I would now like to hand the conference over to Jason Weate, Fund Manager, DXI. Please go ahead.
Good morning. I am Jason Weate, Fund Manager of Dexus Industria REIT, and I am pleased to present DXI's FY 2026 result. I would like to begin by acknowledging the traditional custodians of the many lands on which we operate and pay our respects to elders, past and present. Today, I will cover the highlights, financial results, portfolio performance, and growth drivers before moving to Q and A. DXI provides investors with access to a diversified portfolio of 90 assets valued at AUD 1.5 billion, with 80% of the population within 60 minutes of our asset base, 77% located in infill markets, and a significant AUD 217 million development pipeline at ASCEND at Jandakot. DXI's investment proposition is to generate strong risk-adjusted returns built on three core pillars of secure and growing income, active portfolio management, and prudent capital structure.
Occupancy has consistently remained above 98%, supported by a proactive management of forward leasing risk. We have successfully transitioned to a 100% industrial portfolio, setting a stronger foundation for future performance. Our development pipeline is a key differentiator that drives FFO growth, and our balance sheet discipline has allowed us to pursue acquisitions, fund development, and execute a meaningful buyback, all in parallel. Over the period, the fund delivered AUD 0.176 per security above upgraded guidance, supported by strong leasing outcomes, while distributions totaled AUD 0.166 per security. Like-for-like income growth of 5.3% was underpinned by strong rent reviews and positive rent reversion, with re-leasing spreads of 21.4% providing a further tailwind to future earnings. 45,200 m² of Jandakot completions achieved a strong yield on cost of 7%. Our balance sheet strength was maintained with look-through gearing of 31.2% at the lower end of our target range.
Capital was recycled into acquisitions at Glendenning, Dandenong South, and Moorebank, and our securities buyback program is being executed at pace and has been upsized to 5%. Post-balance date, a zero-cost hedge book restructure was completed, and I will cover this in further detail later in the presentation. DXI offers a differentiated combination of secure income, embedded growth, and a development pipeline of scale. Income security is supported by high occupancy of 98.8% and a proven track record of de-risking near-term expiries through forward leasing. Approximately 87% of income is subject to contracted rental increases of at least 3%, and our development pipeline provides a clear pathway to FFO accretion over the medium-term. DXI remains committed to delivering sustainability outcomes that generate both environmental and financial benefits.
Our sustainability initiatives include incorporating renewable energy solutions such as solar and battery storage into new developments, which not only reduce environmental impact but also enhance asset appeal and long-term value. Turning to our financial results, DXI delivered FFO of AUD 55.7 million, or AUD 0.176 per security, ahead of upgraded guidance. Distributions were AUD 0.166, reflecting the payout ratio of 94.4%. The divestment of BTP drove a net reduction in overall property income, which understates the strength of underlying like-for-like property income growth of 5.3%. Notwithstanding that strength, the combined impact of a 60-basis point rise in our cost of debt and the sale of BTP were the key drivers of year-on-year reduction in FFO per security. Ultimately, FY 2026 was a transition year, and one in which the underlying industrial portfolio performed strongly. A key differentiator for DXI is its balance sheet strength.
We look through a gearing of 31.2% at the lower end of our target range. During the year, we executed AUD 358 million of new and extended facilities at competitive pricing and entered into AUD 550 million of new hedging, including interest rate caps to benefit should rates decline. Post-balance date, we undertook a zero-cost hedge book restructure. This brings forward high rates to reflect mark-to-market debt costs. Interest costs in FY 2027 will be approximately AUD 1.4 million or AUD 0.005 per security higher following the restructure.
From FY 2027, the flatter profile allows property income growth to translate more clearly into the bottom line. DXI reported a valuation uplift of AUD 19.1 million or 1.3% over the year, supported by rental growth and development activity. ASCEND at Jandakot remains a key driver of valuation growth potential, underpinned by tight Perth market fundamentals. Turning to our portfolio performance.
The portfolio delivered strong operating performance across a period of high activity. 170,000 m² of leasing was secured across the stabilized and development portfolio, while re-leasing spreads of 21.4% reflect under-renting in the existing portfolio, with key outcomes at 89 West Park Drive, Derrimut, 50 Jayco Drive, Dandenong South, and Jandakot. Spreads achieved this year predominantly relate to FY 2027 to FY 2029 expiries, making them an additive driver of FFO growth over the medium term. On the four acquisitions completed during the year, we have made a strong start to executing against underwrite assumptions. At 32 Cox Place, Glendenning, we completed the repositioning of the asset, which was acquired with vacant possession. We secured a five-year pre-lease across the site, completely de-risking the investment while retaining future larger scale value add upside potential. In Dandenong South, the positive re-leasing spreads of 20.8% were above underwrite.
At 12 Church Road, Moorebank, we leased an additional unit and saw the capitalization rate tightened by 12.5 basis points, contributing to a AUD 3.1 million valuation uplift. Collectively, these acquisitions demonstrate the fund's ability to drive value through active asset management. Turning to our development pipeline at Jandakot. During FY 2026, four projects across 45,000 m² were completed at a total cost of AUD 43 million. Importantly, these completions are 100% leased compared to average pre-leases of 47% at the time of commencement, and achieved a yield on cost of 7% above our 6.25% + development target. These completions demonstrate consistent execution with momentum continuing across the pipeline. Since acquisition, South Perth rents have grown at over 16% per annum, well ahead of construction costs, a spread that directly underpins our returns.
Yields on costs have improved from approximately 5% at commencement to 7% in FY 2026, reflecting the improving return profile over time. Looking ahead, the committed pipeline spans five sites, with a majority expected to complete over FY 2027 into the first half of FY 2028. These projects are approximately 68% pre-leased and are estimated to deliver a yield on cost of 6.6% above our target of 6.25% +. Post balance date, two additional pre-leases will see the activation of a further AUD 20 million of development at a yield on cost of 7.0%, which will increase overall pre-leases from 68% to 76%. In the context of impact to FFO, it is important to reiterate that every AUD spent at Jandakot going forward translates into a P&L incremental yield on cost of above 8%.
This is because the land has already been acquired and fully reflected in our cost base.
Through to FY 2030, we expect AUD 30 million - AUD 40 million of completions per annum, providing a material driver of FFO accretion over that period. Industrial market backdrop is improving. Across capital cities, rents required to justify new development sit materially above prevailing market rents, making new supply difficult to justify. Developers are responding rationally, and speculative starts are down materially from the peak. Construction costs are forecast to compound well ahead of inflation through to 2028 as data centers, infrastructure, and Olympics-related work compete for land, labor, and specialist trades. This supports tightening vacancy, a pullback in incentives, and ultimately rental growth. The investment case for DXI remains clear. We offer an attractive distribution yield of 6.8% paid quarterly, compelling in both absolute and sector relative terms.
Underpinning that yield are multiple drivers of growth, our development pipeline, embedded rental escalations, aided by our restructured hedge book.
With DXI trading at a 29% discount to NTA, investors can access that income and growth at a compelling price entry point backed by high-quality industrial portfolio. Looking ahead, we are well-positioned to continue delivering long-term value. Our focus remains on disciplined execution of the buyback program, continued build-out of the development pipeline, and preserving balance sheet flexibility. The hedge book restructure reflects a deliberate resetting of FY 2027, allowing future property income growth to translate more clearly into the bottom line. Barring unforeseen circumstances, DXI expects to deliver FY 2027 FFO of AUD 0.17 per security and distributions of AUD 0.166, which remains in line with FY 2026. I will now hand back over to the moderator for a broker analyst Q and A.
Thank you. For broker analysts, 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 then two. If you are on a speakerphone, please pick up the handset to ask your question. The first question today comes from Andy MacFarlane from Bell Potter. Please go ahead.
Oh, hi, Jason and team. You spoke about the hedge book restructure. Can you just walk through the rationale and what it means for FY 2027 and for FY 2028 onwards?
Thanks, Andy. I think as I mentioned in some of my final remarks in the speech there, what we have done is quite deliberate. We have brought forward rates to mark-to-market levels to establish a flatter hedge cost profile from FY 2027. We think that allows underlying property income growth to translate much more clearly into the bottom line earnings off that reset base. It does make it clearer, we think, for market participants like yourself to evaluate the FFO trajectory from here. A couple of points to note. The restructure that we have mentioned that does reduce FY 2027 FFO by AUD 1.4 million or AUD 0.005 per security does account for the majority of the decline versus FY 2026. I would reiterate that the restructure was an NPV neutral one with zero upfront costs.
Thank you. Just looking at the payout ratio, it is about 94% in FY 2026. The guidance for 2027 reflects a step up to about 98%. How should we be thinking about the payout ratio going forward from here?
Thanks, Andy. Look, a good question and no doubt a topical one at the moment. I would start by talking to the fact that our FFO settings that we have provided obviously set a new platform from which we can grow earnings. Naturally, that provides us with greater options in terms of where we want to peg distributions going forward. Strategically, we do think about distribution settings from a couple of different lenses. The first one being the underlying cash flow coverage you have to support distributions. That is a clear one. The other one is your balance sheet settings. We know that if you run gearing lower, you naturally have greater ICR coverage, and that provides you with more flexibility in terms of how you want to run a particular distribution setting. I think they are the mix of things that we look at.
They are definitely the mix of things that we will take into account when we are looking at setting distributions in 12 months' time from now for FY 2028.
The final one, if I may. Just the re-leasing spreads at 21%. Can you just talk about what is driving that level?
Yeah, sure. Obviously it was a great result for us. The significant components really relate to forward leasing that was achieved at Derrimut, which was an FY 2028 expiry. Dandenong South, as we mentioned, which also was a 2028 expiry. And Epping, which was an FY 2029 expiry. So, reducing risk well ahead of expiry in the process. The standout was really Derrimut. It delivered the largest uplift at about 52% above passing. And pleasingly, the rental spread at 50 Jayco Drive in Dandenong South, that is our recent acquisition, achieved a 21% positive reversion, which outperformed our acquisition underwrite. And I should also mention Jandakot in that process. Across the estate more generally, we have achieved 15% positive spreads across the stabilized segment of that estate, supported by strong renewal and new tenant outcomes.
These deals ultimately reduce expiry risk and provide contracted income growth across FY 2027 to FY 2029.
Thanks, Jason.
Thank you. The next question comes from David Pobucky from Macquarie Group. Please go ahead.
Good morning, Jason and team. Thanks for taking my questions. Just a follow-up on FY 2027 guidance and some of the key drivers there. If you exclude the hedge restructure, expected FFO in 2027 would've been roughly in line with FY 2026, despite strong leasing momentum and development completion. If you wouldn't mind just walking through some of those other moving pieces between FY 2026 and 2027, please.
Sure thing, David. Thanks for the question. The way to think about the compositional drivers and starting with the positives. We are assuming like-for-like growth in there of approximately 3%. That's obviously supported by the contracted rental increases and positive leasing outcomes. But we have allowed for some prudent downtime in there. In particular at the final unit that we're looking to lease up at Moorebank, in an asset called 5 Compass Road, at Jandakot. We're assuming some pretty prudent lease-up timing expectations across those couple of sites. That's probably pulling down like-for-like growth a little bit. We obviously will have continued positive contributions from completed and active developments. We are also assuming that we complete the full extent of the 5% buyback by around, let's call it, March next year. They're the positives.
In terms of the offsetting drivers, there will be some ongoing full period dilution associated with the sale of BTP. Excluding the post-balance day of restructure, we naturally would've been stepping up our interest rate cost as well. That's sort of how to think about arriving back to that sort of flat outcome. Also, sorry, floating rates are obviously expected to increase into next year. I guess finally, we are assuming an all-in interest expense of 6% in FY 2027. That is our marginal cost of debt in the market today and really speaks to the growth potential in underlying earnings from here with that in our base in 2027.
Thanks, Jason. That is really comprehensive. I appreciate that. If I could just follow up on the comment you made around completing the full 5% buyback. Obviously, the stock is trading at a substantial discount to NTA still. Do you view the buyback as a superior use of capital to acquisitions and development activity? Or do you believe that you have got the balance sheet capacity to pursue all of those levers?
Yeah. I will start with the opportunity set in front of us. Obviously, we have acquisitions in the market. We have the buyback. We have continued deployment into Jandakot. Of those three, the latter two, the buyback and Jandakot development deployment screen, obviously much more attractive. They, in combination, are our two key areas that we will look to continue deploying. That is why we are confident in including that within guidance. Assuming that current share price levels remain depressed, we will keep buying. In terms of our funding position, look, we are starting off at a point of what? Around about 31%. We are fully funded to continue full development of Jandakot and full execution of the buyback program.
Just the last one from me, just in terms of that funding position being at the lower end of your target gearing range. How do you think about where you want that level to sit medium term or even kind of in the next 12 months as well?
Yeah, good question. I think we have displayed an appetite to generally run it a little more conservative than not. I did mention in my answer to Andy MacFarlane earlier before around distribution settings and the additional flexibility that running lower gearing level does provide you with. We run the fund with an eye to the value in optionality, and we think running balance sheet gearing or look-through gearing rather, at a level that is under 35% will always give you deployment optionality, and that is what we value. I think, you can expect us to continue to manage that at below that level.
Thank you. Appreciate it.
Thank you.
Thank you. The next question comes from Leanne Truong from CLSA. Please go ahead.
Good morning, Jason. Just a question on your development pipeline, particular Jandakot. We can see that on one of the slides, construction cost has gone up a bit. I guess, and I think on page 27 as well, some of the latter projects, you are expecting a yield on cost of 6%. So, I guess post-FY 2027, do you expect to maintain, I guess these strong yield on costs or you expect that to fall a little bit?
Thanks, Leanne, for the questions. I guess the slide where we've shown where net face rents have sort of moved to within that market and the associated rise in construction costs is to provide the market with an understanding of our starting point. Our starting point is strong. We think that there are well prospects for continued rental growth within Southeast Perth market can continue. I guess we've just been obviously very open and direct about the fact that construction costs do continue to rise, and that does pose a risk. But our expectation more generally is that, we will continue to print yield on costs that are strong and arguably above our through the cycle target range for now.
I think that's demonstrated by the fact that the AUD 20 million that I announced in the speech of new commitments that have occurred post-balance date, they are at a yield on cost of 7.0%. I think where we sit in the market today, it's still very strong.
I guess, just a follow-up on that. So your target's 6.25%. You've undertaken a project, with a yield on cost of six. I guess the rationale behind that?
Sorry. Can you just repeat the question, Leanne?
Yeah. You've got a target of 6.25% for a yield on cost, but it looks like 25 Centurion Place, you've got a yield on cost of 6%. Why, I guess, are you going ahead with that project if it's below your target?
Yeah. Thank you, Leanne. My apologies for not picking that full question up earlier. That development is unique. It forms part of the airside part of that broader estate and the airport side of the broader industrial estate. It does reflect a 20-year lease to the government. Naturally, the strength of that covenant, the lease duration, all do point to a rationale that aligns with a tighter yield on cost for that particular stage. It will also open up a pathway for additional development on that airside. It's a new part of the site that has, it's only just sort of been opened up for development. That's the rationale for that particular site. But I would remind you that we think about development at Jandakot in aggregate terms.
If we're doing the vast majority at 7% and we have the odd development at 6%, in aggregate terms, it's still a very strong profile on a risk-adjusted basis.
Yeah. Okay, thank you. Just a final question from me, just to follow up, on the payout ratio. How much of AFFO are you paying out for the financial year 2027 guidance, I think, sorry.
Yeah, look, we don't formally guide to AFFO. In our annual report on page 28, we do have a breakdown of the components. I am happy to sort of work with you offline to sort of get a feel for what that should look like. Post-BTP, the capital drag on AFFO has improved. Industrial assets have always had a lower CapEx burden than suburban office. Yeah, look, it's just not a metric that we're providing guidance to. I think I would bring you back to some of my comments earlier around how we think about distribution settings, being a reflection of both free cash flow to support distributions, but also your balance sheet settings, that provide some additional flexibility around that.
Yeah. Thanks, Jason.
Thank you.
Thank you. The next question comes from Murray Connellan from Moelis Australia. Please go ahead.
Jason, you previously spoken to FY 2028 expiry profile having been fairly under rented, and obviously much of that under renting has come through in the leasing that you have done in the last six months. I was wondering whether you could just give us some guidance on the remaining expiry profile and what your perception is of under renting there or what passing is versus where you think the market is, and maybe just a comment on that metric for the broader portfolio as well.
Sure. I will start with the FY 2028 component. Obviously, a lot of the positive re-leasing spreads that we are releasing as part of today's result did relate to FY 2028. The remaining expiries in that year, we think are under rented now by probably around 6% or thereabout, Murray. I think we quoted around 15% under renting at the half year. Naturally, we have crystallized a lot of that. I do think, across the broader portfolio, under renting now for us probably sits somewhere between 3%-5%. We are not positioning the vehicle as a broader under renting story. For us, our growth drivers are very much more development-focused. That is not to say that there is not under renting in the portfolio, and we are capturing what is there.
I think what we have done today and what remains, all support medium-term growth profile that is very healthy when you take into account the other FFO accretive drivers that we have within our toolkit.
Thanks. Just one more on the recent leasing. Could you say what the average incentive level is on the leasing that has been done in the last six months?
Over the last six months, our average incentive level was approximately 15%.
Got it. Thanks, Jason.
Thanks, Murray.
Thank you. At this time, we're showing no further questions. I'll hand back to Jason for closing remarks.
Thanks everyone for joining the call this morning. Really appreciate your time, and I look forward to catching up with many of you in the coming days. Thank you.