I would now like to hand the conference over to Mr. Pat De Maria, Fund Manager. Please go ahead.
Good morning, and thank you for joining the half year 2026 results call. I'm Pat De Maria, Fund Manager of Dexus Convenience Retail REIT. I've been working with the fund since 2018, and I'm pleased to be delivering my first set of results this morning. I'd like to begin by acknowledging the traditional custodians of the lands and waterways in which we meet today, the Gadigal people of the Eora Nation, and pay our respects to elders, past and present. Today, I will talk to key results for the half, covering highlights and financial outcomes, trends we're seeing in the broader market, and the outlook. In the half year, we delivered funds from operations of AUD 0.105, and distributions of AUD 0.1045 per security, keeping us on track to meet FY 2026 guidance.
Our portfolio continues to deliver a resilient income, with like-for-like income growth of 2.9%. Gearing of 29.8% sits at the lower end of our target range, which will increase as we continue to deploy capital into growth opportunities. Our Glass House Mountains northbound development is partly completed and trading, and we continue to progress planning and lease negotiations at the southbound site. Since 31 December, we have agreed to acquire two fund-through developments for AUD 35 million, subject to conditions precedent. These projects will restock our value-accretive development pipeline and increase our exposure to high-quality metro and highway sites. Net tangible assets grew by 4.4% over the period, underpinned by underlying rental growth and cap rate compression, informed by continued liquidity in the underlying direct market.
DXC provides investors with access to a high-quality, strategic national network of convenience retail assets, featuring significant diversity of over 90 assets valued at AUD 760 million, strong exposure to the daily Australian car fleet, and access to 2.6 million people living within a 3 km radius of our asset base. Further to this, our portfolio has a significant amount of land spanning over 600,000 square meters, with 90% zoned to high-value uses of commercial, industrial, mixed use, and retail. This provides investors with access to a high-quality land bank and alternative use options over time. Income quality remains a hallmark of DXC. Our portfolio offers lease certainty, reflected by a long WALE of 7.6 years and close to 100% occupancy. Strong tenant credit quality, with 95% of tenants being major national or international brands.
Consistency of growth, reflected by a balanced exposure of fixed and CPI-linked escalators, currently generating over 3% growth per annum. Our portfolio is skewed towards metro and highway locations with strong traffic volumes, and this means our sites will play a critical role in supporting commuters, transport, and long-haul travel over the long term. As a manager, we deliver on our investment proposition by maintaining a portfolio focused on defensive income and contracted rental growth, taking an active but disciplined approach to enhance portfolio quality and pursue strategic growth opportunities, and by actively managing a prudent capital structure that has regard to shifts in the broader macroeconomic environment. We have deliberately diversified our tenant base over time, with our income backed by some of the highest quality national and international tenant covenants in the market.
The majority of operators in DXC have committed to long-term reinvestment of their networks, including material enhancement of the convenience retail offering. For DXC, this industry investment supports rent resilience and valuation strength across our network. Now turning to sustainability. Our approach aligns to the Dexus sustainability strategy. We maintain 100% renewable electricity and a net zero position across our managed assets. We engage with tenants on environmental initiatives, including solar installations and EV charging, and these initiatives also play an important role in our developments, such as an energy-efficient design in our Glass House Mountains development. Moving on to the financials. Our FFO distributions and balance sheet continue to demonstrate resilience. The FFO result was 1.3% above the prior period, primarily due to solid like-for-like income growth of 2.9%, which is partly offset by prior year divestments.
NTA per security has grown by 4.4% to AUD 3.80. Our balance sheet is well positioned. We have a staggered debt maturity profile and no expiries until FY 2028. Our low gearing also positions us well, providing capacity to fund our expanded development pipeline. 30 of the 91 assets in the portfolio were independently valued during the half. Property valuations increased by 2.7%, driven by rental growth and cap rate compression of nine basis points. The portfolio cap rate of 6.23% is supported by ongoing strength in the transaction market and remains comfortably above the marginal cost of debt, which we believe will provide ongoing support to valuations. Transaction market evidence supports our valuation outcomes and has continued to show strong levels of liquidity during the year.
Capitalization rates continue to compress to sub-6% on 2025 transactions, and modern assets with attached QSR retailing continue to achieve strong pricing, supporting our underwrite assumptions for our development pipeline. Development of our flagship asset at Glass House Mountains continues to progress. A staged opening at the northbound site is underway, with McDonald's, KFC, and Guzman y Gomez restaurants open and trading, and six EV charging bays also in operation. The balance of the site is due for completion during the June quarter and will include a new expanded On The Run convenience retail offering and an internal Hungry Jack's store. The Glass House Mountains site benefits from approximately 150,000 passing commuters and transport vehicles every day, and we are confident the development will provide strong returns on completion. We continue to invest in our development pipeline.
At Glass House Mountains, a northbound site is now partly open, with the balance of the site due for completion in the June quarter. Lease negotiations are advancing at the southbound site, and we expect to begin the project soon after these are finalized. Additionally, we recently agreed to acquire two fund-through developments, further expanding our pipeline and strengthening our highway and metro exposure. Some of the acquisition metrics are outlined on this slide, and we intend to share further details on these developments, post-satisfaction of the conditions precedent. We are committed to enhancing our portfolio to better serve tenants and maximize investor returns. Once our development pipeline is complete, around 90% of the portfolio will consist of a defensive mix of metro and highway assets.
We've deliberately focused on these metro and highway sites as they benefit from high traffic volumes, favorable zoning, and an ability to adapt to evolving consumer trends, including convenience, spending, and expanded retail offerings. While metro and highway sites remain our priority, we maintain a strategic allocation to regional sites that provide long-term value for our tenants. Our portfolio enhancements have helped to future-proof our asset base. We're strategically reallocating capital from our disciplined asset recycling into our development pipeline. These actions are expected to strengthen several key performance metrics, including extending WALE by 1.2 years, reducing the average asset age by 24%, increasing traffic exposure by 17%, and diversifying income streams through new national QSR tenants. In summary, we are well placed to continue delivering defensive and growing property income through the cycle.
We continue to actively manage the portfolio, prioritizing activities that drive value and further enhance portfolio quality, including the expanded development pipeline and increased emphasis on convenience retail offerings. We reaffirm our FY 2026 guidance to deliver FFO and distributions per security of AUD 0.209, reflecting year-on-year growth of 1.2%. Guidance reflects an attractive distribution yield of over 7.5% for investors, backed by strong income stability. Thank you for joining the presentation today. I'll now hand back 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, and if you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Andy MacFarlane from Bell Potter. Please go ahead.
Oh, hi, Pat. Thanks for your time today. First question, if I may, just on construction of the portfolio. You've mentioned being kind of predominantly metro. Just interested if you're happy with that mix, or you're keen to dial up in terms of exposure towards metro and highway?
Hi, Andy. Thanks for the question. Yes, we've made a concerted effort to focus on metro and highway-centric portfolio as we think this will future-proof the portfolio. We've provided some stats in the presentation that help show our thinking on this, but we've been reshaping our portfolio over the past few years, and upon delivery of our development pipeline, around 90% of the portfolio will be in that metro and highway location. We're comfortable in this range, and we'll continue to assess any new metro highway opportunities when the returns are there and anything that will strengthen our income portfolio across the portfolio.
Yep, makes sense. So on hedging, you hedged at about 71% at the moment, and drops to 62. Just interested in how you're thinking about incremental hedging from here, given, you know, changes to the interest rate outlook more broadly?
Thanks, Andy. So the starting position is good. We've got flexibility to average additional hedging over time. We will—we'll look to continue layering hedging over time, whilst also being cognizant to locking in forward rates at, or above the prior cycle peak cash rate. So in short, we'll be opportunistic where we need to be.
Yep. Maybe just a final one for me. Just in terms of guidance, you've, you've maintained in terms of AUD 0.209, but floating rates have gone up during the half. Just trying to reconcile between floating rates going up and guidance being maintained and any other moving parts to take note of?
Sure. So we've had some outperformance on property leasing versus prior expectations, so this has been offset by the higher floating rates in the second half. So based on this, this is why we're on track for guidance.
Andy, thanks, Pat.
Thanks, Andy.
Thank you. Your next question comes from Murray Connellan from Moelis Australia. Please go ahead.
Morning, Pat. I was wondering whether you might be able to give us a little bit more color on these two new fund-throughs. Yeah, who, where, whereabouts in the world are they, who the tenant bases are, what the assets, broadly speaking, are gonna look like when they're done?
Sure. Hi, Murray, and thanks for the question. While locations and tenants, we can't disclose due to counterparty confidentiality, what we can provide is, and we'll provide further details once the conditions are satisfied, but what we can say is that two fund-through developments are squarely aligned with our metro highway strategy, and they're consistent with our focus on high traffic, convenience-led retail nodes.
Good. Thanks. And then just wondering whether you could comment on direct market demand in the past few months. We're obviously seeing quite a bit of a shift in the interest rate curve. I was wondering whether you might be able to comment on, you know, I guess, you know, valuations being done at slightly lower interest rates and the extent to which, you know, we may see a little bit of softening in cap rates in the next few months. Yeah, are you seeing anything from that perspective in terms of, you know, softening in direct market demand in the past few months?
Thanks, Murray. So we're coming off the back of really strong level of sales over the last 12 months. It was the highest since 2021. On the back of that, in December, it was actually quite high. We had some strong sales that occurred via auctions during that period when we had this potential change in the interest rate environment. So from that end, it appears that demand's been still strong for these assets. A lot of the buyers are privates. They're not as exposed or that the interest rate movements don't affect them as much. But there's been strong level of liquidity and demand for especially assets with QSR retailing attached to the fuel.
Then maybe just one more for me, please. How would you describe your comfort level around gearing at the moment? You know, we've obviously got a couple of fund throughs coming through, but DXC is still just sub 30% geared. How would you expect to see that balance sheet looking over time? Or, you know, I guess, what would a target level look like for you guys at the moment?
Sure. So currently our gearing is at about 30%. Once we deliver our development pipeline, pro forma gets to that mid-30s, that's without any valuation movements. We expect to operate in that level, under most scenarios, obviously, subject to any of the opportunity set that's there. But, we're comfortable with that mid-30s level, particularly given we're in a bit of a different capital and debt environment at the moment.
Got it. Thank you for that, Pat.
Thanks, Murray.
Thank you. There are no further questions at this time. I'll now hand back to Mr. De Maria for closing remarks.
Thanks, everyone, for joining the presentation today, and look forward to catching up with everyone over the coming weeks.
That does conclude our conference for today. Thank you for participating. You may now disconnect.