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Dexus Earnings: Making Headway Amid Tough Office Conditions, but Dexus Is More Than Just Offices

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Dexus’ DXS 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.

Despite the popular “death of the office” narrative, which might be justified for weak pockets in the market, Dexus made decent progress over the year. Office occupancy increased slightly to 95.9% from 95.6%, with only a small increase in incentives (excluding development leasing) to 30.0%, up from 29.4%. The portfolio average lease length increased slightly to 4.8 years from 4.7. Dexus leased a huge 196,998 square meters of space, more than the 189,459 leased in fiscal 2019. This supports our view that weak conditions in office space are as much about new supply as lack of demand.

Dexus provided some interesting data that we think supports our view of bifurcating office demand, with well-located, modern buildings remaining popular and the brunt of vacancy pain likely to fall on older buildings or those in fringe locations. For premium-grade offices in the Sydney central business district, marketwide occupancy is 86%, core CBD occupancy is 90%, and Dexus occupancy is 98%. Dexus, which enjoys a narrow economic moat, is heavily skewed to premium (53% of the portfolio) and Sydney CBD/fringe (49% of the portfolio).

Net tangible assets declined 11% to AUD 10.88 per security, mainly due to office property devaluations. NTA is now about in line with our unchanged fair value estimate of AUD 10.80.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Alexander Prineas

Equity Analyst
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Alex Prineas is an equity analyst for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual in client and advisor services, marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia.

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