DXC’s Portfolio Discount to NTA Persists Despite Positive Revaluations and Redevelopment

Strong Half-Year Performance Amid Strategic Portfolio Moves

Dexus Convenience Retail REIT (ASX: DXC) has delivered a robust half-year result for the six months ending 31 December 2024, confirming a distribution of 10.3 cents per security and reaffirming its full-year guidance. The REIT’s Funds From Operations (FFO) stood at 10.4 cents per security, reflecting a slight 1% decline from the prior corresponding period, primarily due to higher interest rates. However, like-for-like net property income grew by a resilient 2.8%, supported by average rent reviews of 3.1%, underscoring the portfolio’s defensive income characteristics.

Portfolio Quality Enhanced Through Strategic Divestments

DXC strategically divested approximately 5% of its portfolio, generating $38.8 million in proceeds that were used to reduce gearing to 28.7%, comfortably within its target range of 25-40%. These divestments, executed at an average 1.8% discount to book value, not only lowered leverage by 3.6 percentage points but also improved interest rate hedging and reduced exposure to regional and regional city assets. This move reflects a disciplined capital management approach aimed at strengthening the balance sheet and positioning the REIT for future growth.

Development Momentum at Glass House Mountains

Capital redeployment is underway with the commencement of the Glass House Mountains Northbound redevelopment, a $24 million project expected to complete within 12 months. The site is fully pre-leased to prominent tenants including Viva Energy, McDonald’s, Guzman y Gomez, and KFC, with an average lease term of 18 years. The redevelopment has been redesigned to expand the On The Run offering, focusing on food-on-the-go, grocery convenience, and quick service restaurants. The project is forecasted to deliver a yield on cost of approximately 5.8%, exceeding DXC’s cost of capital and enhancing the portfolio’s exposure to high-quality convenience retail service centres.

Positive Revaluations and Portfolio Stability

During the half, 38 of DXC’s 91 properties were independently valued, with the remainder internally assessed. The combined valuations resulted in a net uplift of $3.2 million, or 0.5% above prior book values, despite a modest 6 basis point expansion in capitalisation rates. This positive revaluation trend contributed to a slight increase in Net Tangible Assets (NTA) per security, up 0.3% to $3.57, signaling portfolio stability amid a challenging interest rate environment.

Robust Portfolio Metrics and ESG Commitments

DXC’s portfolio remains highly occupied at 99.4%, with 95% of rental income derived from major tenants and a weighted average lease expiry of 8.2 years, providing strong income visibility. The portfolio’s composition is predominantly metropolitan and highway assets (86%), which benefit from higher traffic flows and flexibility for future land use changes aligned with evolving consumer convenience trends. On the sustainability front, DXC continues to source 100% renewable electricity for operationally controlled assets and maintains carbon neutrality for Scope 1, 2, and some Scope 3 emissions. The Glass House Mountains redevelopment incorporates multiple sustainability initiatives, including electric vehicle charging stations, rooftop solar, and water reuse systems.

Outlook: Defensive Income with Growth Potential

Looking ahead, DXC reiterates its FY25 guidance for FFO and distributions of 20.6 cents per security, translating to an attractive distribution yield of 7.3%. The REIT remains focused on enhancing portfolio attributes that underpin income certainty and growth, preserving balance sheet flexibility, and pursuing value-accretive development opportunities. Despite trading at a circa 20% discount to NTA, DXC’s stable cash flows, strong tenant covenants, and positive spread between capitalisation rates and debt costs position it well to navigate market uncertainties and capitalise on growth initiatives.