• FFO (Funds From Operations): $0.104 per security.
• Distributions: $0.103 per security.
• Gearing: 28.7%, at the lower end of the target range.
• NTA (Net Tangible Assets): Increased by 0.3% to $3.57 per security.
• Divestments: $38.8 million executed, improving portfolio quality.
• Property Valuations: Increased by 0.5% on prior book values.
• Portfolio Capitalisation Rate: 6.41%.
• Asset Divestments: 22 assets totaling over $100 million.
• FY25 Guidance: FFO and distributions per security of $0.206, with a distribution yield of over 7%.

• Warning! GuruFocus has detected 10 Warning Signs with ASX:DXC.

Release Date: February 09, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Dexus Convenience Retail REIT (ASX:DXC) delivered FFO of $0.104 and distributions of $0.103 per security, maintaining a resilient income stream backed by high-quality tenant covenants.
• The company executed $38.8 million in divestments, improving overall portfolio quality and reducing gearing to 28.7%, which is at the lower end of their target range.
• The redevelopment of the northbound site at Glass House Mountains is fully pre-leased and expected to generate attractive returns above DXC's cost of capital.
• DXC's portfolio reflects a high-yielding, valuable land bank with a majority in metro and highway locations, supporting long-term transport and travel needs.
• The company maintains a carbon-neutral position across its controlled asset base and is actively engaging with tenants to support ESG objectives, including the installation of solar and EV charging stations.

Negative Points

• FFO and distributions per security were 1% below the prior corresponding half due to a 60-basis point increase in the average cost of debt and moderate dilution from asset divestments.
• The anticipated total capital cost of the Glass House redevelopment has increased, reflecting upward adjustments to rental terms with major tenants.
• The expected expenditure for Stage 2 of the Glass House redevelopment has increased, with several moving parts still to be finalized.
• Despite a higher interest rate environment, the company faces challenges in maintaining strong pricing for assets, particularly those with QSR retailing attached.
• The company has not undertaken significant hedging activities during the period, which could expose it to interest rate fluctuations in the future.

Q & A Highlights

Q: Good morning, Jason. Just noting that the CapEx or the anticipated total capital cost of Glass House redevelopment has increased a little bit over the last six months. Could you unpack why that was and highlight what the redevelopment entails at this point? A: The increase reflects an upward adjustment to rental terms agreed with the major tenant, which affects the price paid but not the profitability of Stage 1. For Stage 2, expected expenditure has increased due to design finalization and rental levels. Despite this, the project remains an attractive capital deployment option.

Q: With the gearing now having a two-handle on it, and considering the cycle with cap rates stabilizing, how are you thinking about the balance sheet and capacity for deployment? A: Our operating range for gearing is 25% to 40%, allowing flexibility. Future gearing will depend on deployment opportunities, but we maintain a buffer to the top end of the range. We have capacity for at least one to two more meaningful development sites.

Q: How are you thinking about deployment, development versus acquisition, and the buyback? A: Our preference is for development over acquisitions due to better risk-adjusted returns. We see opportunities in the $20 million to $40 million range. The buyback remains for flexibility, but higher returns are available through fund-through developments.

Q: Regarding guidance reiterated today, with the yield curve improving, what are your thoughts? A: The yield curve suggests marginal upside, but we've canceled $46 million in debt facilities, affecting debt establishment costs. The net benefit will be seen in FY26, offsetting lower floating rates.

Q: How are you thinking about hedging at this point in the cycle? A: We started strong with 78% hedged in the first half and will average over 70% for FY25. The current interest rate outlook offers good value in the two-to-three-year part of the curve, presenting hedging opportunities in the second half.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.