Thank you for standing by, and welcome to the Dexus Industria REIT 2024 half-year results. 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 1 on your telephone keypad. I would now like to hand the conference over to Mr. Gordon Kewkie, Fund Manager. Please go ahead.
Good morning, everyone. I'm Gordon Kewkie, the new fund manager of Dexus Industria REIT. Thank you for joining us for the 2024 half year results presentation. I'd like to start proceedings by acknowledging the traditional custodians across the many lands on which we operate throughout Australia. We pay our respects to their elders, past and present, and remain committed to supporting reconciliation across our business. Today, I'll cover off on DXI's investment proposition and key highlights for the period, the financial outcomes, as well as providing some color on portfolio performance and the dynamics across the markets in which we operate. We'll then hand over to Q&A, where I'll be joined by Chris Mackenzie, Head of Industrial Transactions and Development, and Chris Glasson, Head of Real Estate Funds Finance. The purpose of DXI is to generate superior risk-adjusted returns for investors seeking listed industrial real estate exposure.
We deliver this by generating organic income growth from high-quality assets, with our strategically located portfolio capable of reaching 80% of the population in each capital within 60 minutes. Second, we conservatively manage the balance sheet to provide resilience and the flexibility to invest opportunistically. We manage gearing with regard to where we are in the valuation cycle and have operating target gearing range of 30%-40%. Third, we take an active approach to managing the portfolio through improving the efficiency of our assets in partnership with our tenants and pursuing additional value-creating opportunities, such as our development pipeline. Supporting these pillars is Dexus, an aligned manager with over AUD 12 billion of industrial assets under management. Dexus's deep real asset capability and expertise provides us with the ability to leverage not only insights, but tenant and supplier relationships.
In doing so, it allows us to extract maximum value from our assets and ultimately positions DXI to deliver strong relative performance over the long term. Turning to the highlights for the period. Today's result demonstrates the benefit of our proven and long-standing active management approach. Over the past 18 months, we've delivered more than 160,000 square meters of leasing, achieving double-digit re-leasing spreads. This has underpinned strong property income growth, with like-for-like growth of 7.3% across the portfolio this half. We also significantly increased occupancy at BTP to 95.7%, which is a fantastic achievement by the Dexus leasing team. Over that period, we also dealt with forthcoming expiries, bringing forward re-leasing where we thought it favorable to capture localized supply-demand dynamics. Importantly, we have executed almost AUD 300 million of divestment since July 2022.
This has provided us with one of the lowest gearing levels in the sector at 26.2%, which is below our target range and positions the fund for strong relative performance should economic settings remain challenging. Equally, it also provides us the capacity to be opportunistic, should conditions improve. This has been achieved while remaining on track to deliver our FY 2024 guidance, notwithstanding the impact of higher interest rates. Turning to the fundamentals of our quality portfolio. The diversified portfolio comprises interest in 91 assets, valued at AUD 1.4 billion, which generate secure income with strong defensive characteristics. Property income growth is embedded within the portfolio, underpinned by close to full occupancy across the portfolio and record occupancy at BTP, which is at its highest since IPO.
Our portfolio offers an attractive blend of fixed and CPI-linked reviews, which delivered an average rental increase of 4.8% for the half. While leasing volumes in the period were low, this largely reflects the record leasing we achieved in FY 2023, which delivered double-digit re-leasing spreads, as I touched on earlier. We have minimal lease expiries for the second half, providing strong income visibility. Our income is resilient, with a WALE of 6.1 years, backed by high-quality tenant covenants, with no evidence of distress across our portfolio. We maintained a disciplined approach to pursuing growth opportunities through our development pipeline. Over time, we have the opportunity to introduce an additional AUD 16 million of additional income to the portfolio at attractive incremental returns of approximately 8% and above. Turning to sustainability.
Our approach aligns with the Dexus sustainability strategy, which includes three priority areas, being customer prosperity, climate action, and enhancing communities. The DXI portfolio continues to maintain its carbon-neutral status, and across our business park assets, we have maintained close to five-star NABERS ratings. We continue to explore further opportunities to roll out solar across the portfolio with a 1.6 megawatt project at Westrac, which has recently received design approval.... Rooftop solar delivers positive environmental outcomes for our portfolio and for our customers. At BTP, a waste diversion program has reduced the amount of waste being sent to landfill by over 20%. A great outcome, demonstrating our constant endeavor to drive meaningful improvements in sustainability across our portfolio. Turning to the financials. FFO for the half was AUD 27.3 million, or 8.6 cents per security.
Property FFO was down 2.6%, primarily due to the impact of divestments. Significantly, the stabilized portfolio continues to drive strong top-line performance, with like-for-like growth of 7.3%. Reflective of a lower average debt balance from asset sale proceeds, net finance costs were down 8.2%. The full impact of high debt costs was mitigated by a strong hedge cover. With regards to the balance sheet, net tangible assets per security reduced AUD 0.12 to AUD 3.32. The NTA movements were largely driven by a AUD 36.1 million like-for-like property devaluation and a AUD 7.8 million fair value loss on derivatives. We are well-placed from a capital perspective, with pro forma look-through gearing of 26.2%, which is below our 30%-40% target range.
We've been deliberate and decisive in positioning the fund to deliver strong relative performance, regardless of the economic climate. This position of strength allows us the flexibility to pursue the development pipeline, as well as other opportunities that may arise in the future. Asset sales supported natural hedging, which averaged 77% over the half. Hedging of over 80% is expected in the second half, which provides material insurance against increases in interest rates. During the half, we independently revalued 100% of the portfolio. On a like-for-like basis, property valuations declined AUD 36.1 million, or 2.5% on prior book values. Our weighted average cap rate expanded to 5.77%, with industrial cap rates expanding 40 basis points. Rental growth outcomes across the portfolio continued to support valuations. Industrial assets within the portfolio now make up 89% of total assets.
Like-for-like growth was 6%, supported by 4.9% average rent reviews and double-digit re-leasing spreads achieved in FY 2023. We expect strong like-for-like growth to be maintained over the second half. 23,600 square meters of leasing was achieved across a small sample size of deals. This followed the record volumes achieved in FY 2023 and are also a function of high occupancy with limited expiries. Pleasingly, we continue to consistently achieve rental outcomes above valuation assumptions, having outperformed by 10% on deals executed this half. As we look to progress the development pipeline, the quality of the underlying portfolio will continue to improve. Upon completion, we anticipate more than AUD 16 million, representing 15% of additional income, to be delivered from the completed developments.
Jandakot continues to perform well, with 5.2% like-for-like income growth, underpinned by 59% of income linked to CPI. There are now 55 industrial assets, totaling 430,000 square meters across Perth's leading master planned industrial estate. We remain well-placed to continue to roll out further developments that will enhance the quality of the portfolio at attractive risk-adjusted returns in line with our strategy. The total cost of development pipeline is AUD 269 million across more than 330,000 square meters, with projects in Sydney and Perth. Across our committed projects, we have AUD 42 million of remaining spend. Included in this amount is our project in Moorebank, where we've recently received development approval to deliver a multi-unit estate across 17,900 square meters.
This project is located in one of Sydney's strongest submarkets and is to be delivered at an attractive yield on cost of 6%-6.5%. Over the medium term, we estimate a further AUD 125 million of capital will be required to build out the landholdings at Jandakot, where we are targeting yields on cost of 6%+ and generating an incremental yield of 8% and above. DXI is well positioned to fund these developments within the constraints of our target gearing range. A notable omission from our pipeline is a fund-through development at Kemps Creek. Following continuous delays through the planning process, and with no clarity on likely delivery timelines, we decided to exit the project.
In doing so, we were able to provide additional balance sheet flexibility by releasing AUD 67 million of future funding commitments, which equates to a 3% gearing benefit. We've included additional detail on the development pipeline in the appendix for your reference. Long-term thematics for the industrial sector remain supportive, driven by population growth. Australia's population is expected to grow by more than 50% over the next 40 years, or over 1% per annum, which is one of the highest rates among advanced nations. The continued structural shift towards e-commerce is also expected to continue, with online penetration rates expected to increase to 16% by 2030, an increase of approximately 25% from current levels, or 3.5% per annum.
Together, population growth and e-commerce are expected to generate incremental demand for approximately 2.8-3 million sq m of space annually. Over time, this demand is expected to run ahead of the supply of immediately available serviced land. Australian vacancy rates remain low in the global context, with rents also being more affordable, and we are not expecting the domestic market to experience a sharp reversion in rental growth as we witnessed in offshore markets. Although domestic rental growth has begun to moderate as market conditions normalize. At BTP, we delivered exceptionally strong performance, with strong like-for-like growth of 15.4% for the half. This was achieved with 4,400 sq m leased, with continued interest from technology and life science tenants.
Occupancy increased 10 percentage points to 95.7% during the half, but was also supported by average rent reviews of 4%. As in past periods, we have continued to achieve strong retention levels, with 84% of space retained or backfilled within 3 months. These factors continue to support a very attractive income yield of more than 7%. Pleasingly, leasing was executed at positive releasing spreads, while incentives remained circa 15 percentage points lower than the broader Brisbane office market. In summary, I am pleased to reaffirm our FFO guidance of AUD 0.171 per security, as well as distributions of AUD 0.164, which reflects an attractive distribution of approximately 6% for our investors. We are well-placed to continue delivering investors with long-term value.
Our focus remains on: enhancing portfolio attributes that deliver organic income growth, pursuing value-enhancing investment opportunities, maintaining a strong capital position, and leveraging Dexus's capabilities. Our earnings profile is resilient, underpinned by embedded fixed and CPI rental escalations, minimal near-term lease expiries, and prudent hedging levels. Significantly, our balance sheet provides us great flexibility to perform well, regardless of the economic environment. Thank you for joining the call. I will now hand back to the moderator 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 handset to ask your question. Your first question comes from David Pobucky with Macquarie Group. Please go ahead.
Good morning, everyone. And Gordon, congratulations on your appointment, and on the results as well. Look, FFO beat consensus expectations, and you achieved good leasing outcomes at BTP, which increased occupancy there substantially. Guidance was, was only reiterated. So just wanted to ask how we should think about that, from, from your perspective, what's different now, to the upside or the downside versus what was embedded in guidance, when you set it, please?
Thanks for the question, David, and appreciate the message. Look, we remain comfortable with guidance. We believe we're in a strong position to deliver guidance for the period. As you rightly pointed out, there were areas of outperformance within the portfolio, but there were also mitigating factors which meant that we held guidance. Some of these included an early surrender at Jandakot. We were aware that that would create an income hole in our FFO, but it was ultimately the right real estate decision, and on that basis, we proceeded with the surrender. We also saw an unexpected delay within the Kilsyth settlement, which pushed out by about four months and created a bit of a earnings drag for us.
And then finally, we also saw minor delays at our Jandakot developments, which pushed back the leasing program. So hopefully, those factors give you a bit of color as to what ultimately has us holding our FFO guidance for the period.
Thank you, Gordon. Appreciate the color there. You also mentioned double-digit re-leasing spreads, but just wondering if you could quantify what they were in industrial and maybe just expand on leasing conditions and, you know, are you seeing leasing tension continue to soften?
So I guess just to, as by way of reminder, we brought forward a lot of FY 2024 re-leasing into the FY 2023 financial year, and in that period, we delivered re-leasing spreads of around 17%. Going into this period, we had very minimal lease expiries, and in terms of our industrial leasing undertaking, there were only really 5 deals. 3 of those were at Adelaide. If you recall, we had bought those assets at an overrented position and with an initial yield of around 8%. So we managed to hold those rents, but still outperform value or rents by around 10%. So that was a really good outcome. The other 2 leasing deals were at Jandakot, where we achieved re-leasing spreads in the low teens.
... In terms of the broader market, I mean, we've been cautious for some time now. You know, rents have been normalizing. You know, there's still demand, but where we find ourselves now is a situation where tenants have choice, and with that choice, you know, comes softer rents going forward. A lot of that will be a function of localized demand and supply dynamics, and obviously, which markets you're operating on. You know, we, the industrial market remains strong, but we just don't really expect to see the same extent of rental growth as witnessed in past periods.
Thank you. Just one last one from me, if I may, before I turn it over. With you stepping into the role, are you thinking about the strategy for the vehicle any differently? Maybe if you could just touch on BTP there as well, please.
No, I mean, the strategy is fit for purpose. Both Alex and I worked on the fund for seven years, and we're pretty aligned in our views. So, you know, the order of the day is really executing on what we need to do, which is to maximize the portfolio that we do manage. Obviously, within that, there's certain plans in place, and you've mentioned one of them, which is BTP. I would characterize us as being patient in terms of achieving an outcome there. The portfolio is now generating a 7.5% income yield, which is quite attractive, but probably the transaction market needs to improve a little bit for us to have a transaction pathway.
Sentiment around interest rates definitely gives us a pathway to making that happen, but a lot of it really depends on having a motivated purchaser for that asset. While we wait patiently, we will continue to drive performance out of that asset.
Great. Thanks, Gordon. Good luck with the rest of the year.
Thanks, David.
Thank you. Your next question comes from James Druce with CLSA. Please go ahead.
Yeah, hi, good morning, Gordon. Just to follow up on David's question, can you quantify how much that surrender income hole actually is?
Thanks, James. The hole at an income line was around AUD 800,000 for the period. We've subsequently released 40% of that space. Majority of that's back-ended in this half, so you don't see that coming through. Eight hundred square meters of the size was from the surrender date of November, I believe. So there's only a small amount of income coming through into the first half. Obviously, we've taken the benefit of that surrender and applied it against interest, and so on a net basis, the hole was around AUD 600,000, give or take.
Okay, that makes sense. And then in the accounts, and this, can we just run through sort of the big picture? You book about AUD 11.5 million worth of surrender income, and as well as, I think there's a divestment Grand Street, as well. But it looks like you've taken some of that income above the line, so maybe AUD 1 million worth. Can you just maybe describe what's going on there?
Yeah, thanks, and good observation, James. I'm not surprised you picked that up. So the long and short of it is we've taken none of that through FFO, which is probably one of the reasons why we've held guidance. All of that's been booked through our statutory profits. So, does that hopefully give you a bit of color as to how it was treated within our accounts?
Okay, maybe we'll take it offline. And then just on BTP, I mean, it's a record occupancy. You've just moved occupancy up 10% in six months. Office markets generally are still pretty weak. I appreciate this is a single asset, but this has been an asset that's been difficult to lease up over a long period of time. Just curious, what actually changed over the six months? I mean, what's really going on with that asset?
Well, it's fair to say, it definitely outperformed our expectations. We'd obviously were hopeful that we could capture that income in time, but I think it really comes down to just, you know, great commitment from our leasing team. We've spent a little bit of money at Nine McKechnie, in particular, which positioned us to capture that opportunity. The interest for that space was pretty broad, you know, pretty broad-based, so it's hard to really read too much in terms of where that's coming from. I do think it ultimately reflects just the value proposition of BTP within the broader Brisbane market, where BTP provides a really good value proposition to tenants.
Yeah, okay. And then, has that leasing been reflected in the val? Because the asset was down 2.5% over six months.
Yes, some of it will definitely be captured in the vals.
Okay, so how does that work? You lease up 10% of the building, but the val's down.
Well, I mean, it... Some of it's, you know, been taken up in prior periods, so it's... We've been working on Nine McKechnie, for example, for multiple periods. Some of that was reflected in prior period values. So it really is us outperforming downtime assumptions. The full whack of that does not necessarily come through in a single period.
Okay. All right, thank you. One more, if I may, just the simple one, just the OpEx for the half and then the cost of debt that you expect for the second half.
So OpEx, look, the lion's share of that was probably the landlord works at Nine McKechnie, which is around AUD 700,000 minimal maintenance CapEx through the portfolio this half. In terms of debt cost, we printed a number of 3.9% for the half, and we're probably expected to move up marginally from there for the balance of the year. 80% of the debt's hedged-- over 80% of the debt's hedged in the second half, so it should be broadly consistent, although slightly higher.
Fantastic. Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Murray Conallin with Moelis Australia. Please go ahead.
Morning, Gordon. Obviously, still reasonably good income growth coming through from the industrial portfolio, and appreciate that the leasing activity in the last six months probably wasn't numerous enough to get a decent feel for what spreads would be looking like at the moment. But I was wondering whether you might just be able to comment on the under-renting in the industrial portfolio at the moment, as far as you can tell. And yeah, within the context of that, just how we should be thinking about that income growth figure, more medium- to long-term, please.
Yeah. Good day, Murray. So the portfolio is broadly market rented. The industrial portfolio itself is marginally under-rented, and, we've got about 11% of leases expiring, over the next 30 months or so. Within that category, there is a good, rental growth to play for. For that period, we're looking at an under-rented position of around 12%-15%. A lot of that's backended to FY 2026. So there... Yeah, we should be encouraged by what we can be looking to target in forthcoming periods. It's probably also worth noting that, you know, we've generally outperformed value assumptions consistently in the past, so, you know, the under-rented position is just a line in the sand. We'll obviously look to outperform, value assumptions going forward.
Sure. So just to be clear, that 12%-15% is based on the value as assumption rather than yours?
Correct.
Gotcha. Thank you very much.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Korkie for closing remarks.
Thank you, everyone. I hope you can all see the progress we've made over the half. If you do have any questions, please feel free to reach out to me and the team, and we'll be happy to take your questions. Thank you very much, and have a good day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.