord perspective, the rate of change to the domestic car fleet will be gradual. The average age of cars is, you know, on the road right now is roughly 10 years, and last year alone, there were 1 million new ICE vehicles sold in the market, which represents roughly 5% of the total Australian fleet. Secondly, fuel and convenience operators are already meaningfully investing in their operations to capture incremental sources of revenue that are less reliant on fuel volumes.
So from a landlord perspective, we'll continue to work with our tenants as they seek to evolve their product offering, more generally, but also in response to the release of the fuel efficiency standards.
Very helpful. Thank you, guys.
Thank you.
Thank you. Our next question comes from Leanne Truong from Ord Minnett. Please go ahead.
Hey, good morning, Jason, and team. Just a couple of questions from me. It looks like you ended up selling Lonsdale, a bit higher than when you took it to auction in October. So just wondering if you have seen the market improve slightly, given you sold it at a slightly higher price? And also, I guess, why you chose to sell this, the asset, now versus back in October.
Sure, Leanne, I'll start with the first part of your question, and you know, I think the calendar year of 2023 was really a tale of two halves. And you can see in one of the slides that we've put forward, that the second half reflected meaningful declines in volumes, and that was in line with the significant increase in interest volatility that we saw over that period. And I guess, like we had seen with previous interest rate fluctuations over the last 18 months, initial buyer caution is generally shortly followed by a return in demand.
And I think that's what we're seeing in the market now, and that's really due to a combination of the improving outlook for interest rates more broadly, the extent of positive cap rate spreads compared to marginal cost of debt for this asset class. And I think some of the positive themes from fuel and convenience tenants more broadly, including the meaningful reinvestment back into their operations and sites. And so in that context, we feel, you know, pretty, pretty comfortable with, with the market outlook, and indeed, our portfolio average cap rate of 6.3%.
So as it relates to why did we sell Lonsdale now as opposed to then, that that auction round that we took Lonsdale to initially was, unfortunately, in the lead-up to, the Melbourne Cup RBA, meeting in, in early November, and, and that's the point in time when, interest rate rise concerns really, took hold in the market, and we saw a lot of buyer caution enter the market. Moving on two to three months from then, the outlook is, is fundamentally different, and we're seeing a return to buyers that were active at that point in time, but then subsequently fell away, are now back in the market, and, and that extends to multiple buyer groups. You know, high net worth and privates have typically formed the vast majority of transaction activity over the last 18 months.
I think the incremental buyer segment that has come back into looking at buyer inquiries is probably syndicated as well.
Okay, thanks. Thanks, Jason. Just on a follow-up on what you just mentioned, so it sounds like the market, especially in transactional market, is slightly improving there. You said that you will seek further divestment opportunities. Is there a set target that you're looking at? Yeah, just color on that.
Sure. Look, there's no hard target per se. Our focus does remain on maintaining balance sheet strength. So as we release and deploy capital, it will be with a view to continuing to manage at around the midpoint of the target range. And, I think the fact that we've had, you know, 18 months' worth of book value adjustments, that have reflected transaction activity in this new higher-for-longer environment, provides us with confidence in that approach.
Yep. Okay, and I guess one final, sorry, but second question. You mentioned that non-fuel exposures have increased to 12%. So I'm just wondering, ideally, where would you like to, to see that going, like going forward? What's your target there?
Again, there's no specific target per se. I mean, the increment that we have seen in that exposure over time was, for the most part, achieved during, you know, better capital environments, whereby we were able to access capital to buy assets, whereby we could get greater exposure to that tenancy base. Obviously, over the last 18 months, one of the only ways that we have been able to manage that has been via asset divestments. And so, that rate of change has slowed for now, but certainly, as and when we reach a point in time whereby capital market conditions normalize, we expect to resume, you know, incremental direct tenancies with retailers in line with what you've probably seen in the prior three or four years.
Thanks, Jason.
Thanks, Leanne.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Murray Connellan from Moelis Australia. Please go ahead.
Morning, Jason. Just wanted to touch on the announcement of the buyback that was out last week. Would you be able to comment on what sorts of gearing levels you would need to see before you might look to start deploying there? Or I guess, you know, under what conditions you may look to start deploying capital?
Thanks, Murray. Look, I mean, that announcement was really to retain flexibility on our ability to buy back stock more broadly. You know, we always take a balanced approach in terms of how we think about further deployment of capital into a buyback. As a general rule, I mean, we view buyback activity as the kind of activity whereby you have excess capital. And we're probably not quite at the stage where we can say we have an abundance of excess capital right now. And as Leanne, and you know, highlighted on the earlier question, obviously, we'll continue to seek further divestments, and depending on the strength of terms that we can achieve, that may well dictate the kind of asset sale volumes that we're willing to potentially accept.
Then we'll be in a better position to determine whether deployment of capital into a buyback is appropriate at that time. But again, it's very much subject to where the market conditions in the direct property market move to, and strength of terms that we might be able to achieve.
Thanks. And then, just on Glasshouse Mountains, is there an update on the timing of the wave park development that's adjacent to it?
There, there's no specific timing update on that just at the moment, Murray, is the short answer.
Gotcha. Thank you very much.
Thanks, Murray.
Thank you. There are no further questions at this time. I'll now head back to Mr. Weate for closing remarks.
Thanks, everyone, for joining on the call today, and looking forward to catching up with all, with all of you, in due course over the coming days. Thank you.