Company Interview / Sold assets lead to superior returns

Key points:

Dexus Convenience Retail REIT (ASX: DXC) results and the reasons for their resultsThe intended use of funding sourced from recent asset salesThe future of petrol stations and the potential implications of the shift in the energy mix on customer dwell times

Jason Weate, Dexus Convenience Retail REIT fund manager, reflects on the company's recent performance, noting that they've delivered at the top end of their guidance range due to the underlying portfolio performing as it's designed to. Key success attributes include high occupancy rates of 99.7% and fixed renewal growth escalators of around 3%. While the rise in interest rates has had some impact, Jason's opinion draws attention to asset sales equating to approximately 5% of their portfolio, with the received price broadly aligning with book values or NTA.

Jason further highlights the intended use of these funds, aiming for higher returning opportunities, he outlines one such opportunity in the development of a service centre called the Glass House Mountain in Queensland. This redevelopment will feature various convenience retail, and quick service restaurant style offerings, a project that Jason believes will deliver superior returns than the sold assets. Jason declares the market's overall pleasure with these developments.

The future landscape of petrol stations inclusive of alternative fuel vehicles is also touched upon. Jason comments on how the offering needs to cater to longer dwell times due to the shift in the energy mix. He sees potential amplification of services like grocery line offerings, strong food offerings, and spaces that allow people to work or leisurely enjoy their meal. He then gives insight into the balance sheet; currently at 32.9% gearing, this figure drops to 28% following the contract sales. As well as funding the Glasshouse Mountains opportunity, this balance sheet headroom allows for potential acquisition opportunities across Australian east coast markets. Jason concludes by highlighting Dexus's three pillars of its investment proposition, income certainty, growth of income, and prudent balance sheet management.

Full unedited transcript below:

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Meantime, Dexus Convenience Retail REIT will pay distributions of 21 Australian cents per security for the full year and its guiding for 20.6 cents per security for FY 25. So let's get more on those Dexus convenience REIT results. That's a mouthful. I'm joined by Dexus fund manager Jason Wheat in the studio with me. Hey, Jason, nice to see you. Good to be here. Thank you for having me. Good day for, uh, your results to come out on market. And it looks like they've been taken pretty favorably. So what went right? What went right? Um, well, look, I think what we've demonstrated today through our FY 24 result is that the underlying portfolio does what it's designed to do. We have very high occupancy of 99.7%. We drive fixed renewal, um, growth escalators of around about 3%. And that means for very low, um, risk to our top line. Um, so we've demonstrated that obviously that's tempered a little bit by the increase in interest rates in the current interest rate environment. Um,

0:59

but all in all, we've delivered at the top end of our guidance range. I think the market's happy about that. But also, we've announced today that, um, we have contracted up to around about asset sales equating to about 5% of our portfolio. And that's been struck at pricing that's broadly in line with book values or NTA, which is really important in an environment where the stock's currently trading some way below NTA. But we're selling assets, we're selling them in size at a very good level. That really proves up. NTA so why are you selling off the assets? We need funding sources to for higher returning opportunities. One of our nearer term opportunities, um, is a development in Queensland called Glasshouse Mountains on the on the Bruce Highway. Um, that's a full redevelopment of the existing service centre, but also introduces a whole range of convenience retail, um, quick service restaurant style offerings. So it's a really it's a strong project. It's going to deliver more returns than the assets that we've been selling to fund that. And I think the market is overall pretty pretty

1:59

pleased with that. So what is the future of these QSR convenience. You know petrol all in one. Like what do they look like? I think, you know, um, the offering needs to cater to longer dwell times at the end of the day, because we don't know where the shift in the energy mix is ultimately going to take. Alternative fuel vehicles. They might be traditional, you know, IC or can can um, uh, internal combustion engine vehicles or could be a mix of EVs hybrids. Other battery hybrids are really, um, doing very well in the market, where we see annual car sales in traditional battery hybrids are incredibly strong. So, um, car sales are really, um, demonstrating strength in, in fuel reliant vehicles. But in the future it needs to cater to all those different types of fuel types. And so when you have, um, you know, a grocery line offering in the convenience store, you have really, um, really strong food offerings. Places where people can sit, eat, take their time, do some work.

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Um, you know, they're all the services or the provision of services that these, um, sites are going to need to provide over time. Yeah. Really interesting. Just because there are those unknowns when it comes to the mix eventually, but there's going to be some sort of mix of EV in there, no doubt. Yes. Um, the Rav4 I just learned, is the highest selling car in Australia. I think the hybrid model. Interesting. Um, okay, so when you are divesting these assets as well, I mean, what what, you know, what is your balance sheet look like? Because obviously you alluded to interest rates, which is the elephant in the room when it comes to all of this stuff. So our balance sheet gearing at the moment is, is 32.9%. That's right in the middle of our through the cycle operating range of 25 to 40%. So very comfortable balance sheet. After the contract sales that we've announced today would take gearing back down to around about 28%. So really significant headroom, um, as far as our our balance sheet and covenants are concerned, but also it gives us incremental redeployment firepower into things like

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the Glasshouse Mountains opportunity I just spoke to, but also potential other acquisition opportunities in the market as well. Where would they come from? Where would they be? Because you're very much concentrated along the east coast of Australia.

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Did you look further afield? Yeah. I mean, I mean, we we really like fuel and convenience offerings with strong, quick service restaurants attached. So we would love to replicate what we're doing at Glasshouse Mountains and, um, restock our development pipeline accordingly to gain access to more of those sites. So that's something that we'll be really focused on to increase our holdings and provide more redeployment optionality, but also in the direct market in, um, you know, large format retail and, um, other parts within the retail asset segment. There's really good buying opportunities out there at the moment, which makes for, um, you know, a good opportunity for us to continue to rebalance our portfolio and, um, you know, increase our direct, uh, exposure to convenience retailers over time. And when you are thinking about your asset valuations and you're looking for these glass house mountains type projects, I mean, and

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what's the sort of lead time like, how long do you have to sort of get some more of these higher value sites up and running? It's a development times for these sites. Um, a pretty, pretty short. It's around about 12 months to to level the site in its entirety and rebuild that again. Um, so have shorter leading times, but that means you don't need to take as much of a view around what your asset is going to be valued on completion. So we have really good line of sight into the market at the moment. That really demonstrates the strength of that offering and ultimately informs the returns that we think we'll be able to extract in a development like that. But we think over the next 12 months represents a good lead way, a good a good time frame to start executing on further, um, redevelopment options, um, and pipeline over that time frame. So income certainty growth what's your other key focus. So you know you're doing well glasshouse mountains I think um we've all got the name now. We're going to be

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stopping when we make our way up there. Please do. Yeah. So. So where's your laser focus now? Because it has been a tricky time. It has been a tricky time. And I think, you know, we refer to our three pillars of our investment. Proposition one is to deliver certainty of income and growth of income. But obviously prudently managing our balance sheet is another, you know, um, core objective of ours. I think we've done a really good job. I mentioned before, um, you know, we've contracted to sell over $45 million worth of assets. We've actually sold, um, over the last 12 to 18 months, close to 10% of our book. Um, so we are releasing a lot of capital. We're freeing up a lot of capital for more redeployment opportunities. And so what you can expect from us is more prudent balance sheet management and more active remixing of the portfolio as we buy and sell assets to deliver an increase in our returns for our unit holders.