Rising Interest Rates Test DXC’s Defensive Income Strategy Despite Stable Half-Year Results
Dexus Convenience Retail REIT (ASX: DXC) reported steady half-year results for 2025, underpinned by active portfolio management and ongoing redevelopment projects. The fund remains on track to meet full-year guidance while enhancing income security and growth potential.
- Portfolio valued at approximately $709 million with 99.4% occupancy
- Gearing reduced to 28.7%, supporting future growth initiatives
- 3.1% average rent review and 2.8% like-for-like income growth
- Glass House Mountains redevelopment underway, expected completion early 2026
- FY25 guidance reaffirmed with expected FFO and distributions of 20.6 cents per security
Steady Financial Performance Amid Market Challenges
Dexus Convenience Retail REIT (DXC) has released its half-year results for 2025, showcasing a resilient financial position despite a challenging interest rate environment. The fund reported a modest 1% decline in funds from operations (FFO) to 10.4 cents per security and distributions of 10.3 cents per security, maintaining a payout ratio close to 99%. This stability reflects the REIT's defensive income profile, supported by a portfolio valued at $709 million and a high occupancy rate of 99.4%.
Active portfolio management has been a key driver, with strategic divestments totalling $38.8 million executed during the period. These moves have improved portfolio quality and reduced gearing to 28.7%, comfortably within the target range of 25-40%, thereby enhancing financial flexibility for future growth.
Embedded Growth Through Rental Increases and Redevelopment
The fund achieved an average rent review increase of 3.1% and like-for-like income growth of 2.8%, underscoring the strength of its lease agreements and tenant base. With a weighted average lease expiry (WALE) of 8.2 years, DXC benefits from long-term income visibility, with no significant lease expiries until 2030.
Notably, the Glass House Mountains redevelopment project is progressing well. The first stage, Northbound, involves a $24 million investment to expand the convenience retail offering, including new food-on-the-go and quick-service restaurant tenants such as Hungry Jack's and KFC. Expected to complete in early 2026, this development is forecast to deliver a yield on cost of approximately 5.8%, enhancing both income and portfolio quality.
Sustainability and Tenant Diversity as Strategic Pillars
DXC continues to embed sustainability initiatives within its operations and developments, maintaining carbon neutrality across controlled assets and integrating renewable energy solutions such as rooftop solar and EV charging bays. This aligns with broader shifts in energy consumption and tenant strategies, particularly as convenience retail evolves.
The tenant mix has diversified over time, with direct exposure to leading fuel operators and convenience retailers including Chevron, 7-Eleven, Viva Energy, and Ampol. Approximately 11% of income derives from convenience retail sub-tenants, reflecting a growing focus beyond fuel sales to food and retail services.
Market Context and Outlook
Despite higher interest rates impacting finance costs, DXC's average cost of debt rose only modestly to 4.6%, aided by active hedging covering 78% of debt. The portfolio's average cap rate expanded slightly by six basis points to 6.41%, but contracted rent growth more than offset this, supporting a stable net tangible asset (NTA) per security of $3.57.
Transaction volumes in the fuel and convenience property sector have recovered, providing robust price discovery and supporting DXC's valuation. The fund currently trades at a circa 20% discount to NTA with a distribution yield of 7.3%, presenting a compelling entry point for investors seeking defensive income with growth potential.
Looking ahead, DXC remains focused on value-enhancing activities, including further portfolio recycling, development pipeline replenishment, and exploring opportunities beyond traditional fuel and convenience assets. The reaffirmed FY25 guidance anticipates FFO and distributions of 20.6 cents per security, contingent on stable market conditions.
Bottom Line?
DXC’s disciplined capital management and strategic redevelopment position it well to navigate evolving market dynamics while delivering steady income growth.
Questions in the middle?
- How will the Glass House Mountains redevelopment impact DXC’s income and valuation upon completion?
- What are the implications of rising interest rates on DXC’s cost of debt and future distributions?
- To what extent can DXC expand its non-fuel convenience retail exposure amid changing consumer preferences?