Dexus earnings growth drops -6.6% due to COVID

Dexus’s net profit after tax was $983.0 million, down -23.3% on the prior year, due primarily to net revaluation gains of investment properties of $612.4 million, which were $160.7 million lower than FY19. Underlying FFO per security was up 1.0% on the prior year.

Following the Pandemic, the Group has worked to keep ensure business continuity for itself and its tenant customers. Dexus has estimated rent waivers to June 30 will total $26M which has contributed to reducing the distribution growth per security from 5.5% to 0.2%. Rent collections for the Dexus portfolio were strong at 98% in FY20, with 92% collected in the fourth quarter of FY20.

Dexus noted that lead indicators point to a period of uncertainty in the Australian office market, with demand across the major CBD markets likely to be patchy in the short term.

Dexus Chief Executive Officer, Darren Steinberg said: “Office property is a long-term asset class and has shown its resilience to perform through the cycle. However, with Australia in a recession, we are preparing for subdued tenant demand and increased vacancy levels in our core office markets. In this environment we remain focused on maintaining high portfolio occupancy.

“Our ability to act quickly and decisively on both opportunities and challenges has been a contributing factor to our continued success. Our response to the challenging operating environment caused by the onset of the COVID-19 pandemic, together with how we were placed going into the crisis, positions us well for the recovery.

Highlights

• Net profit after tax of $983.0 million, down 23.3% primarily due to net revaluation gains of investment properties being lower than those recognised in FY19
• AFFO and Distribution of 50.3 cents per security, in line with FY19 despite COVID-19 impacts
• Rent collections for the Dexus portfolio were strong at 98% for FY20
• Return on Contributed Equity (ROCE) of 9.0%
• Gearing (look-through) remains conservative at 24.3%, $1.6 billion of cash and undrawn debt facilities
• High occupancy of 96.5% for the Dexus office portfolio and 95.6% for the Dexus industrial portfolio
• All funds performing with Dexus Wholesale Property Fund (DWPF) continuing to outperform its benchmark across all time periods and Healthcare Wholesale Property Fund (HWPF) achieving a one-year return of 10.9%.
• Increased group industrial exposure to $5 billion while expanding the existing relationship with GIC through their acquisition of an additional 24% interest in the Dexus Australian Logistics Trust (DALT) and the establishment of a new Joint Venture (JV) to acquire a 50% interest in Rialto Towers, 525 Collins Street, Melbourne
• Raised circa $955 million of equity for new and existing unlisted funds
• Completed $1.1 billion of developments across the group including 240 St Georges Terrace, Perth, The Annex at 12 Creek Street, Brisbane and 80 Collins Street, Melbourne where significant leasing was achieved
• Progressed planning for the group’s $10.6 billion development pipeline
• Realised $35.3 million of trading profits (net of tax) in FY20 while contracting future trading profits to be realised across FY21 and FY22

In recent years, Dexus has moved to improve the quality and diversification of the portfolio through transactions, developments as well as to growth external funds under management. The group has increased their exposure to the industrial and healthcare property sectors which have performed well despite the pandemic. The Group has also invested in technology initiatives and enhanced workspaces that enable additional flexibility.

Dexus achieved a ROCE for FY20 of 9.0% driven largely by AFFO and revaluation gains from completed developments at 240 St Georges Terrace, Perth and the city retail component of 175 Pitt Street, Sydney.

Dexus continued to maintain a strong and conservative balance sheet with gearing (look-through) at 24.3%, well below the target range of 30-40%, and $1.6 billion of cash and undrawn debt facilities.

Chief Financial Officer, Alison Harrop said: “We have remained focused on preserving capital while selectively investing in assets with solid fundamentals and divesting non-core or lower returning assets. We enhanced our financial position by sourcing $1.85 billion of debt, including the issue of $700 million of 10 and 12-year Medium-Term Notes, which increased our debt duration to 6.9 years and further diversified our funding sources. In this uncertain environment, we remain focused on maintaining the strength of our balance sheet.”

Property Portfolio

During the year, Dexus leased 88,467 square metres of office space across 207 transactions as well as 26,403 square metres of space across office developments, locking in future income streams.

Executive General Manager, Office, Kevin George said: “Our office portfolio was performing well leading into the crisis with high occupancy and significant leasing success, including our leasing focus at 80 Collins Street which achieved record rents and set new benchmarks for the Melbourne CBD.”

In the current environment, office leasing enquiry levels have fallen, and inspection rates have slowed however occupancy has remained high at 96.5%. Dexus hope that their high-quality assets will hold their value better than lower quality assets due to their appeal to both occupants and purchasers as well as their relative scarcity. At 30 June 2020, Prime grade buildings comprised 94% of Dexus’s office portfolio.

Office portfolio like-for-like income growth was +2.4% (FY19: +3.4%), impacted by rent relief measures and a provision for expected credit losses.

Industrial

Dexus manages a growing, high-quality $5 billion group industrial portfolio, $2.2 billion of which sits in the Dexus portfolio. During the year, Dexus leased 181,472 square metres of industrial space across 95 transactions, with the portfolio continuing to benefit from an uptick in logistics and e-commerce demand with non-discretionary and online retail sectors experiencing growth during the crisis.

Portfolio occupancy remains high at 95.6%, however was lower than FY19 at 97.0% primarily due to vacancy at Axxess Corporate Park.

Industrial portfolio like-for-like income growth was -2.1% (FY19: +2.5%) impacted by expiries at Axxess Corporate Park in addition to rent relief measures and a provision for expected credit losses.

Valuations

The weighted average capitalisation rate across the total property portfolio tightened 21 basis points over the year to 5.05%. The weighted average capitalisation rate of the Dexus office portfolio tightened 18 basis points from 5.15% at 30 June 2019 to 4.97% at 30 June 2020 and for the Dexus industrial portfolio tightened 26 basis points from 5.92% at 30 June 2019 to 5.66% at 30 June 2020.

Funds Management

Dexus manages $15.5 billion of funds on behalf of 77 third party clients. The funds platform raised circa $955 million of equity for new and existing funds, including DWPF which raised circa $240 million from existing investors to fund its future development pipeline. DWPF continues to outperform its benchmark over one, three, five, seven and ten years and HWPF continued to deliver strong performance, achieving a one-year return of 10.9%.

During the year, GIC acquired an additional 24% interest in DALT, bringing its total share of the partnership to 49%, and entered into a new commercial JV with Dexus that acquired 50% of Rialto Towers in Melbourne. GIC holds a 90% share in the JV and Dexus holds the remaining 10%. Dexus is the investment manager of the JV and property manager of the entire Rialto Towers complex.

HWPF welcomed two new investors, completed the development of the new Calvary Adelaide Hospital, and acquired the North Shore Health Hub, Stage 1 currently under development at 12 Frederick Street, St Leonards. Post 30 June 2020, HWPF acquired the College Junction building in Clayfield, Brisbane, a modern healthcare facility that accommodates Qscan's head office, radiology clinic and other healthcare tenants.

Developments and transactions

During the year, Dexus completed $1.1 billion of developments across the group including its office development at 240 St Georges Terrace in Perth (96% committed), The Annex at 12 Creek Street, Brisbane (24% committed) and the office and retail component of 80 Collins Street (94% committed). In addition, three city retail projects, four specialised industrial facilities and HWPF’s new Calvary Adelaide Hospital were also completed.

Dexus’s group development pipeline now stands at a cost of $10.6 billion, of which $5.4 billion sits within the Dexus portfolio and $5.2 billion within third party funds. Dexus has only circa $180 million remaining to spend on its committed development projects until the end of FY22. Construction continues at the $84 million Richlands project in Queensland and the $150 million South Granville project in NSW, both industrial development projects held within DALT.

Dexus had an active year of transactions, undertaking $1.2 billion of acquisitions and $1.0 billion of divestments across the group, recycling capital to strengthen Dexus’s balance sheet and enhance flexibility. Dexus divested two assets at pricing in line with their prior book value, including Garema Court 140-180 City Walk, Canberra and 45 Clarence Street, Sydney which is subject to FIRB approval. In addition, Dexus made a number of smaller acquisitions and post 30 June 2020, settled on the divestment of Finlay Crisp Centre in Canberra.

Trading

Dexus realised $35.3 million of trading profits (net of tax) driven by the sale of the initial 25% of 201 Elizabeth Street in Sydney and progress at the North Shore Health Hub in St Leonards, currently under construction and sold to HWPF on a fund-through basis.

Post 30 June 2020, Dexus entered into agreements to sell a portfolio of six trading assets to DALT across two tranches and exercised the option to sell its remaining 25% interest in 201 Elizabeth Street. These transactions (including the North Shore Health Hub) are expected to contribute circa $85 million to pre-tax trading profits across FY21 and FY22 (in the event the options over the second tranche are exercised).

Environmental, Social and Governance (ESG) update

The impact of the Australian drought and bushfire crisis that dominated the summer of 2019-20 increased investor focus on the resilience of Dexus’s properties to climate change. This year Dexus progressed its net zero emissions by 2030 goal by improving energy and water efficiency, delivering its 2020 NABERS Energy and Water targets, and expanding the adoption of renewable energy sources, including the rollout of solar projects across properties in Queensland and New South Wales.

Dexus gained global recognition for its commitment to its net zero goal, enhancing sustainability disclosure and its ongoing focus on portfolio resilience, achieving industry leadership in the Dow Jones Sustainability Indices (DJSI) and a position on the CDP Climate Change A List.

Dexus was again recognised by the Workplace Gender Equality Agency (WGEA) for its active commitment to and progress towards gender equality across its workplace – being awarded an Employer of Choice for Gender Equality (EOCGE) citation for 2019-20. Dexus’s highly engaged workforce is committed to delivering on its strategy, reflected in the high employee Net Promoter Score of +61. Throughout the COVID-19 pandemic Dexus employees have played an instrumental role in ensuring the safety of customers, contractors and the community across the group property portfolios.

Summary and outlook

Darren Steinberg said: “Dexus is well positioned, with a track record of delivering on strategy, a stable and experienced management team, a quality property portfolio with a diversified customer base, and a strong balance sheet.

Dexus intends to deliver a distribution in line with free cash flow in FY21. However, taking into account continued uncertainty, Dexus is not providing distribution per security guidance for the 12 months ended 30 June 2021.