Thank you for standing by, welcome to the Dexus Convenience Retail REIT FY 2026 Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. For broker analysts that would like to ask a question, please press star one. I would now like to hand the conference over to Mr. Pat De Maria, Fund Manager, DXC. Please go ahead.
Good morning, everyone, thank you for joining Dexus Convenience Retail REIT's FY 2026 results call. I'm Pat De Maria, Fund Manager of DXC, I look forward to taking you through our results this morning. Before I begin, I'd like to acknowledge the traditional custodians of the lands on which our business and assets operate, pay my respects to elders past and present. This morning, I'll take you through our full-year highlights, the financial result, portfolio performance and market dynamics, finally, our outlook and FY 2027 guidance. I'll start with the portfolio and the key themes for the year. 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.
Importantly, these are strategic land holdings that can support convenience retail, food and beverage, alternative transport trends over time. DXC's investment proposition is built on three pillars: defensive income, active portfolio management, a prudent capital structure. We've consistently delivered across these areas with occupancy maintained above 99%. Guidance has been met or exceeded since IPO, since the current interest rate environment first escalated in 2022, we've released approximately AUD 108 million of capital for redeployment into higher-returning opportunities and debt retirement. This has provided our balance sheet with the flexibility to continually allocate capital with discipline, directing it to the most value-accretive opportunity, such as the buyback and high-returning developments that drive long-term value. FY 2026 was a year of delivery across each of our key priorities.
We delivered FFO and distributions in line with guidance at AUD 0.209 per security, supported by 3% like-for-like income growth from our contracted rental 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 Glass House Mountains Northbound, now fully open and trading, 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 discount to NTA.
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. 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. DXC's tenant base stands out for both its breadth and quality. 95% of fuel operator income comes from large cap operators with around AUD 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. Our sustainability approach aligns with the broader Dexus strategy. In FY 2026, we maintained net zero on Scope 1 and 2 emissions and 100% renewable electricity purchasing across the managed portfolio.
Glass House 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. FY 2026 saw DXC deliver FFO and distributions of AUD 0.209 per security. This was underpinned by 3% like-for-like income growth, partially offset by higher interest costs and the impact of FY 2025 divestments. While interest rates remain a headwind, our contracted income stream remains strong. That top-line resilience will support FFO growth over the medium term.
DXC's balance sheet remains strong, with gearing of 36% toward the lower end of our target range and no debt expires until FY 2028. Interest rates have increased since the half year. Our focus remains on increasing certainty and reducing the impact of macro volatility. During the year, we extended and increased AUD 145 million of facilities and added approximately AUD 200 million of interest rate hedging.
These actions enhance earnings visibility and ensure liquidity to support continued capital allocation, such as the buyback, while retaining capacity for the committed developments. 70% of the portfolio was independently valued during the year, resulting in a AUD 27.4 million uplift, with cap rates tightening 14 basis points. The uplift was supported by contracted rental growth, the completion of Glass House Mountains Northbound, and continued liquidity in the direct market, including our recent asset sales above book value. 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 market dynamics. EV adoption is rising, but fuel-reliant vehicles still dominate Australia's car fleet, with EVs representing only around 2% of vehicles on the road today. Recent fuel price volatility and tax incentives have supported this EV momentum.
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. Our major tenants are responding to this transition in a meaningful way. They are actively investing in their networks to diversify earnings. This is driving site revenues, improving amenities, and broadening earnings beyond fuel. 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. 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, with investor 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. Modern QSR-anchored assets continue to command strong pricing, supporting both our valuations and the rationale behind our development pipeline. Glass House Mountains Northbound is now fully open and trading, a genuine milestone for DXC. The development achieved a 17% development project IRR, 5.8% yield 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 delivering attractive investor returns. 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. We assess each opportunity through the lens of yield on costs 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. The numbers on this slide tell the story of deliberate cumulative improvement. Since FY 2022, we have released AUD 108 million of assets, with partial redeployment into initiatives that improve long-term portfolio quality and support disciplined capital allocation. 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.
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. 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 yield, which is paid quarterly. This is attractive in both absolute and sector relative terms. Underpinning that yield is a secure and resilient income backed by long leases and very high-quality tenant covenants. With DXC currently trading at a 30% discount to NTA, investors access that income at a compelling entry point backed by quality real estate in a liquid direct property market. DXC enters FY 2027 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. 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. Barring unforeseen circumstances, we expect to maintain FY 2027 distributions at AUD 0.209 per security, which will sit marginally above FFO. This is expected to normalize as contracted income growth is delivered. Thank you for your continued support. I'll now hand back to the moderator for Q&A.
Thank you. For broker analysts that would like 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 Michael Armstrong from Bell Potter. Please go ahead.
Hi, Pat. You haven't provided explicit FY 2027 earnings guidance. Can you please talk about why that is and what the components are for FY 2027?
Sure. Thanks, Michael, for the question. As an income-focused fund, distributions are a core metric that underlying property income can support. In the near term, the payout is marginally above 100% of FFO, and it's temporary. This is due to the cost of debt transition, and it's not a structural issue. We're confident of our top-line growth credentials to support FFO growing back into distributions. Happy to talk about FFO. We expect FY 2027 FFO to be approximately 3%-4% down on FY 2026. From a payout ratio perspective, that's looking at about 103%-104%. The key drivers behind that, as I mentioned, the like-for-like income growth similar to other periods, but if you're adopting the current interest rate curve, you'd see all-in cost of debt rising about 70 points from 4.8%-5.5%, all else being equal.
The net impact of that more than offsets the property income growth for the year.
Okay. Thank you. Could you just clarify what temporary means? Yeah.
Sure. The payout ratio is expected to normalize as contracted income growth is delivered and the earning impacts from the interest rate transition moderates. The timing primarily depends on floating interest rates from here. The direction is clear that the rental growth should progressively rebuild FFO coverage, with the buyback an additional positive driver behind that.
Okay. Thank you. You've done a fair bit of hedging during the period. Can you just remind me what the hedging policy and approach is? Also what some of the rationale behind the extra hedging during the period was?
Yeah, sure. 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. The shape of the curve has changed over the past six months. Look, we acknowledge that shifts in rates can impact earnings, they don't impact the consistency of income growth at the property level, which will support that earnings growth going back into the distributions in the near term.
Thank you. Your next question comes from Murray Connellan from Moelis Australia. Please go ahead.
Morning, Pat. Just a quick follow-up on the discussion around FFO, please. Would it be fair to say that the fund's intention is to effectively hold the distribution flat until FFO catches up?
Good 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. At the moment, we've decided that we're holding it flat for the FY 2027 period.
Got it. Just a question on the timing on the Southbound Glass House Mountains development. Noting that it looks like the guidance is for that to effectively kick off towards the tail end of FY 2026, but it doesn't look like it's yet been committed. 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?
Sure. I suppose firstly, the key thing here is that the tenants on that site, it was important that Northbound opened first. Now that that's opened, there are a number of incremental pad sites that we expect to have on that site, 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. We continue to progress that, Murray, and hopefully can provide some further updates at a later stage.
Got it. Then maybe just looking at the balance sheet and opportunities more broadly. You've obviously got the buyback on, are you looking at any other prospective sales, acquisitions? I guess, how are you thinking about the portfolio strategically at the moment?
Yeah, sure. With our portfolio at the moment, we're quite comfortable with our development pipeline. 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-30s range. Under most deployment scenarios, we expect gearing to be around that level and all else being equal. 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%-35% range. 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.
No worries.
Thank you. I'll now hand back to Mr. De Maria for any closing remarks.
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.
That does conclude our conference for today. Thank you for participating. You may now disconnect.