Dexus Property Group Stapled Security Stock

Thank you for standing by, and welcome to the Dexus FY '26 Results Briefing. [Operator Instructions]

I would now like to hand the conference over to Ross G. Vernet, Group CEO and Managing Director. Please go ahead.

Well, good morning, everyone. We really appreciate you taking the time to dial in this morning. I know it's a really busy day with other companies reporting, and there's probably a few tight analysts given it's been a busy reporting week. Let's 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'll hear from some of the management team who will provide you with a full picture of the business and the operating environment. You'll hear from Keir, our CFO, on the financials; Andy on office, Chris on industrial and Michael on funds management. At the conclusion, I'll provide a summary and outlook, and then we'll open up for some questions.

We know -- Dexus today, it's a good business. Now you may see Dexus as an opportunity to buy high-quality assets cheaply. And in the short term, we're looking to capitalize on that ourselves. But Dexus has all the ingredients to be so much more than that and unlocking that potential is what we're 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've 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've delivered on what we said we would in FY '26, and we continue to make progress on our transition. But 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's work to do to ensure the strategies and products continue to be relevant and deliver for clients and for us. Specific issues have emerged in the infrastructure funds and mandates that transition to Dexus from AMP, and we're 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. And the management team and I are acutely aware of this disconnect, and we are focused on improving it in a sustainable and enduring way. So the question I know you'll be asking is, what are we doing about it? And the answer is, in short, a lot.

As detailed on this slide, in FY '26, 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. And 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. And we're being responsible in how we think about costs and overheads to run the business. And the team will share more on progress and highlights in a moment.

12 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. And 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 $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.

And 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 Kier.

This slide sets out the context, the actions we've taken and the next steps. And there's a few things I want to make sure are really clear. Dexus primarily acts in a fiduciary capacity in these funds. We don't 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's what we're doing. In May, the New South Wales Supreme Court found against the Dexus block in proceedings in relation to APAC, and the investors are appealing that decision with the 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, and this ensures that we have teams focused on delivering in each part of our business. This is evident in the positive outcomes this year we've 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 won't be possible until the appealed outcome is known. These are complex matters, and it will take time to resolve, and we will update you as security holders as decisions are reached.

I'll now hand you over to Kier, our CFO.

Thanks, Ross, and good morning, everyone. Turning to the results in detail. In line with expectations, total AFFO was $484 million, with a distribution of $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 $30 million since FY '24, with the impact of recent initiatives expected to benefit FY '27.

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 Brook Hollow, 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 30 June, the portfolio increased by 1%. Our office portfolio, which is 95% prime grade and 78% weighted to core CBD markets increased by 0.6%. And 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 $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, $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'll now hand over to Andy.

Thanks, Kier, and good morning, everyone. I'll take you through the office results. We own the best office portfolio in Australia, 95% prime grade and 78% in core CBDs, up from 88% and 61% 7 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 30 June. Our leasing volumes of 172,000 square meters were 60% higher than the prior year. Incentives were 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 1-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 '27 expiries stood at 12.1% at 30 June, excluding those, excluding car parks and the leasing that we have secured since the year-end, that reduces to 8.5%. The vacancy we're 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 '27. Further out, FY '30 and FY '31 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 '26, 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 hyper local. 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 0.5 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 1-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 '28. We leased 128,000 square meters across 23 development deals and 68% of the committed book is now pre-leased with fixed annual increases of 3% to 3.5%. Every completion expands the quality end of the portfolio and captures tenants trading up. A portfolio built for the market we're 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, derisking 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're 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 '27 expiries sit in younger prime assets, so our upside is exactly where the market is strongest.

On development, we're actively growing and upgrading the portfolio over 208,000 square meters 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 3 years, and the market has slowed building on spec. Developers now precommit 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're leaning to modern logistics in the best locations and stepping back from the secondary stock the market is discounting.

Thank you. I'll now hand over to Michael.

Thanks, Chris, and good morning, everyone. Our funds business manages $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 DWPS, 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 3 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. And 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 health care fund has not achieved the scale or performance we had hoped for when it was launched almost 10 years ago. And as mentioned earlier, following the unfavorable APAC judgment, we 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 $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 raised $2 billion in equity across the platform, including $260 million in the last 2 months of the year, while also providing liquidity to investors. DWPF's redemption queue, which stood at $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 1-, 2- and 3-year periods. And DWPF continues to outperform its benchmark across all time periods, achieving a 1-year return of 9.3%. The performance of these funds highlights the quality of the underlying portfolios and our active management approach. And with structural fee pressures across the market, strong performance does support fee retention.

Finally, we continue to deliver on our ESG ambitions across the platform. Three funds achieved 5-star GRESB ratings, and we maintained net zero emissions across Scope 1 and 2 for our managed portfolio.

Thank you. I'll 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're evolving the product set. Now we've covered a lot today, and there's lots of moving parts. So let's turn to the priorities for the year ahead. Our commitment to transition the balance -- the business, remains the same and the priorities to get us there have been refined. We've been deliberate about where and how we allocate capital, we remain invested and importantly, where we don't. We are targeting to release more than $2 billion of capital over the next 2 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've 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. But 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.

So, 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 a team in place to execute. We have met commitments to security holders, but we know we have more work to do, and FY '27 will be a critical year for us. And while the core portfolio is expected to benefit from leasing momentum, earnings in FY '27 will be lower. This is driven by minimal contribution from performance fees, trading profits, higher financing costs and the practical completion of Atlassian. We've 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 30 June 2027, we expect AFFO of $0.375 to $0.395 per security and distributions in line with last year at $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. But they are all moving Dexus towards being a more diversified, more capital-efficient business capable of delivering sustainable growth over time. And 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. And while the year ahead will have some challenges, I'm 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'll now open up to any questions. Thank you.

[Operator Instructions] The first question today comes from Adam West from JPMorgan.

My first one today is just on the ongoing APAC matter. But I'm just wondering if you're able to quantify how we should be thinking about the scale or quantum potentially if the shareholders were to take legal action against yourself and whether or not your provision that you've got in there for NTA covers just the current cost of the appeal or also if you were to lose that appeal and had to cover the cost of the upside?

Thanks for the question, Adam. Look, I understand that there is going to be lots of questions around APAC. But obviously, this is a live and complex bit of litigation. So, there's not much I can add beyond what's in the materials in the prepared remarks. In specific -- 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 doesn't kind of provision for -- it doesn't provision for any future claims. It does allow for some cost 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 be kind of -- that will probably happen or if it happens, it will take some time.

Yes. That's clear. I guess just on my second question, but 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? And do you think there's potentially a tailwind of people taking out more space for collaborative and breakout spaces?

Look, I think it's a fascinating question. Andy is in there talking with customers every day. So, I'd like to get him to share some views on that. But I think from my perspective, certainly, what we're seeing in our business is AI is definitely making the most productive people more productive. And that means that we're going to see people investing, I think, in high-quality space and the value and utility of those people actually becomes high 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. And I think bear in mind, our average customer size is relatively small. It's 1,500 square meters 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 the -- 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 Bris.

The next question comes from Andrew Dodds from Jefferies.

Maybe just a follow-up on some of the APAC legal fees. I think back in the first half, you quantified that amount at $17 million. So, I was just hoping where that number kind of sits today and I guess the outlook sort of going forward over the next 12 months of what this number could sort of potentially be?

Yes. Thanks for the question. So, 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 $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. That's clear. And 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 once you're out of blackout? And I guess just how sustainable do you see this just given where look-through gearing is at 33% and close to $1 billion of capital commitments over the next 2 years?

Look, the buyback is something that I'm very passionate about, and that is why it's in the plan. But as you'll appreciate, we are balancing the short term, and there is clearly kind of a short-term gain we had through the buyback through ensuring that we don't kind of start the business of capital for longer-term growth. So -- and when you do all of that while managing risk and you rightly identify the financial risk, I'm also thinking about the investment risk, so how we think about the investment portfolio. So, I guess in a nutshell, it's a balance. All these decisions are guided by our capital allocation framework, which we kind of put in place in 2024. But certainly, at current prices, I'm a buyer of the stock, and you should expect us to be active in coming weeks.

Okay. And just in terms of guidance and what guidance is factoring in, how much of the buyback are you assuming?

There's nothing material in guidance in terms of the buyback. It's not a material needle mover given where kind of cost of debt and the yield of the stock is. It will have benefits in future years as you kind of think about shrinking the capital base. And then when we get earnings growth moving, we're doing it off a smaller capital base. So, it's going to increase NTA, it will increase NAV 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 don't want to stretch it, but we have also announced that we're targeting to at least release at least $2 billion of capital over the next couple of years, and we have a good track record in terms of capital release. So, I kind of think certainly, at current prices, I think it would be a missed opportunity for us not to capitalize.

Right. And then just a final one for me. Just in terms of some of the moving parts in FY '27 guidance, I guess it's been pretty well flagged that performance fees and trading profits are kind of likely to feature less going forward or at least in '27. But it would just be good to understand some of the kind of bigger moving parts just given how deep the sort of year-on-year decline is?

Keir, do you want to?

Yes, happy to take that one. So, you're 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's some slight dilution in there from disposals as well as some allowances for a materially lower contribution from FUM that's under review or consultation. And I think pleasingly, offsetting those headwinds, we're anticipating solid growth in the core portfolio, driven by leasing momentum, stronger office growth and continued industrial performance.

I think just kind of closing out on that, I think that's kind of something that maybe just doesn't 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's after we take into account higher funding costs and the full year impact of the Atlassian coming through. So, I think that's something to -- certainly us as a management team, but also brokers to be focused on.

The next question comes from Adam Calvetti from Bank of America.

Just on the office, do 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 and you don't report leasing spreads and growth -- like-for-like growth of 0%. Like what's going on? When is this going to return to positive?

Adam, it's Andy. Is the question there what's like-for-like for '26 ex divestments?

Yes, ex what's settling in 30 Hickson Road, which I'm sure has dragged it down.

Yes. So, it would be about 2.5% as opposed to 30 basis points in FY...

And is there a reason why [ I'm not ] a leasing spreads?

So leasing spreads are improving, especially on an effective basis. And 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 '26 were negative 8.7%. So that's down from 10.2% at '25.

Okay. That's clear. And then just on the divestments as well, you've got a coupon that's going to be -- is that going to be coming through FFO?

Yes, it will be. That's right.

Okay. That's clear. And then just maybe one quick one as well. Just on this APAC litigation expense, I mean, with the FUM that's at risk, is that still fee paying currently? Is the full $7.3 million? Or how do we think about the $4.5 million fee paying? And is that expected to be fee paying throughout the year?

So yes, we're still providing services and collecting fees in relation to that FUM. As I said, I think the concluding remarks, we haven't had some allowances in guidance for a materially lower contribution from, let's call it, fund that is under review or consultation. We're not being specific as to what that is, but we need to make some assessments around what that is in determining guidance, and we've done that. So yes, we factored in on a reasonable basis what that looks like.

Okay. But it's fair to say that it's contingent on the actual decisions at court. So, if that's delayed, you could see them paying -- you see that fee -- that fund paying fees for all of FY '27?

I would separate the litigation outcomes from the reviews that we're going through with fund clients and trustees.

Right. So you're doing reviews on the full $7.3 million regardless?

Correct.

The next question comes from David Pobucky from Macquarie Group.

Just another one on the infrastructure strategic review. How should we think about the timing of the progress you make there? And I mean, at what point would you have made material progress? And 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 just flagged that this is a process that we're working through with clients, trustees and investors. And so, it's 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's a general acknowledgment amongst all the stakeholders that is a very complex situation, and 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're not going to be -- and we are not, Dexus, going to dictate the timetable. I think we're very respectful of all the stakeholders in relation to that.

What does success look like? I think in the end for us, it's 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. And ultimately, the economics need to be a positive contribution for us given the complexity and the loss of control that you have when we're investing alongside clients. So, I think that's the framework that we're looking about. I accept that this is a difficult situation, we have stakeholders and clients with differential interest, but that's how we're working through it in a methodical and considered way.

And just the second question. You mentioned you're targeting the release of $2 billion of capital over FY '27 to '28. 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. So, if you could provide any comment on those kind of a couple of pieces.

It's 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. But 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've got to get the timing of that right. We've got to make sure we get the right partners in. We're not under pressure to do a deal tomorrow, if that makes sense, but the balance sheet is in a really good position. So, for us, we'll 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're working through that. We'll update the market as we make meaningful progress. And 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.

The next question comes from Tom Bodor from Jarden.

I was just interested in whether you see FY '27 as a trough year for FFO? Or do you think there could be sort of some risk into '28 as well?

We only just delivered the '27 guidance, Tom, and you want us to talk about '28? 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 '27. There's headwinds, there's tailwinds in relation to that. The team is focused on '27, all with the lens of getting the business back to sustainable earnings growth. And so, we'll be pleased to update the market on '28 probably this time next year.

And then on Waterfront and the delays, I think historically, when you've sort of answered questions around that, there's always been sort of 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 you sort of can't take all the risks that could play out. And it seems that weather contingencies have been [indiscernible] through. Does that mean that you're now on the hook for any excessive weather delay from here? And 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. And I think 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. And I'll let Andy provide some specific comments on the contract particulars. But for me, this is -- we 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 lever 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. And notwithstanding the delays, and we do want to get this built as quickly as possible, the economics have been largely preserved. And so, 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 does that look like, but I'll let Andy touch on that.

Thanks, Ross. Tom, so 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. And 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 Hollands to review the program. It does include and resets an appropriate contingency for weather from this point on. And we'll feel much higher conviction about forecasting PC once we get to Level 5, which will be later this financial year. And at that point, it should be much clearer.

The next question comes from Howard Penny from Citi.

Just a question on finance costs and how to think about the sources of funds over the next 2 years. There is 1 or 2 -- there's some potential to renew funding, but also the exchangeable notes 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 2?

Sure. I might take that one. Thanks, Howard. So maybe if we start with gearing, gearing at 30 June 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 has achieved, pro forma gearing sits at around 30%. That's just with the initial proceeds from those sales. And then it steps up to around about 32% if you look at the $0.5 billion of committed DevEx over the course of FY '27. Now things that might occur outside of that, Ross has talked to the $2 billion of capital release over FY '27 and '28, 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. So, 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, look, 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. And you are right, the exchangeable note that expires towards the end of FY '27. It's too early to say what we will do with that particular instrument, but you should assume at the moment that it will be in place until maturity.

And just a second question coming back to thinking about the core portfolio. That portfolio has done well and remains strong. And just thinking about how Dexus is allocating that next dollar. There's 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 dollar of Dexus across those opportunities?

Howard, the way we think about capital allocation is not about the next dollar, it's actually about thinking about the returns on the assets we already own. So, it's both, and that is also driving some of the decisions around divestments. So, I think we see opportunity to sell assets where kind of the go-forward returns are going to not meet our hurdles or returns relative to the redeployment opportunities. So, I think you should expect us to 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 doesn't mean that we're not going to do new things. It means that the -- yes, as I said, the bar is high in terms of doing new and different things. And if you look at actually where we have deployed capital, we haven't committed that marginal capital over the last year. It has been on things that generally have high returns and adding to diversification and ideally capital efficiency in the business. So, there's certainly going to be characteristics of any of the new things that we do.

The next question comes from James Druce from CLSA.

Yes. I think part of the question might have just been answered, but just what you'd like to do with that $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.

Yes, yes. So, we -- just on the maintenance CapEx and leasing CapEx for '27, is that heading up or down? Or what is that number?

Thanks for the question. So, I'd expect it will be a little bit lower than what we delivered in FY '26. 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? I mean it should be trending down [indiscernible] I would have thought.

Yes, I think that's fair. And maybe, Andy, you can talk to certainly office markets where that's the expectation.

I think the short answer is we expect cash incentives as TI, AFFO 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 '28 expiries, we've got half of them in Sydney prime. So, we hope -- we expect to do well there. On the maintenance CapEx and lessors 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. And 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 -- capital to be released? And what cap rate are you holding that asset at now?

So that's -- I think when we started that project, we said there's 2 times 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 is being put in place at the moment. So it reaches PC end of the year, and that is something that would be -- ideally, we'd 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 is 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 asset finance side?

About 65%. I think it's actually good support from the financiers on that. So yes, I think that bodes well for the project.

The next question comes from Lauren Berry from Morgan Stanley.

Just got a couple of questions. The office expiries in FY '27, I think about 8.5%. Can you give us some insights as to the retention rate you're expecting across that portfolio, please?

Simon, it's Andy. Look, we don't -- retention is 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 '28, we have some expiries, some known exits from the portfolio. And so there's a known exit in Australia Square and then a known exit in 385 Bourke Street. Otherwise, I think retention in the year gone by was more than 50%.

No, I mean I was asked -- I guess with 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. So, is that going to create a drag in '27? But by the sounds of your answer, that's going to be a nonissue?

Well, if you look at -- well, look, it's all asset-specific. But if you look at 2 large exits we had from the portfolio last year, we were able to backfill them within 12 months. So, one at 80 Collins Street South and at 25 Martin Place, 2 deals about 3,000 and about 5,000 square meters.

Okay. So, the bulk of the 8.5% expiring, you're pretty comfortable with in terms of being tenanted over the course of the year?

So, the 8.5% is -- the lease expires in '28 that as at today, we haven't dealt with. So, we are in active discussions. We know that we've got some work to do at 385 Bourke Street. Melbourne is a slow market to move, and so that might not be solved by the end of FY '27, but it shouldn't be too far from that.

I think perhaps just to add to that, I mean FY '26 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 '27, just given the leasing momentum to date as well as higher average physical occupancy.

Great. My next question, I'm just interested, you know about 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?

So, we're working closely with our precommitment tenants, Simon, at the moment to mitigate the impact of this delay on their own space requirements. So, 3 of the 8 precommitment 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 precommitment leasing is relatively low given where the market has moved on an effective rent basis and given that the project is 50% under-rented. But that's not something that we're taking for granted.

The next question comes from [ Claire McHugh ] from [ Green Street ].

Just quickly on capital rotation. You've 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. It's -- don't read too much into it beyond we underwrite the assets. We look at the go-forward return. We look at the clearing price, the return at the clearing price and the alternative use of capital. And then we look at the portfolio construction impacts. And we have -- we're building our exposure in Brisbane through the Waterfront precinct. That is going to be the best product in town, I think, for some time. And all the trends that we see actually support strong investment performance from those sorts of assets. So, it's -- that's kind of the model that we approach it in. And clearly, we've got better use for proceeds and assets' going to give us, let's call it, more average type returns.

Okay. And then in terms of the targets, just as a follow-on, in terms of the targets for future disposals, there's been obviously a little bit of discussion. But are you looking at -- just given the comments you've made around AI things 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're seeing better liquidity?

There's a consistent and strong rigor that we apply as we kind of 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's call it, the bottom 10% is typically better than the kind of the average of the top quartile for some competitors. So, I think we're kind of splitting here to some extent if we're kind of talking about quality. We have got principally out of the suburban markets. I think we've got like 2 assets left, which we're in joint ventures, which we would like to exit. But again, it's at what price? So yes, I think kind of -- it's just going to be driven by the numbers.

Yes. No problem. And 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.

The next question comes from Yingqi Tan from Morningstar.

Just a very quick one for me. Just can we just talk about the uncommitted pipeline? I was looking at 60 Collins Street, your yield on cost has increased to 6% to 7%, and it was 5% to 6% a year ago. And 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?

Yingqi, it's Andy. I'll grab that one. So, thanks for pointing that out. 60 Collins Street sits in our sort of predevelopment 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. And so, this smaller scheme, we think, delivers more potential for better risk-adjusted returns for a prospective capital partner.

And I would just reiterate earlier comments around capital allocation, but there is a very high bar for us to commit incremental capital to things that includes development assets that haven't been otherwise committed.

At this time, we're showing no further questions. I'll 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.

Thank you for standing by, and welcome to the DEXUS HY '26 Results Briefing. [Operator Instructions] There will be a presentation followed by a question-and-answer session.

I would now like to hand the conference over to Ross Du Vernet, Group CEO and Managing Director. Please go ahead.

Well, good morning, everyone, and thanks for joining us for our half year 2026 results presentation. I'd like to begin today by acknowledging the traditional custodians of the lands and waterways upon which we operate and pay our respects to elders past and present.

Today, you'll hear from Keir on the financials, Andy on office, Chris on Industrial and Michael on Funds Management. Concluding the presentation, I'll provide a summary and open up to any questions that you may have.

DEXUS is a unique investment proposition in the Australasian real asset market. Today, we manage $51 billion of assets across our platform with third-party funds under management at 2.4x our investment portfolio. We have scale and diversity across the real asset spectrum, $20 billion in office and around $10 billion in each industrial, retail and growth markets, which includes infrastructure, health care and alternatives. This scale is underpinned by our multidisciplinary team with deep expertise across each sector. Importantly, we have access to diverse pools of equity capital, which positions us well to capitalize on opportunities through the cycle.

Our strategy is unchanged and our vision to be globally recognized as Australasia's leading real asset manager continues to guide our decisions. The strategy targets large growing markets, leveraging our multi-sector strengths in transacting, managing and developing across each. Our high-quality balance sheet portfolio, together with a large diversified funds management business continues to differentiate us. Today, the investment portfolio is anchored by prime office exposure across Australia's major CBDs. Over time, the investment portfolio will continue to become more diversified by investing alongside capital partners into a diverse range of opportunities. Our culture, the quality and scale of the portfolio and projects we have underway, coupled with our approach to people, enable us to attract, retain and develop leading talent to ultimately create value for customers, clients and you, our investors.

Turning to our results. We delivered AFFO of $253 million and distributions per security of $0.193. This was the second consecutive six-month period of positive property portfolio valuations, which supported the delivery of a statutory net profit and an increase in NTA to $8.95 per security. Our office leasing volumes were almost double that of levels achieved in the prior corresponding half, including further progress at Waterfront in Brisbane, which is now 71% pre-leased and will deliver a premium product in the strong Brisbane office market.

Our industrial portfolio, as we expected, delivered strong like-for-like growth and re-leasing spreads. We undertook $800 million of divestments for the balance sheet, including the recently agreed divestment of 100 Mount Street in North Sydney. If we turn to the funds business, we continue to work through some fund-specific matters while positioning the business for long-term success. Our flagship funds continue to outperform, DWPF outperforming its benchmark across all time periods, while DWSF, the Shopping Center Fund has outperformed since joining the platform. We raised over $950 million of equity, comprised $640 million of new equity commitments and the facilitation of more than $280 million in secondary unit transactions. We established a new fund series. We closed DREP2 above its initial target, and we continue to rationalize subscale funds to simplify the platform.

In August, I outlined our action items for FY '26, aligned to our three strategic priority areas of transitioning the balance sheet, maximizing the contribution of the funds business and unlocking our deep sector expertise. In addition to the progress I mentioned on the previous slide, key development milestones were achieved at Waterfront in Brisbane. The DEXUS office and industrial portfolios delivered positive total returns over the 12-month period. And DEXUS has now secured $1.4 billion of divestments since 30 June 2024, progressing well towards our $2 billion target. We invested $170 million of seed capital into DSIT1, a new fund series, which we aim to reduce to $50 million during the year. We've reduced the real estate redemption queue by $1 billion. And post the APAC court date scheduled for April this year, we expect to make more progress on solving infrastructure redemptions.

Overall, we've made solid progress and remain focused on the priorities that will position the business for long-term success. Our sustainability strategy focuses on three priority areas where we can make the greatest impact across climate action, customer prosperity and enhancing communities. Sustainability remains core to how we operate, and we continue to receive global recognition for our performance.

Thank you, and I'll now pass you over to Keir.

Thanks, Ross, and good morning, everyone. Turning to the results in detail. In line with expectations, total AFFO was $253 million, with a distribution of $0.193 per security, reflecting a payout ratio of 82%. Office FFO reduced primarily due to divestments and lower average occupancy, partly offset by contracted rent increases. Industrial portfolio income increased due to higher occupancy, development completions and contracted rent increases, partly offset by divestments. FFO from management operations decreased due to lower FUM as a result of divestments and slightly lower performance fees, with $19 million realized in the first half and $16 million secured for the second half.

Finance costs were broadly flat with a higher cost of debt offset by higher interest income. As expected, trading profits were higher with the sale of Brookhollow, Chester Hill and continuing construction at Prestons, securing FY '26 guidance. Maintenance and leasing CapEx is skewed to the first half of the year, mainly due to the impact of incentives on deals secured in prior periods as well as the timing of maintenance CapEx. Looking ahead to FY '27, performance fees and trading profits are expected to be materially lower than FY '26.

It has been positive to see the second six-month period of valuation growth across the office and industrial portfolios. Overall, for the six months to 31 December, the portfolio increased by 1%. Capitalization rates have stabilized with the valuation movement predominantly driven by rental growth. Our office portfolio, which is 77% weighted to core CBD markets increased by 0.7% and our industrial portfolio, which is 90% weighted to core industrial estates and distribution centers increased by 1.6%. Pleasingly, these outcomes demonstrate the quality of the portfolio.

Moving to capital management. Our balance sheet remains solid with look-through gearing towards the lower end of the 30% to 40% target range, providing capacity to fund committed expenditure. During the half, we issued $500 million of subordinated notes at attractive rates and diversifying our funding sources. We have been active with refinancing, resulting in a weighted average debt maturity of 4.6 years, $2.5 billion of headroom and manageable near-term debt maturities. 95% of our debt was hedged during the half at an average rate of 2.9%, providing material interest rate protection. Looking forward, there's $1.2 billion of remaining spend on the committed development pipeline over the next four years, with $360 million expected to be incurred in the second half of FY '26.

Thank you, and I'll now hand over to Andy.

Thanks, Keir, and good morning, everyone. I'll now take you through the performance of our office portfolio. We continue to own and manage the best office portfolio in Australia. Over the past five years, we have enhanced the quality and resilience of our portfolio. And as a consequence, we are well positioned to benefit from the market recovery that is now underway. Location remains a key differentiator, demonstrated by our portfolio occupancy of 92.2%, which remains well above the market average.

Our average incentives of 29% are below market, reflecting the quality of our portfolio and notably, leasing deals done in Perth, Brisbane and North Sydney, where market incentives remain elevated. The effective like-for-like income decline of 2.3% primarily reflects downtime on select vacancies, including 80 Collins Street and 30 Hickson Road, and we expect this to improve into the full year.

Our leasing activity was strong this half with leasing volumes of over 95,000 square meters, almost double the volumes achieved in the prior corresponding period. The portfolio delivered a one-year total return of 5.7% at December, reflecting the improved market conditions.

Looking at our expiry profile, we aim to have no more than 13% of the portfolio expire in any single year. FY '27 expiries have improved to 12.3% following the recent divestment of 100 Mount Street with key expiries remaining in Australia Square and 385 Bourke Street. We remain focused on addressing the more challenging vacancies at 80 Collins Street in Melbourne, which represents 2.2% of portfolio income and 30 Hickson Road in Sydney's Western Corridor at 1.5% of income.

While there is no conclusive answer regarding the potential impact of AI on office markets, we believe different parts of the workforce are likely to be affected unevenly. Our view is that high-value professional work, the kind concentrated in premium CBD buildings, reflecting the majority of our portfolio will be the most resilient to AI replacement risk and may even benefit and grow.

We frequently monitor our customer base, which is well diversified with an average tenancy size of 1,000 square meters and our top 10 customers account for just 20% of our total property portfolio income. The staggered expiry profile, combined with our diversified tenant base, supports resilient income streams across the portfolio.

Our development pipeline provides the opportunity to further enhance portfolio quality. Construction is progressing at Atlassian Central in Sydney with completion on schedule for late 2026. This development is 100% pre-leased on a 15-year lease with 4% per annum fixed increases in what is now an improving Sydney market. At Waterfront Brisbane, we have achieved an important development milestone with the Riverwalk opening earlier this month and the vertical structure coming out of the ground. The Brisbane market continues to strengthen with a positive outlook over the medium term. Pleasingly, Waterfront is now 71% pre-leased with the recent leasing deal reflecting a 40% improvement in net effective rent compared to the previous Waterfront deal struck two years ago. In aggregate, 83% of the committed development book is pre-leased with contracted 3.7% average fixed increases per annum, providing a secure income stream once complete. We have fixed price contracts in place with Tier 1 contractors with material collateral and security arrangements to protect against construction risk. A very high threshold applies to projects in our uncommitted development pipeline and Central Place Sydney has moved out of our uncommitted pipeline as the scheme is reconsidered.

Turning to the office outlook. The evidence continues to suggest that we have passed the bottom of the cycle and are now in the early stages of a recovery. Office demand continues to gain momentum, driven by employment growth, return to work mandates and centralization trends. Net absorption has been positive across all four major CBDs with the strongest absorption in premium grade assets, which is exactly where our portfolio is positioned. Sublease space has continued to reduce and is now close to average levels. Importantly, upcoming office supply is low relative to long-term averages. This provides scope for vacancy rates to fall and rents to grow. Within our own portfolio, we are seeing examples of 15% net effective rent growth on comparable lease deals struck 12 months apart.

Looking at our rental growth expectations over the next three years, we expect strong growth across all major markets with Brisbane and Sydney Premium leading the way, followed by solid growth in Sydney A-grade, Melbourne Premium and Perth. The Sydney CBD core is now 95% occupied with DEXUS at 98%. With the seven-year delay in new supply, there is meaningful upside to the Sydney premium forecast. DEXUS is well positioned to capture this upswing given our portfolio quality and location in core precincts of the major CBDs.

Thank you. I'll now hand you over to Chris.

Thanks, Andy, and good morning, everyone. Our industrial portfolio has delivered a strong result, including a one-year total return of 8.8%. Occupancy by income increased to 97% following leasing success across Sydney, Melbourne and Perth, which also resulted in like-for-like income strengthening to 8.7% as expected. Occupancy by area of 97.5% remains above the national average. We achieved strong re-leasing spreads of 33% across the stabilized portfolio. Average incentives increased to 21.5%, primarily driven by lease-up of key expiries in Melbourne's West and Sydney's Outer West. The portfolio is 8.9% under-rented and 20% is set to access rental reversion upon expiry by FY '27.

On developments, we completed 102,000 square meters during the period, with construction continuing across a further 110,000 square meters. We leased 63,000 square meters across 10 development deals and 68% of our committed development book is now pre-leased with contracted annual increases of around 3%.

Moving to our expiry profile. We have leased 24% of the portfolio over the past 18 months, derisking the expiry profile and capturing strong re-leasing spreads. We remain focused on leasing key vacancies at Matraville, which has now been repositioned along with Gillman. And we are in active discussions with potential tenants on both of these properties. The vacancies we have experienced over the past 18 months have been in older stock in New South Wales and Victoria. And pleasingly, we have achieved strong re-leasing results. Looking forward, 80% of our FY '27 expiries are represented by younger prime assets and provide the opportunity for positive reversion.

Turning to the outlook. Supply under construction has moderated and remains at or below historic average take-up in all markets, while the picture for demand remains supported by strong Australian population growth, enhanced by e-commerce growth. Our portfolio with its focus on core industrial estates in strategic locations is well positioned to benefit from these trends.

Thank you. I'll now hand over to Michael.

Thanks, Chris, and good morning, everyone. Our funds business manages $36 billion in third-party capital across a diverse range of real asset strategies for more than 150 institutional clients with retail and wholesale investors. We've maintained prudent capital structures across our pooled funds with average gearing remaining conservative at around 32%. We have both returned capital and raised equity in existing and new products, but the near-term revenue impact of providing liquidity is still working its way through. While there is more to do, we are positioning ourselves to capture the strong expected growth in pension capital over the medium term.

Last year, we launched a new investment series focused on high-quality assets for long-term value creation, with the first fund in the series securing a 25% interest in Westfield Chermside. Offshore capital, particularly from Asia, is increasingly interested in Australian real estate with the office sector also seeing renewed interest. In the six months to December, we've reduced the real estate redemption queue by around $1 billion, and we continue to rationalize subscale funds. We expect to make further progress on infrastructure redemptions post the APAC court case scheduled for April 2026 with mediation to occur in March '26.

We raised over $950 million in third-party equity, including facilitating more than $280 million in secondary unit transactions. DWPF continues to outperform its benchmark across all time periods, outperforming by circa 200 basis points for the 12 months to 31 December. This highlights the quality of the underlying portfolio and our active management approach. And the shops fund has also outperformed its benchmark since joining the DEXUS platform. And while operating -- while the operating environment remains challenging with some continued pressure in the near term, we are steadily repositioning the business for long-term scalability and growth.

Thank you, and I'll now hand you back to Ross.

Thanks, Michael. Underlying real estate markets continue to improve, supported by positive business confidence, constrained supply pipelines, stabilization in asset prices and improvement in transaction volumes. Barring unforeseen circumstances for the 12 months ending 30 June 2026, we reaffirm our expectations for AFFO of $0.445 to $0.455 per security and distributions of $0.37 per security.

With valuations turning positive, transaction and fundraising markets recovering, our confidence in the long-term fundamentals of the business have strengthened. We are actively exploring opportunities to enhance returns and capital efficiency by increasing third-party capital participation in the $13 billion property portfolio. This would release capital in addition to the $2 billion divestment target. With the sustained disconnect between our equity market valuation and that of our underlying assets and businesses, we have activated an on-market securities buyback of up to 10% of DEXUS securities. We will execute the buyback at a pace consistent with maintaining balance sheet discipline as we progress asset sales and other initiatives to release capital.

Thank you. That ends the formal part of today's presentation. I'll now take any questions that you may have.

[Operator Instructions] The first question today comes from Adam West from JPMorgan.

I guess my first question today is just on the Atlassian development. I'm just wondering if you progressed any plans for a partial sell-down -- full sell-down of that asset?

Adam, thanks for your question. This is certainly an asset that we have flagged that we'll be looking to introduce third-party capital into. I think we've been pretty consistent with the market that we think the best time for that is closer to practical completion. That is slated for the end of the year. We think it's a great investment product, 15-year lease fixed 4% increases. And so yes, that's one of the assets that we will be bringing third-party capital in over the course of the year. It might not happen before practical completion, but it will be towards the end of the year.

And I guess just my second question on the office portfolio. In terms of the core Sydney CBD portfolio in particular, I'm just wondering if you could talk to how much under-renting would potentially be in that segment.

Andy, that's one for you.

Yes. No problem. Adam. So look, re-leasing spreads were positive in all of the CBDs, including Sydney CBD. And so re-leasing spreads obviously impact the extent to which the portfolio is over and under-rented. We're seeing a pattern of better effective re-leasing spreads driving or reducing the extent to which the portfolio is over-rented on an effective basis. And so the portfolio generally is around 7.5% over-rented on an effective basis. That's come in from 12.5% 12 months ago. And it's about 4.5% under-rented on a face basis, which is pretty stable with 12 months ago.

The next question comes from Cody Shield from UBS.

Just firstly, on the buyback. My understanding was that you need to do more than $2 billion of divestments to get the buyback away. Is that still the case? Or are you sticking with that $2 billion target?

I think we're very resolved around the $2 billion target. And I think what we're flagging is we see real value in the security price where it's trading. We instituted a pretty disciplined capital allocation framework when I stepped into the chair. Dare I say that has regard to the return on the investments we already have and also marginal uses of capital. So we are definitely resolved we're going to get through that $2 billion target. And as I have shared in my concluding remarks, we are actively looking at bringing third-party capital into the $13 billion investment portfolio. That has the potential to release a significant amount of capital. And certainly, given where we're trading today, the buyback would be a really good use of that.

Okay. That's clear. And then just turning to the leasing at Waterfront, looks like a good outcome. Just wondering whether there's some flex in that 5% to 6% yield on cost that you're targeting?

I think I've been pretty clear. I always kind of think we're going to be at the higher end of that range, and there's always scope for us to outperform. We're really pleased. We have great belief in that product. I think that is validated and the strategy of the team to be kind of patient and wait for the market to come to us on the leasing there. So I think that's a tremendous validation of the product and the leasing strategy from Andy and the team.

I would also kind of just flag that even at that yield on cost, we're going to be materially under-rented in that asset just given how much the market has moved. So I think there's going to be a great ultimate return for our security holders and DWPF, which is our co-investor there. And yes, I would like to kind of see the team surprise on the upside.

The next question comes from Simon Chan from Morgan Stanley.

My first question relates to the buyback. guys. How much of the buyback do you think you'll actually do in the second half of fiscal year '26? And if you are genuine about kicking off the buyback in the second half of fiscal year '26, I would have thought there's scope for you to change your earnings guidance for the year because you're buying back stock at essentially 10% earnings yield and your cost of debt is 5%.

So maybe I'll take the question in two parts. Are we serious about the buyback? The short answer is yes. I think it's not just a statement of intent, but we see real value in the company where it's trading. We see a disconnect. We have a very high-quality portfolio. Valuations have troughed. We see valuations moving north from here. And I think the market is fixated on maybe EPS growth and some noise in the business, be that developments or litigation, those sorts of things. So we see good value at the current level. We need to make sure that as we're executing that buyback, we're doing it in a disciplined way that we have regard to the balance sheet strength, which is really important to us. But I think I am getting more confident around the transaction market. It is improving. And certainly, I think bringing third-party capital into the platform and the confidence we have in doing that, there is scope for us to release a lot of capital.

And as I said in previous responses, I think the buyback is a really good use of capital at current levels. So I can't predict where the stock price is going to be in three months' time, and we're not going to put that into guidance. But certainly, at current -- trading at current levels, if we can be more active on capital recycling, I think you're going to see us being very active.

Okay. Fair enough. My second question, in Slide 17, and I think Andy Collins might have touched on this. That's that last bullet point, high threshold to commence new development projects. I think he referred to that after talking about scrapping central place. What's your new threshold now? Like are you going to have a -- have you guys done the review and have settled on a high yield on cost hurdle before you kick anything off? Can you talk to that, please?

I would say coming back to our capital allocation framework, this is something that is constantly assessed. And when we kind of look at alternative uses of capital, including things like a buyback, which we've announced today, there is a very high threshold for us to start new projects. So that's not to say that we're not going to do it, but where we do it, it needs to be capital efficient. We need positive economics from the management enterprise, and we need to believe that the underlying projects are going to deliver really good risk-adjusted returns. So -- that's how we...

I get that Ross. But previously, Central Place was -- you were guiding to, I think, 5% to 6% yield on cost and you've now scrapped it. So can I assume that 5% to 6% no longer custom?

I think that's probably fair to say 5% to 6% yield on cost kind of depending on where cap rates are is a pretty skinny development margin. So that's not a good use of shareholder capital, and we won't be committing projects on that basis.

The next question comes from Andrew Dodds from Jefferies.

In the remarks, you noted that $1 billion of real estate redemptions were satisfied in the period. I'd just be interested to hear where that redemption backlog is sitting today. I think it was around $3 billion back in the August results.

Andrew. Yes, redemptions are around about $2 billion. We satisfied about $1.5 billion during the half year period. And they're now around evenly spread between real estate and the infrastructure exposures. And infrastructure will obviously be dealt with in line with the APAC court case resolution, which isn't too far away. So our expectation is that the current redemptions will likely be dealt with within 12 months.

All right. That's a good outcome. And then just secondly, on trading profits, the expectation this year was for $40 million post tax. It looks like you have done that alone in the first half. So I guess just the expectations for the second half. And also just in FY '27, the slide on Page 59 in the presentation sort of shows pretty minimal opportunities for trading profits. So I mean, is it pretty safe to assume that there won't be any contribution in '27?

Look, I might take the comment on '27 and Keir can talk to '26. I think what we're providing is in guidance that as we sit here today, the realization of meaningful trading profits and they have been a meaningful contributor in '26, the likelihood of that recurring in '27 at this point in time seems lower probability, and we're flagging that to the market.

What I would say on trading profits is I am confident in the value creation that sits in projects that we currently have under our control and development in the trading book. I think it is just a matter of timing and the decisions that we're going to make in terms of the realization of those profits. So I think that's how I'm thinking about '27.

But Keir, do you want to comment on '26?

Sure. Thanks, Ross. So you are correct. The vast majority of trading profits have been realized in the first half. There will be a very immaterial amount coming through in the second half. So I wouldn't factor too much into your forecast. We're still expecting circa $41 million for the full year.

The next question comes from Adam Calvetti from Bank of America.

Just on Atlassian, I mean, there's $610 million to spend, it's well above the current run rate that you've been spending CapEx at. I mean is there any financial implications if this was to be delayed?

Yes. So, Adam, it's Andy. So under the contract, it's a fixed price contract. We have the protections in the event of a delay. So from that respect, it's typical for a development like that. Are you -- is there more to your question from a financing perspective?

No, just any financial implications for DEXUS and then whether it's with the actual tenant, if that was to be delayed, it sounds like there's not.

Yes, that's correct.

Okay. And then just on office, I mean, of that 80-odd or 90,000 that you did over the half, I mean, how many tenants are expanding versus contracting in size?

Yes. Good question, Adam. So just like the breakdown of that leasing volume, about 20% is tenants upgrading. That's the first thing to note. About half of the tenants by area reflect renewals. That's the second thing to note. And in terms of growth, there are some great examples of tenants within the portfolio growing going from one tenant. One example is in 25 Martin Place, a financial services tenant going from one floor to two. And there are others with smaller tenants coming out of incubators, small suites moving up the curve into larger suites. And so that's about 25%.

But just to clarify that, so 20% upgrading, half are renewing and 30% are contracting?

I didn't say contracting, sorry, Adam. So you need to look at those proportions independently of one another. To answer your question directly, about 25% of tenants we dealt with grew.

The next question comes from Ben Brayshaw from Barrenjoey.

Could you just talk about the rationale for the issuance of the subordinated notes during the period, the $500 million? And could you also clarify the margin achieved on that new debt, please?

Sure. Thanks for your question, Ben. So the issue of the sub-notes, I'd say that was a very prudent and opportunistic capital management initiative. It provides us with enhanced financial flexibility to pursue investment initiatives, certainly those with pretty attractive risk-adjusted returns whilst our planned capital recycling is ongoing.

In terms of spreads, I mean, you'll have seen DCM spreads have narrowed and the sub-senior spread is now at historically tight margins. So the 5.25-year notes were issued at 1.75% over three-month BBSW and the 8.25 were swapped back to floating, and they reflected an initial margin of 1.85% over three-month BBSW.

And will you receive equity credit from your rating agencies for those notes?

That's right. We will. 50% equity credit.

Terrific. And just in relation to your comments, Ross, on becoming more capital efficient to build the balance sheet portfolio. Do you have a target interest in mind in so far as ownership that you would like to maintain across the assets that you bring in capital partners for?

Look, that's -- it's going to be considered on a case-by-case basis. I think the reality is we have a really high-quality portfolio. There's lots of options for us. We have existing JVs, which are 50-50, which we can bring third-party capital into. And we have existing assets that we own and control that we can establish new strategies around. So I think it's going to kind of depend on what clients want. And ultimately, we're going to run a bunch of options concurrently and choose those which are best for DEXUS security holders.

I wouldn't see a scenario where if these are high-quality assets, which they are, we don't want to -- we want to have a meaningful aligned interest with our clients. So that's, call it, in the range of 10% to 20% would be kind of at the bottom end.

Okay. And would Waterfront Place and Atlassian potentially form part of those capital and partnering transactions?

I'm not going to be specific on assets, but I would say, as a general principle, we are open to looking at every asset in the platform and we'll be, as I say, running options concurrently to assess what is the best outcome for DEXUS security holders having regard to, to be frank, what we sell, but also the redeployment and what's left afterwards.

The next question comes from Tom Bodor from Jarden.

I just was interested in the passing yield on the circa $800 million of divestments.

I don't know that we have that one to hand. We might come back to you on that.

Okay. But I mean if I take something like 100 Mount Street, is it fair to assume that it's relatively high passing yield?

There's a reasonable passing yield. I would say that asset has got a reasonable amount of CapEx coming in the next few years. So we think divesting at these levels is an attractive decision at this point in time.

Okay. And then on the Waterfront project, just would be interested, can you confirm that you've allocated 100% of the podium costs to the first tower? Or have you pro rata it based on the square meters of the towers above or some other formula?

So when we look at the total project costs that are quoted in the appendix, the cost of the podium is in the Stage 1 cost. In terms of the yield on cost, we strip that out, and we can go into a little bit more detail later today, if you'd like, around the methodology. But we take that out in terms of calculating the yield on cost for Stage 1, but it is included in the yield on cost that we quote for Stage 2.

Okay. And then I guess just following on from that, in light of the positive momentum you've had on leasing there in that first tower, how do you think about the potential to get the second tower going in the next couple of years? Or is it really too early at this point to consider that?

Look, I think that's a quality problem to have given the opportunities that we have in the portfolio. But I refer to Andy's earlier comments as a high threshold to commence. New development projects will be somewhat guided on that project as well by our partner there, which is the wholesale fund, DWPF.

I think as there is increasing flow and interest from capital, that might be something that we reassess over the next 12 months, and there's certainly going to be some synergies in keeping continuity of contractor on site. So it's not really a decision for today. I'll just kind of make the point that for DXS, it's marginal capital, it's going to be a high threshold. So that is going to be a gating issue for us.

The next question comes from David Pobucky from Macquarie Group.

Just a follow-up on the buyback and how you're thinking about balancing the buyback development and growth initiatives. I mean, DEXUS reset its target payout ratio, I think, almost a couple of years ago now to retain more capital for growth. So perhaps if you could talk a bit more about some of those growth initiatives you're working on, please?

Look, I would certainly like to be growing the business more. And I think the market is increasingly conducive to where we kind of see the cycle and we see flow of capital from clients. But the reality is, given where we're trading is DEXUS security prices are really compelling proposition. So to be frank, new projects and opportunities are going to compete with that. So as long as we're trading at these levels, that's a pretty high bar.

I would like to think -- and if I kind of take a step back, we have a significant balance sheet. And so the scope for us to undertake considerable capital recycling and releasing a lot of capital by bringing third parties into that investment portfolio actually, I think, gives us scope to do both. But obviously, we'll be assessing all those opportunities on a case-by-case basis at that point in time. So I can't predict where the share price is going to be. All I can say is as I sit here today, it looks very attractive from a marginal use of capital.

Just second question on Office. You saw a modest improvement in incentives in the period. Would you say FY '26 is the peak year for incentives? And what's the expectation around when that starts flowing through to earnings?

Well, David, just in terms of market incentives, so we've seen vacancy peak in Sydney and in Brisbane and in Perth. Vacancy is expected to peak in Melbourne shortly, next 12 months. And so that should flow through to market incentives. And of course, our incentives, we try to manage them lower than that market number.

I think if we're thinking about just the pure dollar spend in terms of incentives. So I would expect this year, CapEx will be sort of probably a little bit below what it was in '25, but is expected to be higher in '27 off the back of the strong leasing that the team has been doing.

The next question comes from Howard Penny from Citi.

I just wanted to ask about the equity raising. So they raised -- you guys raised $640 million in third-party equity commitments and $280 million secondary unit transactions. Could you describe where the equity interest is coming from domestic, international? And maybe just as far as possible, give us some background as to where these equity inflows are coming from?

Sure, Howard. We've seen a wide variety of interest from -- we've got a diversified platform with different channels of capital, and it's safe to say there's a wide variety of interest that, that attracts. So we've seen increasing interest from offshore investors, particularly in the pooled funds. And then from a domestic investor perspective, what they're increasingly looking to do is partner with us in some of our initiatives. So the DDIT trust, which was launched is the first in a series, and we've seen very, very pleasing demand from investors to essentially come into a club. That's been largely domestic, but I would say we've got a wide variety of interest from a wide variety of areas at the moment.

And my second question is just on cost of debt and where you see that potentially peaking over the next 2 years and refinancing risk on that?

Thanks, Howard. I'll take that one. So the cost of debt, you'll have seen has increased. It went from 4.2% up to 4.7% for this half. I expect for the full year, we'll be sitting at the high 4s next year, sort of 5-ish. So we are pretty close to market at this point. In terms of refinancing risk, very minimal expiries coming up. We have been very proactive with refinancing. We just did more than $1 billion on average at about 15 basis points, tighter rates and an increase in tenor. So we will continue to take a proactive stance with our refinancings.

The next question comes from James Druce from CLSA.

I was hoping you could comment just on the bucket of performance fees that you might have. I noticed you have the second half secured. I was just trying to get a sense of what's left after that.

Is that -- sorry, in relation to '26? Or what's the longer-term outlook for performance fees, just to clarify?

Yes. You've got the second half secured. So I'm just wondering how you're looking for '27 and '28. Are there things behind that, that can come through? Or is this sort of a strong year for performance fees...

So, the significant contributions in, to be frank, '25 and '26 was there was an infrastructure performance fee on a mandate that was crystallized on the sale, and there was a significant outperformance in the industrial strategy, the DALT portfolio, which was realized over a couple of periods. So I would say they were at the kind of the larger end of the scale. We are trying to introduce performance fees into new strategies and initiatives. They're not going to be straight line. They are going to be a little bit lumpy. And I think what we're kind of flagging is as we look towards '27, that level of kind of contribution is unlikely at this point in time.

Yes. Okay. That's helpful. And just interested in your Slide 18, just looking at the net effective rent forecast. I was sort of wondering, have you incorporated any AI impact into those forecasts? And how do you think about the sort of the uncertainty or dispersion that could create over the next 3 years?

I just generally in relation to dispersion, we've kind of been calling this for a while we see increased dispersion in performance in assets across, I would say, both real estate and infrastructure. And to be frank, the better assets we think are going to do better and there will be assets that potentially get stranded or left behind.

I think the good thing for us is whether it be in the balance sheet portfolio or our funds, we generally have those high-quality assets in those premium locations. So I'd say at a group level, we feel well positioned. And these are difficult things to predict. But Andy, I know you've got some views on this.

Yes. So I think difficult to predict is right. So in terms of how AI lands, no one really knows right now, but we -- what we're seeing in our portfolio through engagement with our customers is that it is resulting in some of our customers growing. And so I'll use an example where a law firm following implementation of an AI augmentation program actually leased more space because they could adjust their ratio of lawyers to non-lawyers. And so they needed more space. That's one anecdote. You can't apply that to the whole portfolio or to the market. But I think it's not as simple as drawing a straight line between AI implementation and like a blanket adjustment to office demand.

And I would say, thematically, we do kind of see that the nature of work that is more likely to be impacted by AI is typically going to be middle or back office functions. And those -- that work is typically going to be in the suburban markets. And that is not a space that we are particularly exposed to.

The next question comes from Yingqi Tan from Morningstar.

My first question is in regards to that $1 billion redemptions. Just wondering if you are able to quantify how much of these are secondary transactions and how much is of this funding actually left the platform?

So during the half, about $1.5 billion was set aside. Most of that was in -- there was also a special redemption in the shops fund. And then as we said, about $280 million of that was through secondary transactions, so obviously stayed on the platform and the rest were units being redeemed. So those units disappear.

And with the money that has been redeemed, could you also share whether it's sold to any external parties? Or is it I guess, within DEXUS other platform?

Essentially, the process is we free up cash to meet redemptions. So we'll sell assets or use debt. So by virtue of the fact that there's assets being sold, that would be off the platform. And to the extent it's debt, well, it's just an increase in debt in the fund.

That's clear. And my second question is to Andy. Would you be able to share what the office leasing spreads were in the past six months for the deals that you have achieved?

Yes, no problem. So face spreads were positive across all markets. For our portfolio, the face spread was up 9%. The effective spread trajectory has come in from 16% or negative 16% to negative 10% to now negative 5%. So just to clarify, the effective spread on the leasing that we've done in the first half is negative 5%, which is a material improvement. So in terms of the submarkets, in Brisbane, we achieved positive 10% effective spreads.

The next question is a follow-up from Adam Calvetti from Bank of America.

Ross, I just wanted to follow up on your comments made to Simon earlier on the 5% to 6% yield on cost guidance, essentially not cutting the mustard, I think, is the term. I mean I'm looking at the uncommitted developments, we're still quoting 5% to 6% for Waterfront, 80 Collins and Pitt and Bridge. Does that mean to get revised going forward?

We're not committing those projects yet, I think that's a question for when we're committing those.

Is that a target range? Or I mean why is that in there?

I think we'll assess those when we're kind of close to the start line. Things like Pitt and Bridge Street are still years away. And the reality is they are income-producing assets. So it's not a decision for today. I think what we're -- the yield on cost is and we think about development margins, we have to have regard to where we think stabilized cap rates are. Again, that's an assessment that we kind of think we need to make at the time of starting those projects. So rest assured, if we're deploying capital into development projects, we're going to need to be compensated for the risk and it's going to meet our internal hurdles.

At this time, we're showing no further questions. I'll hand the conference back to Ross for any closing remarks.

Thanks, everyone. Enjoy the day, and we'll catch up with you over the next few weeks.