Company Reports

Dexus’ first-half result revealed adjusted funds from operations of AUD 0.27 per security and distributions of AUD 0.27. That’s on track with our unchanged full-year estimates, and management guidance for full-year distributions of AUD 0.48 and AFFO “broadly in line with” fiscal 2023, excluding trading profits. We maintain our AUD 10.80 fair value estimate and Dexus securities screen as undervalued.

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading.

Office conditions will likely remain tough for several years given the weight of arriving supply, and mediocre demand, but narrow-moat Dexus securities price in more than enough bad news to look undervalued. Dexus pays a fiscal 2024 yield of roughly 7% against a 10-year bond yield of roughly 4.5%, which looks attractive while investors wait for recovery.

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading.

Dexus’ fiscal 2023 result was broadly in line with our expectations. Funds from operations, or FFO, was AUD 64.0 cents per share, and distributions were 51.6 cents, at the upper end of guidance and marginally above our estimates. Our distribution estimate for fiscal 2024 is 48.0 cents per share, in line with guidance, driven by lower trading profits. Excluding trading profits, management expects adjusted funds from operations, or AFFO, to be roughly in line with fiscal 2023.

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading.

Narrow-moat Dexus has increased its fiscal 2021 distribution growth guidance to 3%, up from flat. We raise our forecast accordingly, which implies distributions totalling AUD 51.8 cents for the 2021 fiscal year. We make no change to our earnings estimates--we already assumed growth of 3% in funds from operations, or FFO, with the new distribution growth estimate in line with that. We slightly increase our distribution estimates for the years from fiscal 2022 through to 2025, and decrease our estimates from 2026 to 2030. We still assume Dexus’ earnings recovery is hampered somewhat by rival office supply arriving, but we assume Dexus maintains a slightly higher FFO payout ratio in the near term, balanced by a slightly lower payout ratio further out. Our estimates for the overall amount distributed over the next decade remains near identical to previous, and our earnings estimates are unchanged.

We see risks to Australian office demand as widely overestimated, despite our expectation that work-from-home will endure post-pandemic. Several REITs remain modestly undervalued, particularly those focused on prime grade offices, with long leases, and solid balance sheets. We raise our fair value estimates for three particularly high-quality office-heavy REITs: Dexus, GPT, and Mirvac.

We make no change to our AUD 9.70 fair value estimate for narrow-moat Dexus following the December-half result from Australia’s office giant.

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading.

We increase our fair value estimate for narrow-moat Dexus by 4% to AUD 9.70. Nearly 25 cents of the increase is due to the remarkable resilience demonstrated in Dexus’ industrial property portfolio. About 10 cents of the increase is driven by lower debt costs that are locked in. The balance is due to Dexus buying back a small number of securities at prices below our fair value estimate.

Dexus is a diversified Australian REIT that generates income from: charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading.

Property heavyweight Dexus’ half-year result reflected strong conditions, especially in undersupplied office markets such as the Sydney CBD. However, we expected narrow-moat Dexus to perform well this half. We make no change to our fair value estimate of AUD 9.50, and we continue to view the shares as expensive at current levels.

We reduce our fair value estimate for Dexus Property Group to AUD 9.50 as we transition coverage to a new analyst. Our narrow moat, medium uncertainty, and Standard stewardship ratings are unchanged.

We make no change to our AUD 11.00 fair value estimate for narrow-moat rated Dexus Group. The diversified Australian REIT reported a strong fiscal 2019 result, bolstered by persistent tight office supply and strong industrial demand. This helped drive rents and valuations upward, but this was expected, and our long-term assumptions are little changed. At AUD 13.18, Dexus screens as overvalued. Even after an 84 cent increase to AUD 10.48, net tangible assets remain close to our fair value estimate.

We confirm our AUD 11.00 per share fair value estimate for diversified Australian REIT Dexus Property Group as we transition coverage to a new analyst. Our narrow moat, medium fair value uncertainty, and Standard stewardship ratings are unchanged. At current prices, the stock is trading 18% above our valuation. Dexus owns high-quality assets, but the high growth rate in office rents over 2016-19 looks unsustainable due to the upcoming supply-side response and moderating growth in the white-collar work force. Our valuation implies a forward fiscal 2019 P/E ratio of 16.6 and a distribution yield of 4.6%. Assumptions include office rents growing by 3.5% annually to fiscal 2021 but occupancy slipping on new supply from 2022. On balance, we believe the combination of ongoing demand for high-quality office space and some constraints on supply should lead to rent growth exceeding inflation in the long term.

Narrow-moat-rated Dexus Property, in conjunction with the Dexus Wholesale Property Fund, or DWPF, have agreed to acquire a mixed-use CBD precinct in Melbourne for AUD 1.476 billion. Dexus will own 75% and DWPF the 25% balance of the site at 80 Collins Street Melbourne comprising the existing tower, a new south tower, a retail podium, and a 255 room hotel. To fund the purchase, Dexus is undertaking an underwritten AUD 900 million institutional placement at AUD 12.10 per security and a non-underwritten security purchase plan, or SPP, to raise up to AUD 50 million. Eligible security holders under the SPP can subscribe for up to a maximum of AUD 15,000 of new Dexus securities at AUD 12.10 per security. The SPP offer is expected to open on May 8 and close on May 29. Terms of the SPP will be set out in a SPP booklet that will be sent to eligible security holders shortly.

The purchase by Dexus and the Dexus Wholesale Property Fund, of DWPF, of the 50% balance of the MLC office tower for AUD 800 million will provide a kick to short-term earnings. However, it is low quality growth, as Dexus is funding its stake through abnormally cheap debt, 7-year exchangeable notes paying a coupon of 2.3%. Benefits will mostly accrue over the longer term via higher fund management fees and flexibility to autonomously redevelop the lower retail levels of the site. Dexus has little scope to develop the 67,000 sqm of office over 67 floors or the underground car parking. But, significant value could be created from enhancing the 5,600 sqm of retail to benefit from increased traffic flow when the new Martin Place Metro Station completes in 2024.