Thank you for standing by, and welcome to the Dexus Industria REIT FY23 Results Briefing. All participants are in a listen-only mode. There'll be a presentation followed by a question and answer session. If you wish to ask a question, you'll 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 Alex Abell, Fund Manager of Dexus Industria REIT. Please go ahead.
Good morning, everyone. I'm Alex Abell, Fund Manager of Dexus Industria REIT, thank you for joining us for the 2023 full year result presentation. Dexus Industria REIT has interests in 94 properties across Australia, we acknowledge that each of these are on the lands of the traditional custodians.
I would like to start proceedings by acknowledging the custodians across those many lands, pay respects to their elders, past and present, and reaffirm Dexus's commitment to supporting reconciliation. Today, I will touch on DXI's investment proposition and key highlights for the period, the financial outcomes and positioning of the REIT, as well as providing some color on portfolio performance and the dynamics across the markets in which we operate. The purpose of DXI is to generate superior risk-adjusted returns for investors seeking listed industrial real estate exposure.
We deliver this through four key pillars. Firstly, delivering organic growth through ownerships in 94 high-quality assets. Occupancy across the portfolio is 97.5%, and the income is underpinned by a weighted average lease expiry profile of 6.3 years and embedded annual rent reviews, which in FY23 averaged 4.9%.
Conservatively managing the balance sheet has always been a focus of ours, AUD 250 million of asset sales contracted throughout the period will result in DXI's look-through gearing, reducing to 27.3%, and the hedging profile for FY24 being over 70% of total debt at an average rate of 1.7%. This strong capital position provides resilience and also the flexibility to invest opportunistically over the coming periods.
We have an extended track record of creating value through active asset management, which is often delivered by improving the efficiency of our assets in partnership with our tenants, and having the discipline to recycle assets and reinvest into higher returning opportunities.
These activities are all driven by Dexus, an aligned manager with deep, real asset capability and over AUD 60 billion of assets under management, including AUD 13 billion of industrial real estate. Dexus's capability and depth of expertise provides us with the ability to leverage insights and extract maximum value from our assets, and ultimately positions DXI to outperform throughout the investment cycle. Now, let's turn to the highlights for the period.
What you'll see in this results presentation is that we have consistently delivered on our commitments that we laid out 12 months ago, including the FFO guidance and proactively disposing of AUD 250 million of assets to reinvest into higher returning opportunities and to repay debt. With pro forma look-through gearing anticipated to be 27%, which is below our 30%-40% target range.
Leasing activity has also been strong across the board, capturing growth in FY23 that will then compound into FY24. Re-leasing spreads strengthened to 24% into the second half of the year, and the average rent review reported was 4.9%, delivered by CPI-linked reviews across half the portfolio, and new developments totaling 50,400 square meters were completed to June 2023.
If we include another two projects completed just last month, the total developments exceed 68,000 square meters, leased to global e-commerce players, including Amazon, HelloFresh, and Marley Spoon. The portfolio now comprises of interest in 94 properties, valued at AUD 1.6 billion. Income resilience is provided through high occupancy, combined with annual rent reviews, driven by CPI and fixed uplifts, and a diversified pool of tenants.
These property and income foundations are enhanced by the growth we are positioned to capture through the lease expiry profile and the development pipeline, which will provide opportunities to capture strong market rental growth in future periods.
The DXI portfolio continues to maintain a net zero status, an outcome we largely achieved through our controlled assets, which has been supported by the installation of 2.3 megawatts of solar across the portfolio, and we have an additional 6 megawatts contracted for deployment in FY24.
Dexus, as the manager of DXI Industrial REIT, has progressed numerous monitoring and inclusion initiatives throughout the year, has also refocused the sustainability strategy on customer prosperity, climate action, and enhancing communities. Let's now turn to the financials. At the top line, property FFO increased by 13.3%, driven by average rent reviews of 4.9% and a full period contribution from Jandakot. These growth drivers were partially offset by the divestment of Rhodes Corporate Park for AUD 161 million in November 2022.
Net finance costs were $5.9 million higher, driven by a higher debt balance following acquisitions in 2021, and the cost of debt increasing 110 basis points to an average of 3.5%. FFO per security of $0.171 is in line with our, with the midpoint of our guidance range, and the distribution of $0.164 was as we stated in August 2022.
Net tangible assets per security reduced $0.16 to $3.44. The NTA movements were largely driven by a $31 million fair value write-down associated with the divestment of Rhodes Corporate Park in the first half, and over the year, like-for-like valuation declines of $22.9 million were reported.
We are well-placed from a capital perspective, with pro forma look-through gearing sitting below our 30%-40% target range. This is a position of strength that allows us to pursue the development pipeline and other opportunities that may arise in future periods. The asset sales also supported natural hedging, which averaged 68% throughout FY23, and we anticipate hedging to exceed 70% in FY24.
From a security and certainty of funding point of view, we took out AUD 75 million of new five-year debt facilities, and following the receipt of sales proceeds, canceled AUD 175 million of near-term maturities. After taking into consideration these changes, DXI does not have any debt maturities until financial year 2025. We revalued 100% of the portfolio for the year.
The portfolio fell in value by 3.5% over the year, which equates to AUD 56.3 million. In the first half of the year, AUD 26.7 million of fair value adjustments were reported and largely impacted by the sale of Rhodes. In the second half of the year, financial fair value declines of AUD 29.6 million were reported and cap rates expanded a further 27 basis points.
Over the year, cap rates expanded 47 basis points in total, with valuation declines being somewhat offset by higher market rents, especially across the assets with short weighted average lease expiries, as well as those assets with passing rents increasing by CPI reviews. The industrial assets in the portfolio now make up 89% of total assets.
4.9% average rent reviews, in addition to higher rents recorded upon renewals, were somewhat offset by inter-period vacancy that impacted like-for-like growth by 2%, resulting in 3.2% being reported. Re-leasing spreads gained momentum in the second half of the financial year, growing to 24%, which were driven by key asset management initiatives.
The total leasing activity surpassed 127,000 square meters, another record, whilst the overall market has remained strong, fundamentally, the leasing outcomes are a result of the quality and the location of DXI's industrial assets, which can reach 80% of the population in each capital city within 60 minutes and attract a deep pool of tenants.
As we complete the development pipeline, the portfolio quality will continue to improve, ultimately, we anticipate more than $19 million of additional rent will be derived by assets developed by Dexus. Active asset management has always been a key driver of value, re-leasing spreads are only one aspect of a valuation. In simple terms, valuers apply a cap rate, or in effect, a multiple, to an estimated market rent to determine value.
When we exceed the estimated market rent, everything else being equal, the valuation will rise by the same amount, that's a key factor we focus on when driving asset management initiatives. In Victoria, we drove re-leasing spreads of 30%, 39%, and 21% across three deals, importantly, from a value perspective, the deals averaged 20% above the independent valuer rent assessments.
At Narangba, in Brisbane, we worked with our tenants to provide additional tenure at rents 22% above the valuation assessment. In Adelaide, where we bought assets in 2021 at a 9.7% passing yield, we drove rent another 5% higher, further improving the overall return on cost.
Our Jandakot investment is performing strongly, with 5.4% average rent reviews, supported by 61% of the properties with CPI reviews and re-leasing spreads of 21.6% across 45,000 square meters of activity. Following the recent development completions, there is now over 435,000 square meters at Perth's leading master plan industrial estate, and we remain well-placed to continue to roll out developments at targeted yields on costs of 6%. Now, moving to our developments and how we plan to unlock future growth.
The pipeline is now almost 400,000 square meters across three locations, and when complete, over one-fifth of the portfolio will be Dexus developed. We have committed AUD 87 million of projects, another AUD 150 million of capital will be required to build out on the current land holdings. Specifically at Jandakot, we completed five warehouses to July 2023, including a 21,000 square meter warehouse to Amazon, that provides them the flexibility to expand further as they grow on the site. We have only built to 27% coverage compared to the usual 55%-60% site coverage.
Amazon's decision to establish their primary Perth presence at Jandakot reinforced our view that the location is the best in Perth for e-commerce distribution, and we expect many other tenants will follow suit, which will drive demand for the remainder of the developments.
We currently have two spec projects totaling 31,800 square meters at Jandakot, and with completion scheduled later this calendar year, we anticipate capturing the strong market rental growth that remains resilient on the back of low supply and a booming West Australian economy. In Sydney, we have a fund-through development at Kemps Creek. We have contracted to have this warehouse delivered for a fixed price, removing the risk of cost inflation, whilst also allowing us to benefit from rising rents that continue to be achieved.
We anticipate this development will complete in late 2024. At Moorebank, we expect a planning approval in the coming weeks, which will allow us to progress on a 17,800 square meter development in one of Sydney's strongest submarkets at a yield on cost of 6%. We have included additional detail on the development pipeline in the appendix for your future reference.
The industrial leasing markets are underpinned by above average demand and low vacancy. Dexus anticipates a structural shortfall that's created between the 2.8 million and 3 million square meters that is required, shown in the blue line on this slide, and supply, which is anticipated to be 2.2 million square meters over the next 12 to 15 months.
The challenge the occupier market has is the supply, as there simply isn't enough of it, particularly high quality supply. This reduces their ability to move into more efficient and flexible facilities that may include automation and improve their business performance. With population growth strengthening and e-commerce on a steady upward trajectory, we expect demand to remain above supply.
As a result, anticipate vacancy to remain low. The chart on the right shows the submarkets most relevant to where DXI is delivering new development product. The starting point for these markets is a very low vacancy level of 0.2% in Sydney and 0.6% in Perth. Some of the lowest vacancy rates in the world.
While Sydney's outer west market may look slightly oversupplied, this is a 12 million sq m market, so 530,000 sq m of spec supply represents an increase of less than 4%. We anticipate once construction on new facilities progresses and completion dates become more certain, tenants will move from other Sydney submarkets, such as the Southwest, to take up this new stock, which is otherwise not available.
We expect a similar movement of tenants in Perth into the southern precinct, where there is a growing cluster of e-commerce operators at Jandakot, and the new housing we are creating provides choice for tenants that has otherwise been starved of alternatives. The Dexus team continue to produce strong results at BTP, and in the last 12 months have leased 8,700 sq m, which equates to 27% of total building area.
There continues to be good demand from technology and life science tenants, who took up approximately 30% of leasing. Rents are holding firm, which is a reflection of the quality and relevance of the location and the buildings. Occupancy is now increased to 86%. With over 80 customers across DXI's 12 buildings, there is excellent tenant diversity that provides resilience to the income line and cash yield. DXI is well placed to deliver long-term value.
Development completions, double-digit re-leasing spreads, 50% of the portfolio benefiting from CPI reviews are all factors that will drive like-for-like growth into FY24. As I have outlined today, the balance sheet is resilient. We have the flexibility to be defensive if markets become more challenged or offensive, where we see the ability to capitalize on unique opportunities to create value.
Barring unforeseen circumstances, funds from operations guidance is AUD 0.171 per security, Distributions paid quarterly are anticipated to be AUD 0.164 for the financial year 2024, which equates to a 5.9% distribution yield based off yesterday's close. Thank you for joining the call, and I'll now hand back to you for 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 headset to ask your question. Your first question comes from David Pobucchi from Macquarie Group. Please go ahead.
Morning, Alex. Can you hear me okay?
I can.
Great, thanks. Hope you're well, and thanks for taking my questions. Just the first one: you typically provide cost of debt assumptions as part of guidance, but you haven't done so this time. Are you able to provide any color on that or any other assumptions that form the AUD 0.171 per share, please?
Yes, good morning, David. We did provide an assumption last year, given that, you know, that was largely framed around the basis that there was significant interest rate volatility at a similar period last year, which straddled effectively 100 basis points. Whereas, that number probably more represents about 50 basis points this year.
Looking back over the last couple of months, it's fair to say that our interest rate assumption sits around the mid fours. Obviously there's some moving parts within our income line, and we also anticipate a little bit of volatility in the interest rate expense line. Given our, our debt book is 70% hedged, we've had the confidence to come out with a guidance number of AUD 0.171. We're pretty comfortable that we'll be able to deliver that.
Thanks, Alex. That's helpful. Appreciate it. You touched on some of the market dynamics in your presentation. Can you provide a bit more color on what you're seeing in terms of leasing demand? Secondly, what you're seeing in terms of capital demand, please.
Yeah, sure. I mean, in terms of capital demand, probably the best example we have of that is the 2 in June sold and announced in June, and the proceeds will come in 2 weeks for one of those assets, and the other assets' proceeds will land in October.
Those assets were sold at an average discount of 2% to our December book value. There is still good demand out there for assets whereby you can generate a good cash yield. When I say a good cash yield, I mean north of 5 cash yield with the potential for growth. Our portfolio provides, certainly provides those characteristics.
In terms of leasing markets and dynamics, I mean, as always, each sub-market has its own nuance, but generally speaking, we have seen a, a slowdown in demand. We're not being bowled over by demand the way we were 12 months ago, but rents are still being pushed upwards. There's still tension in the market, and that really just comes back to a lack of choice for tenants.
You do need to make some difficult calls, and we made some difficult calls during the year around how hard we push rents, but we've provided some examples of those in our slides that, you know, despite demand slowing a little bit, and that's largely based on retail sales slowing, and we do expect inventories to continue to tail off a little bit, that the overall vacancy dynamic means that rents will remain resilient, and we'll continue to get some growth from where we are today.
Thanks, Alex. Just one last one before I turn it over, if I could, please. Just any insight in terms of future capital recycling? Are there any specific assets that, that you look to recycle? Maybe any comments on, on BTP, please?
Yeah. We've obviously done a fair bit of work during the period, selling AUD 250 million worth of assets is no mean feat, and we did that quite proactively to get ahead of funding commitments and provide the balance sheet with the flexibility, not only to do the development pipeline, but to pursue other opportunities.
We will continue to remain open-minded about recycling assets and either paying down debt or looking to invest that elsewhere into new opportunities. But it's fair to say, at the moment, we're very comfortable with the capital position. We don't have any particular driver to sell assets immediately. We will work through the development pipeline and funding requirements methodically, as we have done this year, into future periods.
Thank you, Alex. Appreciate it.
Sure.
Your next question comes from James Druce from CLSA. Please go ahead.
Yeah, good morning, Alex. Can I just dig into one of David's questions, just talking about the assumptions next year? Firstly, on the 4.5% cost of debt, what floating rate are you assuming for that?
Good morning, James. Well, that's where we see BBSW sitting around those levels, so I think that does-
Okay. What's the cost of debt? Okay, what's the actual cost of debt assumption for the weighted average?
Perhaps if I just peel this back for a moment. BBSW sits around, sits in the mid 4s. You add margin and line fees to that, your marginal cost of debt is 6%, give or take, a little bit above, I would suggest. You've got hedging at 1.7% that is laid over, over the 70% of the book. You can feed that through your models.
Yeah, that's great.
It should give you the right answer.
Easy. Like for like NOI, how are you thinking about that, given that you've just leased up a bit of vacancy, you're still seeing very strong, leasing spreads coming through?
Exactly. Average rent reviews during the period were 5%. You had 16% renewal spreads, as you said, we picked up some, we leased it. Some of the challenges I, I have when predicting like for like income growth is that vacancy does play a role in that, as I called out during the slides, it impacted our like for like growth during the period by 2%. I would expect it's north of 5% into FY24.
Yeah, because I don't remember you guys calling out that the vacancy risk, for the second half. Can we just dig into that? Because that was quite a substantial impact.
Yeah. We had some vacancy at Adelaide Airport. We'd been working with a number of tenants. It just took us a little bit longer to secure those deals, and that did hold us back in the second half of the year in terms of revenue. That's probably just some of the challenges of inter-period vacancy, which is a little bit difficult. I can sympathize with investors in terms of visibility on that. It happens from time to time, and that's what held us back.
Is that just tenants being a bit more cautious, or is there, is there anything to extrapolate from, from that comment?
It's sometimes caution, it's sometimes just caused by internal machinations on the tenant side in terms of getting their approvals, particularly if they're offshore companies, for example. Sometimes it's legal matters, so, you know, sometimes 2 weeks can drag into 4 weeks, can drag into 6 weeks.
These are just sometimes the day-to-day real-life challenges that happen. I wouldn't say it's particularly common that you have a heads of terms that drags on for 3 or 4 months. When it does, it can sometimes impact that inter-period vacancy downtime.
Okay. And I just noticed at the back of the press, the Jandakot yield on cost to complete, completed was about 5.2%. Yeah, your marginal cost of debt is 6. You got 2, 2 earnings. Is that the case, and, and does it really make sense to, to ramp up development under these-
From a yield on cost point of view, building to only 25% of your land cover does drag it back. We took a view that Amazon would help us build that cluster effect and build greater momentum in our development pipeline that would help unlock that land to take it from being effectively a drag on our interest expense.
Bearing in mind, we don't capitalize interest on development land until it becomes an active development. To put that in simple terms, we've got about AUD 80 million of land on our balance sheet that's dragging our interest expense line on an unhedged basis by about AUD 5 million a year. Unlocking that generates us a yield well in excess of 6% because we're taking it from being a drag of interest expense to being fully income producing.
From an accretion basis, it looks more like 8%. Every AUD we stick in and, and turn it into a, you know, 6% total yield on cost for the land. It's, it's a slightly different way to think about accretion, but it's, it's something you should definitely keep in mind in terms of how supercharged that development land can become, given it goes from being a drag on interest expense to fully income producing.
Again, maybe just to ask the question another way, in terms of value creation, should we expect a yield on cost plus your management fee to exceed the cost of debt in the near term?
Oh, well, we've called out the yield on cost of 6%. The management fee is. I mean, when you value an asset, you don't, you don't value a management fee as part of a valuation. It certainly should be value accretive. It should be accretive to NTA, and as I said it, to the bottom line, it should also be accretive because we're deploying it against land that is just a simple drag on our interest expense.
Maybe not so much on a cash basis. Okay. All right, one, one last question, if, if I may. Just the, the look-through tenant incentives and maintenance CapEx. There's, there's a note halfway down, but I don't think you have the non-cash incentives in that.
Yeah. Incentives and maintenance CapEx for the year. If I can just explain how we think about that. The maintenance CapEx and incentives for cash incentives for the industrial book was about AUD 1.4 million on the AUD 1.4 billion of assets. Then for the business park assets, we had about AUD 1 million of maintenance CapEx at BTP and Rhodes, then we had incentives of about AUD 3.7 million across those two precincts. They're obviously the real cash drag for us, which we've been pretty open about over recent periods.
As we move this vehicle and progress our strategy towards being fully industrial, we expect the maintenance and incentive drag to reduce significantly, as we've seen this year across the industrial book.
I'll finish up here, but in the investment property reconciliation, the incentives are AUD 7 million. I'm just trying to reconcile the AUD 3.7 you just provided.
We will dig into that detail off the call.
Thank you.
Those numbers I provided should likely get you there.
Okay.
If we're a little bit shy, then I'm sure we'll be able to bridge it offline.
Thank you.
Your next question comes from Murray Connellan, from Moelis Australia. Please go ahead.
Morning, Alex. It looks like the expected completion dates on the development book have been pushed back slightly across the board. I was wondering whether you could comment on that, please, and then also, just more broadly, how you're seeing... things like the availability, the, the availability of, of labor and materials at the at the moment versus six months ago.
Good morning, Murray. Yes, so our Sydney developments have been pushed back another 6 months, give or take. It's been pretty frustrating in the outer western Sydney. We're not the only developers that are held up out there.
Even those with development approvals are held up by other matters relating to other government entities. If anything, that's an incredible frustration for occupiers as much as developers. We feel reasonably confident that we will be able to complete Kemps Creek by Q2, financial year 2025. Moorebank, as I said, we're expecting our DA in the next couple of weeks there, so we should be underway pretty quickly.
In terms of pricing and material availability, the pressure seems to have come off pricing a little bit, albeit it is a little bit submarket specific. You know, for example, in the outer west of Sydney, the airport construction is dragging a lot of labor, we do anticipate that will start to free up in the coming periods.
In Perth, we've got the constant battle that any company has with resources and the drag that that provides on labor and cost. We haven't seen the same escalation in costs in recent months as we have in prior periods. We're pretty comfortable that it's starting to tail off. Does it drop meaningfully? I doubt it. We're pretty comfortable where we sit now in terms of our yield on cost and how we're looking at, deploying leading forward.
Thanks. Just on BTP, it looks like the vacancy reduced there a bit, 3.5. There are still a few near-term expiries as well. Would you mind just commenting on the, you know, tenant demand strategy around leasing and the outlook there as far as you can see?
Yeah, sure. I mean, to a certain extent, it's much of the same. Small tenants remain active. Incentives are low for small tenants. They don't have a lot of choice for high quality buildings, which our buildings provide. In the last 12 months, we secured a tenant over one of our buildings, which has been vacant for quite some time, and they are a vet science user, so it's great to have another medical and life science-related user come into the precinct, which is, you know, growing in trend at BTP. Labs, medical users, tech users, they've got a real presence there now. They continue to be our targets from a strategic point of view.
Frankly, subtenants that are sub-200 square meters move faster, and are easier to deal with than the larger briefs. Overall, Brisbane's performing pretty well. Even the CBD's seen a pickup in occupancy, and so we're benefiting from just greater optimism in more generally, and, and you're seeing that through the numbers as well.
Thanks very much.
The next question comes from James Druce from CLSA. Please go ahead.
Oh, goodday, Alex, I just had, had one follow-up for you, if I may. You mentioned, some specific assets where the rents were, the market rents were versus the valuation, or the rents and the valuation. Can you comment on the entire portfolio for industrial, where rents are versus what the rents are in balance?
Yes, that's a good question, James, and one of the reasons why I called that out, it's a matter that we've been looking at for a long time, is that we, we tend to consistently outperform the value or assessment of rents.
So across the book now, we're broadly market rented, and in, in, you know, when you, when you reference the value assessment of rents compared to passing rents. As I mentioned, we, we sort of consistently outperform that. That should probably give you a little bit of color in terms of we're broadly market rented today, but I expect us to continue to outperform.
Okay, maybe I'll ask the question another way. What sort of market rent growth do valuers put in for the next couple of years, say?
That it's always different by every submarket. They're running through CAGRs of circa 3.5% on a 10-year basis. But some of them have, you know, short-term growth of 5%, for example, and then it tails back down over the later periods.
What that ignores is the starting rent, which is always, you know, that's what they capitalize. There's, there's many moving parts to a valuation and the, the CAGR, I probably, to be honest, I focus less on the CAGR, I focus more on the starting rent and your ability to beat that, which is what we continue to do.
All right. Perfect. Thank you.
Thanks.
There are no further questions at this time. I will now hand back to Mr. Abell for closing remarks.
Thanks, everyone, for joining the call. I'm really proud of our team here at Dexus and the results we've achieved during the year. We're positioned in the right assets, we've got a really strong capital position, and we're delivering on our strategy. We look forward to catching up with you all in the coming days and weeks. Obviously feel free to drop us a line in the meantime, and we'll leave you to the rest of your day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.