Dexus - Strong Markets Driving Returns
Dexus today announced its property portfolio operational update for the quarter ended 30 September 2019.
Darren Steinberg, Dexus Chief Executive Officer said: “This office market cycle is certainly not over, with our office portfolio effectively full and the Sydney and Melbourne office market vacancy rates at very low levels. In this environment we remain confident of being able to continue to drive rental growth in our quality office properties in these markets, particularly in those leases coming up for expiry over the next few years.”
Darren Steinberg said: “We’ve seen a significant increase in interest from offshore investors seeking to invest into quality direct office property in our funds management business. This increased interest is partly a function of the relative pricing and rent growth for Australian office comparing favourably to global cities.
“When you combine this trend with the actual transactional evidence that has flowed through in both Sydney and Melbourne over the past few months, along with the spread to bonds which has increased further, we are confident that we will see further cap rate compression.
Leased 27,267 square metres of office space and 4,660 square metres of office development space across 77 transactions with office portfolio occupancy remaining high at 98.1%
Leased 22,691 square metres of industrial space across 30 transactions, with industrial portfolio occupancy increasing slightly to 97.4%
Launched our next stage of office as a service through the acquisition of the Australian operations of Six Ideas, a strategic workplace and change management consultancy, enabling our customers to align workplace with organisational goals and strategy
Sold the North Shore Health Hub, Stage 1 currently under development at 12 Frederick Street, St Leonards on a fund-through basis to Healthcare Wholesale Property Fund
Dexus was named the Global Industry Leader for the Real Estate Sector by the Dow Jones Sustainability Index (DJSI) and achieved Global Sector Leader status for listed office in the Global Real Estate Sustainability Benchmark (GRESB)
Dexus office portfolio
Executive General Manager, Office, Kevin George said: “Our portfolio occupancy remains very high. In a period of limited contiguous space options and limited new supply, we have the opportunity to reset rental levels across 147,900 square metres of vacant or expiring space across our Sydney portfolio, which is currently 8% under-rented, up to the end of FY22. This represents approximately 17% of our total office income.
“We continue to generate good enquiry volumes in line with our experience of the last 18 months and are very encouraged by the growth in SMEs and the technology sector, including cloud computing, social media and cyber security. The services industry generally is still benefiting from significant infrastructure investment in our key markets and this has helped underpin our high occupancy level.
“During the quarter we launched our next stage of office as a service through the acquisition of the Australian operations of Six Ideas, a strategic workplace and change management consultancy, enabling our customers to align their workplace with organisational goals and strategy. We also opened Dexus Place in Perth, which enables us to offer our Perth based and visiting customers the benefits of a state-of-the-art workspace with the flexibility of access from one hour to one month.”
Over the quarter to 30 September 2019, a total of 31,927 square metres of office space was leased across 77 transactions in the core portfolio and the development projects that are underway or recently completed.
Dexus industrial portfolio
Over the quarter to 30 September 2019, 22,691 square metres of industrial space was leased across 30 transactions. Occupancy (by income) increased slightly to 97.4%, while WALE (by income) was maintained at 4.7 years. Average incentives on leasing undertaken during the quarter reduced compared to FY19, with a higher proportion of deals during the quarter being represented by effective deals. Incentives on face deals were down slightly compared to FY19.
During the quarter, Dexus completed its office development at 240 St Georges Terrace in Perth (now 95% committed with 7.1 year WALE)
Dexus’s group development and concept pipeline now stands at a cost of circa $8.7 billion post completions during the quarter, including 240 St Georges Terrace and Calvary Adelaide Hospital.
In early October, Dexus successfully completed the issue of $200 million of domestic Medium Term Notes with a 10-year tenor at an attractive all-in rate of 2.62%.
During the quarter, HWPF acquired the North Shore Health Hub, Stage 1 currently under development at 12 Frederick Street, St Leonards. The state-of-the-art healthcare facility, being developed by Dexus, will support existing infrastructure in a growing healthcare precinct on Sydney’s lower North Shore and is due for completion in late-2020, with 50% of the facility already pre-committed.
As mentioned in the development section, the new Calvary Adelaide Hospital development was completed during the quarter.
As mentioned above, Dexus sold the North Shore Health Hub on a fund-through basis to HWPF and will continue to manage the development for total revenue of circa $224 million6. The sale is expected to contribute circa $18-22 million in trading profits pre-tax, which will be realised across FY20 and FY21, with the amount for each financial year dependent on the progress of the development and leasing.
Dexus also exchanged contracts to sell a 25% interest in 201 Elizabeth Street, Sydney and entered into a put and call option for the remaining 25% in late 2020 for a total of $315 million. The sale is expected to contribute circa $34 million to pre-tax trading profits in FY20 and is expected to contribute a further circa $34 million in pre-tax trading profits in FY21 in the event either option is exercised.
FY20 outlook and guidance
Dexus reiterates its market guidance for the 12 months ending 30 June 2020 to deliver distribution per security growth of circa 5%, with the distribution payout ratio remaining in line with free cash flow.