Thank you for standing by, and welcome to the Dexus Convenience Retail REIT 2022 half-year results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Chris Brockett, Fund Manager. Please go ahead.
Thank you, and good morning, everyone. Welcome to Dexus Convenience Retail REIT's 2022 half year results presentation. Look, before I start today, I'd really like to say a quick thank you to the team for all the records during this busy period. It's certainly been greatly appreciated. We would like to start by acknowledging the traditional custodians on the lands on which we operate as an owner, manager, and developer of assets across Australia. We pay our respects to their elders past, present, and emerging, and remain committed to supporting reconciliation across our business.
Moving to the key highlights. I'm pleased to report that the fund has delivered another strong set of results in what was a period of uncertainty in the broader market, demonstrating the resilience of our portfolio.
Distributions of AUD 0.115 per security for the half were up 4.6%. We also remain on track to deliver our FY 2022 FFO and distribution guidance, which was upgraded in December to AUD 0.231 per security and represents a 5.5% increase on FY 2021. It has been another active period, having contracted the acquisition of 6 assets valued at AUD 73.7 million. These acquisitions represent good value compared to other transactions we've seen in the market, with an average yield of 5.6% and an average WALE of 10.5 years.
We raised AUD 66.3 million of new equity during the half to fund the acquisitions and provide balance sheet capacity to pursue further growth opportunities as and when they arise.
We maintained our disciplined approach to capital allocation and retained flexibility to deploy capital towards value-accretive opportunities. We continued to deliver on our strategy of providing investors with an attractive, defensive, and growing income stream. We have achieved consistent income and value growth over time for investors, demonstrated by our distribution per security growth each financial period, as well as growth in NTA per security of 8% per annum over the past 4 years. We've also actively diversified and enhanced the overall quality of the portfolio.
Since inception, we've acquired 53 assets valued at AUD 397 million at an average acquisition yield of 6.1% and a long WALE of 12.5 years, which reflects our disciplined approach to acquisitions, ensuring that the opportunities we pursue are attractively priced and meet our strict investment criteria.
These acquisitions have considerably enhanced the portfolio's tenant diversification and quality through the introduction of six new major fuel tenants since the IPO. Our established partnerships with major tenants and developers also ensures that the fund is well-positioned to take advantage of future growth opportunities. We also take an active approach to managing the portfolio.
It was pleasing to complete several initiatives during the half, including the repositioning of the Morley and Canning Vale sites through expanded retail offerings, including a new Pizza Hut restaurant, as well as commencing the development of the Redbank Plains site to include car wash facilities. Turning to strategy, Dexus Convenience Retail REIT is focused on providing investors with an attractive, defensive, and growing income stream, which is underpinned by resilient cash flows and long-term leases to quality national and international operators.
Our strategic objectives are to prudently manage capital to deliver long-term value to all security holders, and to engage with and support our tenants to ensure that they are well-positioned for the long term, including the sustainability of their operations. Our mandate, which has not changed since inception, is to invest in high quality, convenience retail and non-discretionary retail properties. While our current portfolio is focused on service stations, our mandate includes the entire convenience retail landscape, which we are attracted to for its defensive qualities and secure underlying cash flows.
We maintain a disciplined approach to acquisitions, ensuring that the opportunities meet our strict investment criteria, including location, strength of lease covenants, and various site-specific factors such as land size and zoning.
While the market dynamics and industry trends will continue to evolve and change, the portfolio is well-positioned to remain resilient with long-dated leases providing income certainty in the medium to longer term, with 93% of leases by income expiring in FY 2030 and beyond. During the half, we executed new long-term lease deals with 7-Eleven at Redbank Plains and Viva Energy at Lawnton, pushing these lease expiries out to FY 2037.
These leases, which included major capital investments from the tenants to upgrade the sites, highlight the continued commitment from our major tenants to remain at these sites for the long term and adapt to the evolving market trends, and it ensures the long-term income sustainability of the fund.
We also have an optimal portfolio mix, with 66% of the portfolio being represented by metro sites that are well located with strategic advantages for convenience retail alternatives long into the future. While 17% of the portfolio are highway sites that will remain essential for long journeys and long-haul trucks no matter what energy is fueling our vehicles. The remainder of the portfolio are regional sites which have high exposure to diesel sales and are located in areas where EV adoption is expected to be significantly slower.
The portfolio is well-placed to remain resilient in the long term with strong future income security. Dexus' globally leading ESG credentials will support the advancement of our ESG approach. Unlike other asset classes, our major fuel tenants have full operational control over the sites because they have whole of land leases.
The majority of these tenants have already announced net zero targets, and the fund is here to support them as they continue to provide essential goods and services to their customers while enhancing the sustainability of their operations on our sites. For example, for Caltex, we facilitated the rollout of on-site solar at 300 sites across their entire network, 40 of which are within our portfolio. These solar works are expected to commence later this year. Moving to our financial results. FFO was up AUD 3.2 million to AUD 15.4 million compared to the 2021 half year.
Now, this was primarily driven by a AUD 5.1 million or 32.5% increase in net property income due to like-for-like income growth of 2.3%. The balance came from the contribution of acquisitions.
Incorporating the new securities issued during the period, FFO per security was up 6.6%. Distributions per security grew by 4.6%, with our payout ratio just under 100% of FFO and in line with cash flow. NTA per security was up 4.4% on 30 June to AUD 3.83, and that was primarily driven by the AUD 21.1 million property revaluation gain. Moving to capital management now. The balance sheet is in a strong position with gearing of 32%, which is around the midpoint of our target gearing range of 25%-40% and provides sufficient capacity to pursue accretive opportunities as and when they arise.
At the same time, we are actively considering asset sales to recycle capital into opportunities that will continue to enhance the overall quality of the portfolio.
The fund's weighted average cost of debt remains competitive at 2.7%, and the weighted average debt maturity is 2.5 years with a relatively even maturity profile. Turning to portfolio valuations. Independent valuations were undertaken on a total of 42 assets. Together with the recently acquired properties, 47 of the portfolio's 112 properties were independently revalued. Overall, 94 properties have been independently valued within the last 12 months. The weighted average cap rate across the portfolio tightened 20 basis points from 6.02% to 5.82%.
The total revaluation increase, excluding fair value alignment, was AUD 21.1 million. Cap rate compression was responsible for 54% of the total increase, while rental growth attributed to 46%.
Appetite for service stations and convenience retail assets has remained strong over the last 12-18 months, fueled by existing market participants, along with investors seeking alternate, asset classes that are defensive in nature and supported by secure and predictable cash flows. Transaction volumes remained stable in calendar year 2021 compared to 2020, with average market transaction yields tightening 31 basis points to 5.38% over the year.
Turning now to portfolio performance. The portfolio remains resilient and is underpinned by strong lease covenants and reliable tenants, with 90% of income derived directly from the major fuel tenants. The portfolio continued to record occupancy at close to 100% and is supported by a long weighted average lease expiry of 11.5 years.
During the half, we successfully secured new long-term lease deals with major fuel tenants at 2 properties, enhancing the fund's lease expiry profile and providing security holders with a stronger level of income security, with 93% of rental income expiring in FY 2023 and beyond. The portfolio provides a sustainable and growing income stream, with 78% of rental income subject to fixed annual increases of 3% or more, while 19% is linked to CPI rental escalations, and this results in an average portfolio rental growth of 3% per annum.
The chart at the bottom left illustrates the growth we have achieved, increasing the portfolio by approximately AUD 515 million since the IPO in July 2017, with AUD 130 million of this attributable to revaluation gains. This highlights that we have acquired well, in line with our disciplined approach to acquisitions, which has created value for investors. In the process, we've continued to de-risk the portfolio through enhancing tenant diversification and quality. Moving to acquisitions. During the period, we successfully contracted 6 acquisitions at an average yield of 5.6% and WALE of 10.5 years. Dubbo Service Center was acquired on a fund-through basis, and it's expected to complete by April 2022.
All of the other transactions had settled prior to 31 December, with the exception of BP Greendale, which settled last week. Turning to the development projects. During the period, we completed the fund-through development at Hillcrest in South Australia, which comprises a Mobil service station and a standalone Hungry Jack's.
Total spend for the project was AUD 8.5 million, representing a yield on cost of 5.5%. This site was revalued at AUD 9.1 million on a 5.2% cap rate at 31 December. The fund has one further fund-through project currently in progress, and that's the Dubbo Service Center, which comprises a Mobil service station and a standalone Carl's Jr. The fund is also investigating a potential second stage to this development, which will involve another standalone quick service restaurant and 3 large format retail tenancies, all of which will be leased to quality tenants.
In summary, the fund remains well-placed to continue to deliver on its strategy of providing investors with an attractive, defensive, and growing income stream. We have high income security with contracted annual rent increases and long-term leases to high-quality, well-capitalized tenants.
We have a disciplined approach to managing our capital with the willingness to divest assets or acquire assets that meet our strict investment criteria and stack up financially. We continue to actively execute on our strategic objectives. Finally, we reiterate our FY 2023 effective final distribution guidance that was upgraded in December 2023, AUD 0.231 per security, subject to a continuation of current market conditions and no unforeseen events. On that note, thank you for your time this morning. I'll now hand it back to the operator for any questions.
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 a speakerphone, please pick up the handset to ask your question. Your first question comes from Leanne Truong from Ord Minnett. Please go ahead.
Good morning, Chris and team. My first question is, you've got some available liquidity, and you've also announced a buyback. I guess, going forward, are you more likely to be acquiring asset or buying back shares?
Yeah. Well, I mean, I think, you know, there's no doubt that DXC has experienced a, you know, a weaker share trading performance recently, Leanne. When we've activated the buyback program, you know, to provide us the flexibility to be opportunistic and enhance security holder returns by taking advantage of, you know, that continued and persistent share price weaknesses, b ut equally, we also remain opportunistic in terms of our acquisitions as well.
We'll continue to opportunistically look to acquire assets where it makes sense to do so, in particular, considering the cost of capital, and of course, the transaction needs to stack up financially and create you know, it needs to create value for investors as well. Look, we remain opportunistic on both sides.
We'll continue to actively manage our capital appropriately. It will all sort of depend on where we think the best value is and presents itself for our investors.
Yeah, thanks. In terms of acquisitions, are you seeing the market being more competitive, less competitive or the same?
Well, I mean, there's no doubt that the last two years have had significantly increased transaction volumes. That's evident in the fact that the weighted average transaction yield had dropped 31 basis points to 5.38%. I mean, I still think we're still acquiring well. Our average acquisition yield is 5.6% in the half. Look, I think it's going to be interesting to see whether that translates into this year. Yeah, we're still very opportunistic about what we are seeing out there and will continue to be disciplined in our approach to acquisitions.
Just a question on your rent reviews. I noticed that you're assuming CPI of 2.25%. Do you think there's some upside there for the rest of financial year 2022?
Yeah. I look, if inflation was to go up beyond that, there certainly is upside. I mean, that's the view. That's the house view as to where inflation will land. I think we've got a good mix of fixed rental increases and CPI-linked increases. I mean, as you say, 19% of our income is linked to CPI rental increases. So, yeah. I mean, I think that potentially is some upside, but I mean, I can't speculate on where inflation's gonna head, unfortunately.
Yeah. Just one final question from me. I noticed you've got some developments going on there, Redbank Plains and Canning Vale and the rollout of the solar. Are you rentalizing that or is that being paid by the tenants?
Are you talking about the solar installation?
Yeah, the solar installation, and also you've just done some developments at Redbank Plains in Canning Vale.
The development at Redbank Plains is that we're using some excess land that we had. We've essentially taken that excess land that essentially 7-Eleven weren't using. We've done a new lease deal with 7-Eleven for a portion of that land, and we're developing a new 6-bay car wash with a Queensland-based car wash operator that will go in there. That's like a brand-new lease to a new operator. The Morley and Canning Vale sites were us just working with our part of the new lease arrangements with EG Group, which kicked in during the half. We worked with them.
We didn't need to make a capital contribution towards that.
That was something that EG ended up funding, but it was factored into the rents, if you like, that we achieved, the new commitment rent that we achieved for those brand-new ten-year leases. In terms of the solar on like solar roll-out, no, those are costs that will be borne between the solar energy provider and/or Caltex. They have an arrangement between themselves. All that we did was facilitate the engagement between the solar energy provider and Caltex. We brought the parties together as we saw there's an opportunity for Caltex to, you know, to roll out or have a rollout of solar in their network.
As I say, I mean, 330 sites of their 380-odd sites nationally, it's pretty good for Caltex to be able to have such a significant solar rollout. Thanks, Chris. That's all from me.
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, Chris. Could you just give us a little bit of color around, appreciate you've made mention of the direct markets and the strong valuation uplift that seems to have come through from a yield perspective. Just in terms of transaction volumes in the last call it six months, could you maybe just unpack what those have looked like? Have they been impacted by lockdowns? Then maybe just a comparison between what things have looked like from an auction perspective versus the off-market component.
Yeah, thanks, Murray. I mean, the only evidence we've got is sort of more so over the whole of the calendar year 2021, which, as I said, transaction yields have, you know, tightened 31 basis points. The transaction volumes were in line with what they were in 2020, which in 2020 was nearly at their all-time highs as well. There's no doubt in 2021, transaction volumes remained high and the results were obviously sharper than what they had been previously. I mean, we have seen the service station sector tighten almost the most out of all asset classes, probably along with childcare.
I haven't seen much in the way of transactional evidence so far this year, albeit we're only sort of really only properly 2 or 3 weeks in. We'll see whether that continues. As I said to Leanne, I will be interested myself to see how that transpires this year. I can only speak to anecdotal evidence, but the assets that are normally put into an auction process are the ones that sit in that AUD 4-AUD 16 dollar price point, and they are the ones that are obviously the most attractive to the high net worth individuals who tend to participate in auction processes rather than the institutional grade properties like ourselves.
I you know I would hazard a guess that the results at an auction process are significantly tighter or sharper than what they would be through, say, an EOI process. We tend to participate in EOI processes or more commonly for us is in off-market opportunities. Yeah, I mean, the auction process towards the end of last year did ease off a little bit in December, but I think it was fair to say there was a fair degree of lethargy in the market by then, probably coming off the back of what was a very busy transactional year in the sector.
Thanks. Just noting that, yeah, I think the last development that is currently underway in your portfolio is the one that you're doing in Dubbo. Last I recall, I think it should probably be finishing more or less now, if that's right. Although I don't know whether there's been a few delays through COVID. Just wondering whether the strategy is gonna remain to keep that development pipeline refreshed or whether the deployment of capital now makes more sense going into the direct market rather than into development.
Yeah. On the Dubbo asset, we do expect that to complete in April 2022. We originally thought it was gonna be February, March. Dubbo has been impacted by some severe weather, particularly throughout December. That has had a little bit of impact on the delays on that one. We do expect that site will be complete in April. We also, you know, as said during the presentation, we do see it as an opportunity to do a second stage, which is actually larger than the stage one, the one that we're building now.
That would include, again, another standalone quick service restaurant, as well as three large format retail tenancies. We're investigating that.
We're sort of doing our due diligence on that with the developer at the moment. That might be an extension of the development pipeline. I mean, I still see the development part, development projects and certainly the fund-through projects as being, you know, an important avenue of growth opportunity for us. It does come with some advantages in terms of stamp duty savings. It allows us through our relationships with the developers to get access to some good opportunities before they would ordinarily probably go to the market once they're complete.
It does give us the opportunity to buy well. I think, you know, certainly with the developments that we've done, we've bought those well and created value for investors.
They've all gone up in value since we've built them. I still think it's an important part of our growth. Equally, you know, I think acquiring near new or existing assets in the market is just as important. We'll continue to take an opportunistic view to all of our acquisitions going forward.
Thanks. Just lastly, yeah, you've mentioned that the potential to be selling a few assets, although I don't know whether that's necessarily set in stone yet. I was wondering what the thoughts are around the sorts of things that may go in the event that would start happening.
Yeah. I mean, we're absolutely remaining opportunistic and open-minded in regards to property sales. You know, recycling the capital into opportunities that will enhance you know, the overall quality of the portfolio. That's the most important thing. We're assessing the portfolio to identify properties that you know, we believe do not meet our strict investment criteria. I'm talking about, for an example, assets that require you know, significant CapEx investment such as the older sites with the older tank infrastructure. You know, I'm not gonna be calling out any specific assets at this stage, of course.
For sure. Thank you very much, Chris.
Thanks, Murray.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Brockett for closing remarks.
Yes, thank you. Look, I just wanna thank everyone. I know it's a busy time of year for you guys. I really appreciate your time this morning and I look forward to catching up with you guys over the next few days. So, thank you and enjoy the rest of your day.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.