Thank you for standing by, and welcome to the DEXUS FY 2026 results briefing. 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 one on your telephone keypad. I would now like to hand the conference over to Ross Du Vernet, Group CEO and Managing Director. Please go ahead.
Good morning, everyone. We really appreciate you taking the time to dial in this morning. I know it is a really busy day with other companies reporting, and there is probably a few tired analysts given it has been a busy reporting week. Let us begin today by acknowledging the traditional custodians of the lands and waterways on which we operate and pay our respects to elders past and present. Today, you will hear from some of the management team who will provide you with a full picture of the business and the operating environment. You will hear from Keir, our CFO, on the financials, Andy on office, Chris on industrial, and Michael on funds management. At the conclusion, I will provide a summary and outlook, and then we will open up for some questions. We know DEXUS today, it is a good business.
You may see DEXUS as an opportunity to buy high-quality assets cheaply, and in the short term, we are looking to capitalize on that ourselves. DEXUS has all the ingredients to be so much more than that, and unlocking that potential is what we are all about. We have a diverse platform with deep sector expertise and the ability to create assets. We have long-term and deep relationships with private capital, and we have a balance sheet of serious scale with high-quality assets. Over the past few years, DEXUS has been making a deliberate transition. We have been reshaping our portfolio, improving its quality, becoming more capital efficient, and building a more diversified business, all with a very clear ambition to create a more resilient business that can generate sustainable earnings growth over time.
Today's results show that we have delivered on what we said we would in FY 2026, and we continue to make progress on our transition. I also want to be clear about where we are today and open about the work we have to do. While we have a high-quality investment portfolio, we have further to go in transitioning the balance sheet to be more diversified and more capital efficient. That will improve our ability to generate attractive and sustainable returns for security holders through the cycle. We have a funds management business of scale and significant relationships with clients, but there is work to do to ensure the strategies and products continue to be relevant and to deliver for clients and for us. Specific issues have emerged in the infrastructure funds and mandates that transition to DEXUS from AMP, and we are addressing these directly.
Our portfolio and deep relationships have created a privileged position when it comes to deal flow, but investing in this market has become more asset specific, and we need to be very selective about the opportunities we go after as we deploy capital alongside third-party clients. This is all reflected in a security price that materially understates the value of the underlying investments and value in the platform. The management team and I are acutely aware of this disconnect, and we are focused on improving it in a sustainable and enduring way. The question I know you'll be asking is: what are we doing about it? The answer is, in short, a lot. As detailed on this slide, in FY 2026, we delivered solid outcomes in our core business. We delivered on divestment targets. We secured attractive capital growth opportunities.
We substantially resolved redemptions across the core real estate platform, and we raised capital from clients, twice as much as last year. We're driving hard on the performance of our own investment portfolio, improving occupancy, income, and returns from the assets we already own. We continue to focus on meeting the needs of our fund clients, delivering performance in those strategies, and ensuring we bring new opportunities that create long-term value. It shows the resilience in our operating model, the ability to deliver this performance while navigating the challenges in infrastructure. We're also putting down the foundations for longer-term growth with initiatives like the Boral JV, a more than decade-long project which we expect will create the nation's largest logistics precinct. We're being responsible in how we think about costs and overheads to run the business.
The team will share more on progress and highlights in a moment. Twelve months ago, we set out a series of priorities and action items that will move us towards our goal to reshape the business to deliver more sustainable earnings growth over the longer term. As you can see on this slide, we've made decent progress. Atlassian Central topped out last month and is on track to complete this year. Our other major project, Waterfront, is experiencing further delays but remains favorably positioned in the country's strongest workplace market, and the commerce remains intact. We've had success attracting capital to products we've created that leverage our capabilities with DREP2 exceeding its original target by nearly AUD 300 million. The conversion of a Brisbane office to student accommodation asset in DREP that reached PC in June is a good example of what the platform can create.
People are such an important part of our platform. The execution of strategy, the creation of value, the management of risk, the connection with customers, clients, partners, all of this relies on people. We have a great team of passionate experts who thrive in creating and driving value from assets, and we continue to invest in them, strengthening the leadership, the skills, and the capabilities in the platform. We also continue to actively address fund-specific issues. This includes responding directly to the APAC matter, continuing to support our fund investors, and ensuring that we embed learnings into the wider business. I'd like to spend a moment on this before I hand over to Keir. This slide sets out the context, the actions we've taken, and the next steps. There's a few things I want to make sure are really clear.
Dexus primarily acts in a fiduciary capacity in these funds. We do not have a direct ownership or control of the underlying assets. Our job is to act in the best interest of investors, our clients, and that is what we are doing. In May, the New South Wales Supreme Court found against the Dexus Bloc in proceedings in relation to APAC, and the investors are appealing that decision with a court date scheduled in October.
Managing this well for our clients is critical, and we take it seriously. Pleasingly, our operating model, which is designed around the sectors, ensures that we have teams focused on delivering in each part of our business. This is evident in the positive outcomes this year we have achieved across the wider platform. I can understand some of the frustration from security holders regarding the uncertainty. Fund-specific decisions will be made by RE boards and trustees.
Legal processes have a timeline of their own, and some conclusions will not be possible until the appeal outcome is known. These are complex matters, and it will take time to resolve, and we will update you, our security holders, as decisions are reached. I now hand you over to Keir, sorry, our CFO.
Thanks, Ross, and good morning, everyone. Turning to the result in detail. In line with expectations, total AFFO was AUD 484 million, with the distribution of AUD 0.37 per security, reflecting a payout ratio of 82%. Office FFO reduced primarily due to divestments and lower average income producing occupancy. While industrial FFO increased, driven by development completions, higher average physical occupancy, and strong re-leasing spreads, partly offset by divestments. Co-investments in pooled funds increased, driven by Dexus' investments in DSIT1 and DWSF, as well as higher distributions received from some funds. As expected, FFO from management operations decreased due to lower FUM as a result of divestments, lower management fees, and slightly lower performance fees. While active cost management reduced group corporate costs by 6%.
Taken together, group corporate and management operation costs have now reduced by more than AUD 30 million since FY 2024, with the impact of recent initiatives expected to benefit FY 2027. Finance costs increased due to a higher weighted average cost of debt, partly offset by the impact of divestments. As expected, trading profits were higher with the sale of Brookhollow, Chester Hill, and completion of construction at Prestons. And maintenance CapEx and leasing decreased for the office portfolio as a result of timing, partially offset by higher incentives across the industrial portfolio. The recovery in property valuations is increasingly being driven by fundamentals, with market rent growth the main contributor this year, partly offset by a marginal expansion in capitalization rates. Overall, for the 12 months to June 30, the portfolio increased by 1%.
Our office portfolio, which is 95% prime grade and 78% weighted to core CBD markets, increased by 0.6 of a percent. Our industrial portfolio, which is 89% weighted to core industrial estates and distribution centers, increased by 2.3%. These outcomes demonstrate the quality of the portfolio and stabilizing valuations despite the interest rate environment. Moving to capital management, our balance sheet remains solid with look-through gearing of 33.4%, which is expected to reduce by around 1.5 percentage points following recently announced divestments, net of circa AUD 490 million of committed development spend over the next 12 months. This provides support to recommence buyback activity. We have been active with refinancing, resulting in a weighted average debt maturity of 4.2 years, AUD 2.5 billion of headroom, and manageable near-term debt maturities.
91% of our debt was hedged during the year at an average hedge rate of 3%, providing material interest rate protection. Thank you, and I will now hand over to Andy.
Thanks, Keir, and good morning, everyone. I will take you through the office result. We own the best office portfolio in Australia, 95% prime grade and 78% in core CBDs, up from 88% and 61% seven years ago. Occupancy improved significantly this year from 92.3% a year ago to 95.7%, our strongest result since June 23, and remains well above market average. The improvement was driven by a combination of leasing success on vacant space and divestments secured post June 30. Our leasing volumes of 172,000 square meters were 60% higher than the prior year. Incentives for 26.4% held down by effective deals in Melbourne and excluding those, incentives were 29.9%, still well below market. Effective like-for-like income grew 30 basis points, impacted by downtime on key vacancies at 80 Collins and 30 Hickson Road, however, improving since the half year as we had targeted.
The portfolio delivered a one-year total return of 5.4%. We are working to address the capital intensity of office ownership, pushing for lower lease incentives, effective rent structures, and investing in fit-outs that endure beyond a single lease term. These initiatives compound over time and will improve free cash flow. We aim to hold any single year of expiries below 13% of the portfolio. FY 2027 expiries stood at 12.1% at June 30. Excluding those, excluding car parks, and the leasing that we have secured since the year-end, that reduces to 8.5%. The vacancy we are most focused on is 80 Collins Street in Melbourne, which represents 1.2% of portfolio income. There are also upcoming expiries at Australia Square and 25 Martin Place, where we will pursue leasing across a combination of suites and turnkey whole floors. We expect an improvement in like-for-like growth in FY 2027.
Further out, FY 2030 and FY 2031 sit above the threshold today, driven by concentrations at 80 Collins Street and 240 St Georges Terrace, expiries we have a long runway to manage. Our portfolio is well diversified and is weighted to financial, insurance, and legal services, high-value professional work concentrated in premium CBD buildings. That is the work we think is most resilient to AI and in parts may benefit from it. Two city shaping developments that will further enhance the portfolio quality are underway. Atlassian Central is on schedule for practical completion in late 2026, 100% pre-leased for 15 years with fixed 4% annual increases. As flagged at the half year, completion of Waterfront Brisbane has been delayed. The expected completion of late 2029 is based on the contractor's current program, with greater certainty expected once construction passes level 5 later this financial year.
Dexus' share of total cost has increased primarily due to interest costs and leasing incentives. While we have a fixed price construction contract and earlier delays are expected to be absorbed within the relevant contractual provisions, a delay of this length goes beyond that capacity, impacting our cost to complete. We remain confident in the asset. 71% pre-leased, rents around 50% below market in the country's strongest office market. The project remains profitable, yield on cost remains materially in line, and known valuation impacts are reflected in carrying values and NTA. The office market has commenced a recovery cycle supported by a very favorable supply backdrop. Completions across the major CBDs will remain well below long run averages for an extended period, with development economics challenged by higher construction costs. Demand is harder to predict, but the supply outlook is clear and supportive of stronger rental growth. Performance remains hyperlocal.
As the chart shows, Sydney core premium assets have materially outperformed the broader market and are one of the few segments where net effective rents are above pre-pandemic levels. Dexus is positioned exactly where the market is strongest. 95% prime grade, 78% in core CBD precincts. Thank you, and I'll now hand you over to Chris.
Thanks, Andy, and good morning, everyone. We leased nearly half a million square meters this year across stabilized and development, our second-largest year on record. Our industrial portfolio has delivered a strong result, including a one-year total return of 7%. Occupancy by income reduced slightly to 94.6%, impacted by expiries at select assets with relatively high rents, partly offset by lease-up of other vacancies. Occupancy by area of 96.5% remains above the national average. We achieved strong re-leasing spreads of 24%. Average incentives increased to 21%. This is supply driven and location specific. Recent completions in select submarkets have given tenants more choice. It's not a signal of broader demand softening. Underlying reversion is unchanged. The portfolio remains 8.1% under-rented, with 20% accessing reversion by FY 2028.
We leased 128,000 sq m across 23 development deals, and 68% of the committed book is now pre-leased, with fixed annual increases of 3%-3.5%. Every completion expands the quality end of the portfolio and captures tenants trading up. A portfolio built for the market we are now in. Returns driven by rental growth, reversion, and development, not cap rate tailwinds. Moving to our expiry profile, we have leased 32% of the portfolio over the past 24 months, de-risking the expiry profile and capturing strong re-leasing spreads. We remain focused on leasing key vacancies at Matraville, Lakes Business Park, and Greystanes, and we are in active discussions with potential tenants on these properties. The vacancy we absorbed was older stock in New South Wales and Victoria, and we leased it well. The market is splitting.
Quality, well-located assets stay in demand while secondary stock is discounted, and our portfolio sits on the right side of that line. 80% of FY 2027 expiries sit in younger prime assets, so our upside is exactly where the market is strongest. On development, we are actively growing and upgrading the portfolio over 208,000 sq m in play this year, 154,000 completed and a further 54,000 under construction. This is new prime high-performing stock, modern facilities meeting the specifications occupiers are demanding as they move out of older buildings into better, more efficient space. Supply is in check. Around 60% less speculative supply over the next three years, and the market has slowed building on spec. Developers now pre-commit before they start, so little new vacancy is being added. As existing vacancy is absorbed, the setup points one way, tightening availability, returning rent growth, and easing incentives.
Data centers are accelerating and are now a structural tailwind. Close to 290 hectares taken up across Sydney and Melbourne. A new higher and better use for power-served industrial land. That lifts land values and replacement costs. That supports the value of our existing modern stock. We are leaning into modern logistics in the best locations and stepping back from the secondary stock the market is discounting. Thank you. I will now hand over to Michael.
Thanks, Chris, and good morning, everyone. Our funds business manages AUD 36 billion in third-party capital across a diverse range of real asset strategies, servicing 150 institutional investors, along with direct and wholesale clients. The platform is diverse across channel, sector, and risk profile, and it brings together products we have managed for a long time, like DWPF, strategies we have built organically, like DREP, large joint ventures, and products that came to us through platform acquisitions like AMP and APN.
Funds management is a competitive business, and we are not here simply to promote products and collect fees. We invest alongside our clients, focusing on three things. Investments must generate attractive returns in areas we have a competitive advantage. Clients need to support the product, and the fee economics need to be fair, delivering a positive financial contribution. That is the lens we apply to both new and existing products.
DEXUS has been in business for 40 years, and there will be a need to refresh and renew funds from time to time. For example, our healthcare fund has not achieved the scale or performance we had hoped for when it was launched almost 10 years ago. As mentioned earlier, following the unfavorable APAC judgment, we have formalized a review of the infrastructure products and strategies acquired as part of the AMP acquisition. That review builds on work already underway to resolve some fund-specific issues. DEXUS holds a modest co-investment in these strategies, around AUD 260 million, so the reviews are focused on ensuring these funds have contemporary strategies that align with client needs and our capability to deliver.
Turning to our achievements for the year, we have raised AUD 2 billion in equity across the platform, including AUD 260 million in the last two months of the year, while also providing liquidity to investors. DWPF's redemption queue, which stood at AUD 1.7 billion at the start of the year, has been completely resolved post-year-end. We have also maintained our focus on returns. DWSF was ranked first among all wholesale funds in the MSCI Index over the one, two, and three-year periods, and DWPF continues to outperform its benchmark across all time periods, achieving a one-year return of 9.3%. The performance of these funds highlights the quality of the underlying portfolios and our active management approach. With structural fee pressures across the market, strong performance does support fee retention. Finally, we continued to deliver on our ESG ambitions across the platform.
Three funds achieved five-star GRESB ratings, and we maintained net zero emissions across Scope 1 and 2 for our managed portfolio. Thank you. I will now hand you back to Ross.
Well, thanks, Michael. I know our clients have a lot of confidence in your focus on the fund strategies and how you are evolving the product set. We have covered a lot today, and there is lots of moving parts, so let us turn to the priorities for the year ahead. Our commitment to transition the business remains the same, and the priorities to get us there have been refined. We have been deliberate about where and how we allocate capital, where we remain invested, and importantly, where we do not. We are targeting to release more than AUD 2 billion of capital over the next two years by introducing third-party capital into our core long-term holdings and continued pruning of the portfolio. Capital deployment will focus on opportunities that support us being more capital efficient, more diversified, and ultimately generating more sustainable earnings growth.
Examples of these type of opportunities include the Boral joint venture and a modest investment we have made in an Australian data center operator, ADC. I expect the buyback will continue to feature as an attractive use of capital. We have deep belief in the value of the business and see this as a lever to generate value for security holders as we navigate our transition. With transaction markets improving and our divestment target exceeded, we are now in a position to capitalize on the current disconnect. To be clear, the buyback does not replace our long-term growth strategy. It is a near-term lever to create value for security holders. In summary, it has been a year with both challenges and evidence of real progress. We are focused and clear-eyed about addressing the headwinds and have a solid plan and the team in place to execute.
We have met commitments to security holders, but we know we have more work to do, and FY 2027 will be a critical year for us. While the core portfolio is expected to benefit from leasing momentum, earnings in FY 2027 will be lower. This is driven by minimal contribution from performance fees, trading profits, high financing costs, and the practical completion of Atlassian. We have also made some allowances for materially lower earnings contribution from the funds under review and consultation. As a result, and barring unforeseen circumstances, for the 12 months ended June 30 2027, we expect AFFO of AUD 0.375 - AUD 0.395 per security and distributions in line with last year at AUD 0.37 per security. As we think about the year ahead, every decision, every action is taken through a lens of creating sustained value for our security holders.
Some of those actions will have an impact relatively quickly, and others will take time. They are all moving DEXUS towards being a more diversified, more capital-efficient business capable of delivering sustainable growth over time. I have real conviction in that direction. We have high-quality assets. We have valuable capabilities and relationships that have been built over many years, and I have enormous confidence in the team across DEXUS who are doing the hard work to make this transition happen. While the year ahead will have some challenges, I am generally optimistic about what we can achieve, and I thank our security holders, our clients, our customers, and our partners for their support, and the DEXUS team for their dedication and focus. That ends the formal part of today's presentation. We will now open up to any questions. Thank you.
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 then two. If you are using a speakerphone, please pick up the handset to ask your question. We ask that questions be limited to two per questioner. The first question today comes from Adam West from JPMorgan. Please go ahead.
Oh. Hi, Ross and team. Thanks for taking my question. My first one today is just on the ongoing APAC matter. I'm just wondering if you are able to quantify how we should be thinking about the scale or quantum if potentially the shareholders were to take legal action against yourself, and whether or not your provision that you have got in there for NTA covers just the current cost of the appeal or also if you were to lose that appeal and have to cover the cost of the other side.
Look, thanks for the question, Adam. I understand that there is going to be lots of questions around APAC, but obviously, this is a live and complex bill of litigation, so there is not much I can add beyond what is in the materials and the prepared remarks. In specific, to answer your question around what is kind of cooked in NTA today, that essentially relates to legal costs, both for our clients, but also legal costs for the other parties to the judgment to date. It does not provision for any future claims. It does allow for some costs for us to get through the appeal on our side as well. So, there is nothing in NTA today or provisions made in the accounts today for subsequent claims.
I would make the observation that no claims have been made, and to the extent that claims are made, that will probably happen or if it happens, it will take some time.
Yeah. No, that is clear. I guess just on my second question, just in terms of, I guess, the AI dynamic and just some of your conversations you might have been having with your tenants in terms of leasing, how do you see the use of space changing in the future? Do you think there is potentially a tailwind of people taking out more space for collaborative and breakout spaces?
Look, I think it's a fascinating question. Andy's in there talking with customers every day, so I'd like to get him to share some views on that. I think from my perspective, certainly what we're seeing in our business is AI is definitely making your most productive people more productive. That means that we're going to see people investing, I think, in higher quality space, and the value and utility of those people actually becomes higher moving forward. But Andy, what are you seeing when you're talking to your customers?
For the most part, our customers are, like us, investing in AI productivity tools and seeking to capture that performance gain. They are yet to see AI flow through to a reduction in headcount, that type of efficiency. It's more about productivity for them. I think bear in mind, our average customer size is relatively small. It's 1,500 sq m for the balance sheet.
So those types of small to medium-sized enterprises are more likely to be using AI to grow than to contract. In terms of how the space is used, I think whenever there's heightened uncertainty, tenants look for shorter lease terms and more flexibility. That's probably what we're seeing in briefs.
Perfect. Thanks for that.
Thank you. The next question comes from Andrew Dodds from Jefferies. Please go ahead.
Oh, hey. Good morning, guys. Thanks for your time. Maybe just to follow up on some of the APAC legal fees. I think back in the first half, you quantified that amount at AUD 17 million. So I was just hoping, where that number sits today and, I guess, the outlook going forward over the next 12 months of what this number could potentially be.
Yeah, thanks for the question. In terms of the costs, both for the proceedings to date and as Ross mentioned in respect of our costs for the appeal, those costs that can be more reliably estimated total approximately AUD 60 million, and they've been expensed in the P&L and reflected in NTA. I don't think it's appropriate for Ross's comments to estimate what future costs will look like.
Okay. Thank you. That's clear. Then maybe just one on the buyback, given your comments in the outlook statement. Ross and team, is the intention to restart the buyback tomorrow now you, well, once you're out of blackout? I guess, just how sustainable do you see this, just given where look-through gearing is at 33% and close to AUD 1 billion of capital commitments over the next two years?
Look, the buyback is something that I am very passionate about, and that is why it is in the plan. But as you will appreciate, we are balancing the short term, and there is clearly a short-term gain to be had through the buyback. So we are ensuring that we do not starve the business of capital for longer term growth. We need to do all of that while managing risk, and you rightfully identified the financial risk. I am also thinking about the investment risk, so how we think about the investment portfolio. I guess in a nutshell, it is a balance. All these decisions are guided by our capital allocation framework, which we put in place in 2024. But certainly at current prices, I am a buyer of the stock and you should expect us to be active in it in coming weeks.
Okay. Just in terms of guidance and what guidance is factoring in, how much of the buyback are you assuming?
There is nothing material in guidance in terms of the buyback. It is not a material needle mover given where cost of debt and the yield of the stock is. It will have benefits in future years as you think about shrinking the capital base, and then when we get the earnings growth moving, we are doing it off a smaller capital base. So it is going to increase NTA, it will increase net per security. It will give us more positive leverage to growth as the business turns around. The other point I would make, just on your earlier question around capacity for the buyback, I think we are thinking carefully about the balance sheet. We do not want to stretch it.
But we have also announced that we are targeting to at least release at least AUD 2 billion of capital over the next couple of years, and we have good track record in terms of capital release. So I think, certainly at current prices, I think it would be a missed opportunity for us not to capitalize.
All right. Thank you. Just a final one from me. Just in terms of some of the moving parts in FY 2027 guidance. I guess it has been pretty well flagged that performance fees and trading profits are likely to feature less going forward or at least in 2027. But it would just be good to understand some of the bigger moving parts, just given how big the year-on-year decline is. Thank you.
Keir, do you want to?
Yeah, happy to take that one. So you are right, as we have flagged, we anticipate an immaterial contribution from trading profits and performance fees. Now, those factors alone account for 14% of the lower earnings. Outside of that, there are a number of moving parts. So we anticipate impacts from higher funding costs, practical completion of Atlassian. There is some slight dilution in there from disposals, as well as some allowances for a materially lower contribution from FUM that is under review or consultation. I think pleasingly offsetting those headwinds, we are anticipating solid growth in the core portfolio driven by leasing momentum, stronger office growth and continued industrial performance.
I think that, just kind of closing out on that. I think that is something that maybe just does not jump out of the result is, notwithstanding the headline print of earnings being lower next year, the underlying business is actually pretty much flat, and that is after we take into account higher funding costs and the full year impact of the Atlassian coming through. So, I think that is something to certainly us as a management team, but also brokers to be focused on.
Okay. Thank you very much, guys. Appreciate it.
Thank you. The next question comes from Adam Calvetti from Bank of America. Please go ahead.
Oh, hi, Ross and team. It's Adam. Hey, just on the office, you provide a like-for-like number ex the divestments. I mean, you guys have, as Andy said, the best office portfolio in the market. You do not report leasing spreads and growth like-for-like growth 0%. What's going on? When is this going to return to positive?
Adam. Hi, it's Andy. Is the question there what's like-for-like for 2026 ex-divestments?
Yeah. Ex what's settling 30 Hickson Road, which I am sure has dragged it down.
It has, yeah. It would be about 2.5% as opposed to 30 basis points in FY.
Is there a reason why and what are leasing spreads?
Leasing spreads are improving, especially on an effective basis.
For the first time in a long time, we are now on an effective basis under rented in Sydney CBD and in Brisbane CBD. The effective spreads on the deals we did in FY 2026 were -8.7%. That's down from 10.2% at 2025.
Okay. That is clear. Then just on the divestments as well, you have a coupon that is going to Is that going to be coming through FFO?
Yes, it will be. That is right.
Okay. That is clear. Then just maybe one quick one as well. Just on this APAC litigation expense. I mean, with the FUM that is at risk, is that still fee paying currently? Is the full AUD 7.3, or how do we think about the AUD 4.5 fee paying, and is that expected to be fee paying throughout the year?
We are still providing services and collecting fees in relation to that FUM. As I said in, I think, the concluding remarks, we have made some allowances and guidance for a materially lower contribution from, let us call it FUM, that is under review or consultation. We are not being specific as to what that is, but we need to make some assessments around what that is in determining guidance, and we have done that. We have factored in on a reasonable basis what that looks like.
Okay. But it is fair to say that it is contingent on the actual decisions at court. If that is delayed, you could see that FUM paying fees, for all of FY 2027.
I would separate the litigation outcomes from the reviews that we are going through with FUM clients and trustees.
Right. So you are doing reviews on the full AUD 7.3 regardless?
Correct.
Okay, great. Thanks.
Thank you. The next question comes from David Pobucky from Macquarie Group. Please go ahead.
Morning, Ross, Keir, team. Thanks for taking my questions. Just another one on the infrastructure strategic review. How should we think about the timing of the progress you make there? I mean, at what point would you have made material progress? Maybe at a high level, what would success look like to you and DEXUS security holders off the back of the review?
Thanks, David. In terms of timing, we will just flag that this is a process that we are working through with clients, trustees, and investors. It is not for DEXUS to dictate the timetable per se. I think there is a shared interest in trying to get resolution, but I think there is a general acknowledgement amongst all the stakeholders that it is a very complex situation. We also have to navigate, as I said in some of the remarks, the conclusion of the litigation is probably going to impact some of the decisions as well. So, I think we collectively, as a stakeholder group, would like to get clarity as soon as practical. It will take some time. We are not, DEXUS, going to dictate the timetable. I think we are very respectful of all the stakeholders in relation to that. What does success look like?
I think in the end, for us, it is not that complicated. We want to have strategies that we think can deliver attractive returns. We want to have strategies and products that our clients are going to support us in. Ultimately, the fee economics need to be a positive contribution for us, given the complexity and the loss of control that you have when we are investing alongside clients. So, I think that is the framework that we are looking about. I accept that this is a difficult situation, and we have stakeholders and clients with differential interests, but that is how we are working through it in a methodical and considered way.
Yeah. And just the second question. You mentioned you are targeting the release of AUD 2 billion of capital over FY 2027 - 2028. A few months ago, there was an article in the press that mentioned DEXUS was trying to put together an office fund that might include stakes in some of your top buildings. If you could provide any comment on those couple of pieces. Thank you.
It is always dangerous to comment on press speculation. Look, we see a great opportunity to improve the returns for DEXUS security holders and the capital efficiency of the business by bringing third-party capital into that very high-quality office portfolio. I would say the same principle applies as we think about our logistics assets as well. So, improved capital efficiency is a clear objective. We have got to get the timing of that right. We have got to make sure we get the right partners in. We are not under pressure to do a deal tomorrow, if that makes sense. The balance sheet is in a really good position. So for us, we will work through it, again, in a methodical, considered way. I think pleasingly, institutional capital interest in office has come back a long way. 12 months ago it was hard.
I think there is a general acceptance around the better assets are really going to perform well. Andy has given you some good color around I think the supply-demand dynamics have really favorable setups, and I think that is acknowledged globally by investors. So, we are working through that. We will update the market as we make meaningful progress. As I think I flagged at the Macquarie Conference earlier this year, the scope for material capital release from these initiatives is significant, and the challenge is going to be back down on the redeployment and the use of those proceeds.
Thank you, Ross.
Thank you. The next question comes from Tom Bodor from Jarden. Please go ahead.
Good morning, Ross and team. I was just interested in whether you see FY 2027 as a trough year for FFO, or do you think there could be some risk into 2028 as well?
Well, we only just delivered the 2027 guidance. Tom, when you want us to talk about 2028. Look, I think we're very clear around the business needs to be in a position where it has a sustainable earnings base and it's going to deliver sustainable earnings growth for security holders. I think we're very clear around the plan of what we need to do in 2027. There's headwinds, there's tailwinds in relation to that. The team is focused on 2027, all with the lens of getting the business back to sustainable earnings growth. We'd be pleased to update the market on 2028, probably this time next year.
Thanks for that. Then on Waterfront and the delays, I think historically when you've answered questions around that, there's always been a refrain of a fixed price contract and it's the builder's risk. But clearly, a fixed price contract isn't ever fully fixed because the builder can't take all the risks that could play out, and it seems that weather contingencies have been eaten through. Does that mean that you're now on the hook for any excessive weather delay from here? What other risks are you exposed to in that contract?
Look, developments involve managing risk. Absolutely, and we are laser-focused on this as a team. While there has been delay and there will be some costs, and these are principally financing costs, as Andy alluded to, there really isn't a better project in the country to be invested in, certainly in the office space. I'll let Andy provide some specific comments on the contract particulars. For me, we've picked the right market. This is the right product in the right location, a premium asset in a premium location. We've had the right leasing strategy. We didn't let it up too quickly. Notwithstanding views around John Holland, I think we have the right procurement strategy. This is a tier 1 builder with deep expertise and financial support, and they are very well equipped to deal with a build of this complexity.
Notwithstanding the delays, and we do want to get this built as quickly as possible, the economics have been largely preserved. I think that's the important thing for us. I think you're right to identify, well, if there is further delays from this point, what's that look like? I'll let Andy touch on that.
Thanks, Ross. Hi, Tom. The fixed price contract remains intact, and it protects DEXUS and DWPF from escalation in construction costs. It also anticipates a regime for liquidated damages in the event of delays to practical completion. The previously announced delays have been absorbed within that capacity in the contract. This delay to late 2029 is frustrating, but we have been working closely with John Holland to review the program. It does include and resets an appropriate contingency for weather from this point on. We'll feel much higher conviction about forecasting PC once we get to level five, which will be later this financial year. At that point, it should be much clearer.
Hope there's no rain.
Yeah.
Thank you. The next question comes from Howard Penny from Citi. Please go ahead.
Thank you very much. Just a question on finance costs and how to think about the sources of funds over the next two years. There is one or two, there's some potential to renew funding, but also the exchangeable note that's coming up in November 2027. Could you just guide us on how you see sources of funding and just overall funding costs over the next year or two?
Sure. I might take that one. Thanks, Howard. Maybe if we start with gearing. Gearing at June 30 was 33.4%. That's towards the lower end of the range. If we pro forma for the post-balance date divestments that the team's achieved, pro forma gearing sits at around 30%. That's just with the initial proceeds from those sales. Then it steps up to around about 32% if you look at the AUD 500 million of committed DevEx over the course of FY 2027. Things that might occur outside of that, Ross has talked to the AUD 2 billion of capital release over FY 2027 and 2028. That will further benefit gearing. Naturally, there are also things that we are looking to spend on, including the buyback, as well as potential other investments.
It's difficult to give you a forward estimate, but hopefully, that helps with some of the moving parts. If we're looking at cost of funding itself, the team has done a great job in terms of the hedge book. We have quite high hedge coverage. The average rate is around about 3%. As that rolls off, it will normalize to higher rates. You are right, the exchangeable note, that expires towards the end of FY 2027. It's too early to say what we will do with that particular instrument, but you should assume at the moment that it'll be in place until maturity.
Thank you very much. Just a second question, coming back to thinking about the core portfolio. That portfolio has done well and remains strong. Just thinking about how DEXUS is allocating that next AUD. There is a few opportunities, it seems, at hand, both taking opportunities, maybe liquidity in the funds, the share buyback, and reinvesting into developments and the core portfolio. How are you thinking about allocating that next AUD of DEXUS across those opportunities?
Howard, the way we think about capital allocation, it is not about the next AUD, it is actually about thinking about the returns on the assets we already own. So it is both, and that is also driving some of the decisions around divestment. So, I think we see opportunity to sell assets where the go-forward returns are going to not meet our hurdles are returns relative to the redeployment opportunity. So I think you should expect us continue to be active. There is no shortage of opportunities out there at the moment, quite genuinely. I think the challenge for our team is, given where the buyback is at, the bar is very high. So it does not mean that we are not going to do new things. It means that the, yeah, as I said, the bar is high in terms of doing new and different things.
If you look at actually where we have deployed capital, we have committed that marginal capital over the last year. It has been on things that generally have high returns and are adding to diversification and ideally capital efficiency in the business. So they are certainly going to be characteristics of any of the new things that we do.
Well, thank you very much.
Thank you. The next question comes from James Druce from CLSA. Please go ahead.
Yeah. Hi, Ross and team. I think part of the question might have just been answered, but just what you'd like to do with that AUD 2 billion of capital that will be released over the next couple of years. Is there any other color you can add?
I'd probably just be saying the same thing. You can have another extra question if you want to.
Yeah. Just on the maintenance CapEx and leasing CapEx for 2027. Is that heading up or down? Or what is that number?
Thanks for the question. I'd expect it'll be a little bit lower than what we delivered in FY 2026, and that's a combination of the office portfolio being smaller, as well as the work that the team has been doing in terms of managing CapEx and the way in which we do that. That's slightly offset by an increasing contribution from industrial as a consequence of higher incentives and flowing through the book.
Has that peaked, given that what you're doing with the portfolio now? It should be trending down from here, I would have thought.
Yeah, I think that's fair. Maybe, Andy, you can talk to certainly office markets where that's the expectations.
Yeah, look, I think, the short answer is we expect cash incentives as TI, FFO CapEx to continue to gradually reduce. What you see in the number will be a reflection of the composition of leasing, and so we're able to really drive incentives down in the markets that allow us to. Sydney Prime, Brisbane. Incentives are sticky in Melbourne and in Perth. If you look at our FY 2028 expiries, we've got half of them in Sydney Prime, so we hope to, we expect to do well there. On the maintenance CapEx and lessor's work line, the timing of those works happens when the space becomes available and the TI flows when the space is leased. That's probably how I would suggest you look at that. Yeah, we're trying to be really disciplined in how we allocate that capital, make sure we create a product that leases well.
But we are capturing the benefits of scale.
Okay, that's clear. And one more, if I may. Just on Atlassian, is that in the bucket to be a capital to be released, and what cap rate are you holding that asset at now?
So I think when we started that project, we said there's 2x to monetize this asset. It's going to be before we start and when we complete, and we kind of, to be frank, missed the boat, unfortunately. So yes, as we get to completion, that will be one of the assets as much from a, to be frank, portfolio concentration risk as anything else. So, that's a levered structure. The financing's being put in place at the moment, so reaches PC end of the year, and that is something that would be, ideally would be bringing some third-party capital in. Given it's a levered structure, it's not a huge check to raise. It's in the books, I think it's 5,375.
Is the cap rate 15-year fixed 4% leases, clean cash flows. A lot's probably going to depend on where bonds are trading at the end of the year as to what that capital raise looks like.
Okay. And how levered is that on the project? Sorry, on the-
Yeah. 65
on the asset finance side.
About 65.
Okay. 65. Thank you.
I think there's actually good support from the financiers
on that. I think that bodes well for the project.
Yeah. Okay. That's clear. Thank you.
Thank you. The next question comes from Lauren Berry from Morgan Stanley. Please go ahead.
Oh, good day, guys. It's Chan here. How's everyone? Hey, guys. Just got a couple of questions. The office expiries in FY 2027, only about 8.5%. Can you give us some insights as to the retention rate you're expecting across that portfolio, please?
Hi, Simon. It's Andy. Look, retention's one of those statistics that we don't focus too much on and the outcome of retention is printed ultimately in occupancy and leasing volumes. In FY 2028, we have some expiries, some known exits from the portfolio, and so there's a known exit in Australia Square and a known exit in 335 Bourke Street. Otherwise, I think your retention in the year gone by was more than 50%.
Okay. No, I used the word retention. I was more worried about downtime, et cetera, right? If you've got existing tenants leaving and it could take several months for you to backfill it. Is that going to create a drag in 2027? By the sounds of your answer, that's going to be a non-issue.
Well, it's all asset-specific, but if you look at two large exits we had from the portfolio last year, we were able to backfill them within 12 months. One at 80 Collins Street South and one at 25 Martin Place. Two deals about three and about 5,000 square meters.
Okay. The bulk of the 8.5% expiring, you're pretty comfortable with in terms of being tenanted over the course of the year?
The 8.5 is the lease expires in 2028 that as at today we haven't dealt with. We are in active discussions. We know that we've got some work to do at 385 Bourke Street. Melbourne's a slow market to move and that might not be solved by the end of FY 2027, but it shouldn't be too far from that.
I think perhaps just to add to that, FY 2026 was impacted by some downtime, particularly at 30 The Bond. I think what is pleasing in terms of our expectations is we're expecting more normalized growth in 2027, just given the leasing momentum to date, as well as higher average physical occupancy.
Great. This is my next question. I'm just interested, do you know with the Waterfront delay up in Brisbane, what does that mean for the tenants who had signed up to move in? Are you on the hook to help them out in terms of helping them extend their existing lease or were there flexibilities in the deal that they signed with you guys?
We're working closely with our pre-commitment tenants, Simon, at the moment to mitigate the impact of this delay on their own space requirements. Three of the eight pre-commitment tenants are within our control at 1 Eagle Street, and we're working closely with everyone to help mitigate that impact. I think the risk to pre-commitment leasing is relatively low given where the market has moved on an effective rent basis, and given that the project is 50% under rented. That's not something that we're taking for granted.
Okay, good one. Thanks. Cheers, guys.
Thank you. The next question comes from Claire McKew from Green Street. Please go ahead.
Hey, thanks, guys. Just quickly on capital rotation. You have been selling assets in Brisbane. Is that simply a function of liquidity being stronger in those markets, or is there something specific about the return profile of those assets that make the disposals the right call despite the market's compelling outlook?
Thanks, Claire. Do not read too much into it beyond we underwrite the assets, we look at the go forward return, we look at the return at the clearing price and the alternative use of capital. Then we look at the portfolio construction impacts and we are building our exposure in Brisbane through the Waterfront precinct. That is going to be the best product in town, I think, for some time. All the trends that we see actually support strong investment performance from those sorts of assets. So, that is the model that we approach it in, and clearly we have got better use for proceeds than assets are going to give us, let us call it, more average type returns.
Okay. Then in terms of the targets, just as a follow on, in terms of the targets for future disposals, there has been obviously a little bit of discussion, but are you looking at, just given the comments you have made around AI themes and so forth, are you really looking to target some of those, perhaps, on the risk spectrum, more at-risk assets as you look to refine the portfolio? Or will it continue to be opportunistic and commensurate with where you are seeing better liquidity?
Look, there is a consistent and strong rigor that we apply as we think about this analysis. I think the quality problem that we have, to be frank, is that the portfolio is of such high quality at the moment that let us call it the bottom 10% is typically better than the average or the top quartile for some competitors. So, I think we are splitting hairs to some extent if we are talking about quality. We have got principally out of the suburban markets, I think we have got two assets left, which were in joint ventures, which we would like to exit, but again, it is at what price? Yeah, it is just going to be driven by the numbers.
Yeah, no problems. Then maybe just lastly, just on the secondary units, can you just give us a sense across the sectors where they traded versus their own NAVs or NTAs?
Sure, Claire. For DWPF, for example, the flagship fund, part of the redemption facility has a baked-in discount of 2%, and that's where the most recent transactions have happened. Predominantly, other redemptions have been through liquidity mechanisms, so they weren't traded. But I would say in summary, this year, we've seen the discounts pretty much disappear.
Yeah, thanks. That's helpful.
Thank you. The next question comes from Winky Tan from Morningstar. Please go ahead.
Hi, good morning, Ross and team. Just a very quick one from me. Can we just talk about the uncommitted pipeline? I was looking at 60 Collins Street. Your year-on cost has increased to 67%, and it was 5%-6% a year ago. We know that the Melbourne office market isn't improving just yet. I'm just curious as to what has changed in the past year.
Hi, Winky. It's Andy. I'll grab that one. Thanks for pointing that out. 60 Collins Street sits in our pre-development classification, which affords us the opportunity to iterate with the development scheme and the development feasibility. You'll see that the area and the project cost has also changed. This smaller scheme, we think, delivers more potential for better risk-adjusted returns for a prospective capital partner.
I'll just reiterate earlier comments around capital allocation, that there is a very high bar for us to commit incremental capital to things, and that includes development assets that haven't been otherwise committed.
Yeah. That's clear. Thank you.
Thank you. At this time, we are showing no further questions. I will hand the conference back to Ross for closing remarks.
Look, thank you everyone. I know it is a really busy day. We look forward to catching up over the coming weeks. Thanks for your time.