Dexus Results Reflect strong Commercial and Logistic Markets


Dexus announced this week that it had achieved an increase of 5.5% in Adjusted Funds From Operations (AFFO) per security in FY19 driven by strong commercial and logistics markets in Sydney and Melbourne and continued capital inflows which have allowed the group to grow to $31.8bn in assets under management.

Dexus Chief Executive Officer, Darren Steinberg said: “We have performed well across all areas of the business, meeting our distribution guidance while remaining focused on creating sustained value. We secured $3.1 billion of quality acquisition opportunities, increasing our office exposure in core markets and enhancing our embedded pipeline of office development projects in both the Melbourne and Sydney CBDs. "

Dexus confirmed a 5.0% growth in distribution per security for FY19, and confirmed its guidance of circa 5% growth in distribution per security growth for FY20 driven largely by continuing positive leasing spreads expected in upcoming lease renewals in the Sydney portfolio which remains under‐rented and where leasing spread achieved in FY19 were +24%.

FINANCIAL HIGHLIGHTS

  • AFFO per security of 50.3 cents, up 5.5% on FY18

  • Distribution per security of 50.2 cents, up 5.0% on FY18

  • Return on Contributed Equity (ROCE) of 10.1%

  • Gearing (look-through) of 24.0

Operationally, Funds From Operations (FFO) increased $28.2 million or 4.3% to $681.5 million. The underlying business, excluding trading profits, delivered FFO per security of 62.9 cents, growing by 3.8% on the prior year. AFFO per security of 50.3 cents grew 5.5%.

Dexus’s net profit after tax was $1.28 billion, down 25.9% on the prior year. The key driver of this movement was $773.1 million net revaluation gains, which were $428.7 million lower than FY18. Cap rate compression in the Office Portfolio contributed to 39% of the uplift in the office portfolio with a weighted average cap rate of 5.15% (down 22bps on FY18). For the Industrial portfolio, cap rate compression contributed to 77% of the valuation gain with a weighted average cap rate of 5.92% (down 48bps on FY18).

Dexus achieved a ROCE for FY19 of 10.1% driven largely by the strong AFFO result as well as revaluation gains from the recently completed development at 100 Mount Street in North Sydney which delivered an exceptional IRR of 39.6%.

Capital Management

Dexus continued to maintain a strong and conservative balance sheet with gearing (look-through) at 24.0% at 30 June 2019, well below Dexus’s target range of 30-40%. Total debt duration remained high at 6.7 years and Dexus further diversified its funding sources through the issue of $425 million of Exchangeable Notes to fund the acquisition of a further 25% interest in the MLC Centre, Sydney. Securing opportunities.

In May 2019, an equity raising comprising a $900 million institutional placement and a $63.9 million SPP, which was increased from its original $50 million cap, was used to partially fund Dexus’s 75% interest in 80 Collins Street, Melbourne.

Transactions

The group secured $3.1 billion of opportunities for Dexus and their third party capital partners. These included:

  • a future development site at 60 and 52 Collins Street, Melbourne (100% Dexus)

  • a large-scale mixed-use development at 80 Collins Street, Melbourne (75% Dexus, 25% DWPF),

  • the remaining 50% interest in MLC Centre, Sydney (25% Dexus, 25% DWPF),

  • three properties located adjacent to 56 Pitt Street, Sydney (50% Dexus, 50% Dexus Office Partner), two of which have exchanged to be acquired on delayed settlement terms post 30 June 2019,

Dexus delivered $34.7 million of trading profits net of tax from the sale of 32 Flinders Street, Melbourne. Dexus progressed the sale of the North Shore Health Hub, St Leonards, and post 30 June 2019 exchanged contracts to sell a 25% interest in 201 Elizabeth Street, Sydney, while entering into a put and call option to sell the remaining 25% interest in late 2020. The sale of 201 Elizabeth Street is expected to contribute circa $34 million in trading profits pre-tax in FY20 and a further circa $34 million in FY21 in the event either option is exercised. Dexus is targeting $35-40 million of trading profits net of tax in FY20.

A total of five projects diversified across sectors and trading strategies have been earmarked to deliver trading profits of $210-300 million pre-tax in future years.

Office & Industrial

The Dexus office portfolio delivered 3.4% like-for-like income growth which was affected by vacancy at Sydney Olympic Park as well as a tenant dispute in Queensland, with the timing for receipt of proceeds uncertain. The Queensland space has already been leased to a new customer who is now in occupation.

The Dexus office portfolio achieved a 10.6% total return for the year which was driven by valuation uplifts and leasing.

Occupancy increased to 98.0% at 30 June 2019 (FY18: 96.0%) driven by leasing in Dexus’s largest core market, Sydney, as well as Brisbane.

During the year, Dexus leased 324,765 square metres of industrial space across 87 transactions with Dexus’s industrial portfolio occupancy remaining high at 97.0% and the portfolio delivering like-for-like income growth of 8.0%.

Development

Dexus see development as an efficient use of capital at this time in the cycle when access to quality properties on market is competitively bid. The $7.1 billion development pipeline comprises committed and uncommitted projects and circa $2.2 billion pipeline of potential concept development projects provides with embedded future growth.

Funds Management

The Funds Management business grew by 16% to $16.2 billion with 129 properties managed on behalf of 79 third party capital partners. During the period, Dexus secured new capital via;

  • GIC as a foundation investor in the newly created Dexus Australian Logistics Trust, a circa $2 billion portfolio seeded with assets from Dexus’s existing industrial portfolio.

  • M&G Real Estate as a new investor in the Dexus Industrial Partnership and

  • Employees Provident Fund (EPF) Malaysia as a new investor in the Healthcare Wholesale Property Fund (HWPF).

  • 9 new investors in DWPF, including six investors who joined through a $340 million equity raising.

All funds delivered strong performance, with DWPF achieving a one-year total return of 10.24%, outperforming its benchmark over one, three, five, seven and ten years. The Dexus Office Partnership has achieved an annualised unlevered total property return of 14.3% since inception.

Post 30 June 2019, Dexus reached agreement to restructure the investment management joint venture with Commercial & General for HWPF, resulting in a streamlined governance structure and Dexus continuing as the sole investment manager of the Fund. Dexus has also agreed to purchase Commercial & General’s units in HWPF.

Outlook and guidance

Dexus’s market guidance for the 12 months ending 30 June 2020 is to deliver distribution per security growth of circa 5%.

DXS Trading Chart vs ASX200 AREIT Blue - DXS, Purple ASX200 AREIT Last 12 months

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