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Dexus Enjoys Sydney Office Exposure


Dexus released their third quarter operational update this week with an upbeat assessment of their progress across their leasing, development, funds management, transactions and capital management strategies, thanks to a strong Sydney office market.

The Group which controls some $29Bn of real estate is well placed in the markets which are experiencing good growth. Leasing enquiry has remained robust over the quarter despite uncertainty as a result of external factors, such as elections.

The Group reported a total of 61,099 square metres of office space was leased across 93 transactions in the core portfolio and in the development projects that are underway. Whilst there was no indication of the current lease spreads, Dexus's December updated reported a leasing spread of 18% in the Sydney market and with a significant lease expiry exposure (17% of total office income) to the Sydney office market coming up over the next 2 years, the business is expected to generate strong income growth in the years ahead.

Dexus added to its Sydney exposure following the purchase of the remaining 50% of the MLC Centre for $800m allowing for future positive rental reversion in the office space and through a further 12,800 square metre ground floor retail development. In addition, Dexus divested of two non core properties at 11 Talavera Road, Macquarie Park for $231.2 million and Finlay Crisp Centre, Canberra for $62 million.

Dexus notes that its target for FY19 office like-for-like growth of 4-5% may be affected by a tenant dispute in Queensland which has required them to revise their target for FY19 office to 3%.

Dexus progressed its $5.0 billion group development pipeline of which $2.6 billion sits within the Dexus portfolio and $2.4 billion within the Funds Management business. Recently completed projects include the new Sydney Tiffany & Co store at 175 Pitt Street and the final stage of Quarrywest estate in Greystanes. The pipeline projects now include the expansion of the MLC Centre retail and the redevelopment of the Theatre Royal.

In the Industrial markets, Dexus continued to see strong leasing demand with occupancy and WALE (by income) have been maintained at 96.9% and 5.0 years respectively, while forward leasing has mitigated future expiry risk with minimal downtime resulting in FY20 expiries reducing from 14.2% at 30 June 2018 to 7.7% at 31 March 2019. Dexus also settled on the acquisition of the 9-hectare brownfield site at 425 Freeman Road, Richlands, QLD which had been previously announced.

As a Funds Manager, Dexus has also been busy securing capital for the 25% interest in the MLC Centre acquisition attracting six new investors and further diversifying DWPF’s unitholder base.

Whilst the group has secured a major equity commitment of $100 million to the HWPF fund, it has confirmed that it will no longer proceed with the investment in Heathley Healthcare REIT, a new stapled vehicle which was proposed to list on the ASX. The agreement Dexus held with Heathley Limited was subject to a successful Initial Public Offering and following discussions with Healthley an agreement was made to not proceed as planned. The new capital for the fund will, subject to FIRB approval, provide capital to acquire the North Shore Health Hub at 12 Frederick Street, St Leonards.

Guidance

Dexus reaffirms its market guidance for the 12 months ending 30 June 2019 for distribution per security growth of circa 5%, with the distribution payout ratio remaining in line with free cash flow.

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From 1/1/2018

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