Dexus today announced its result for the half year and upgraded its guidance for distribution per security growth from circa 5% to circa 5.5% for FY20.
Dexus Chief Executive Officer, Darren Steinberg said: “We continue to make significant progress towards our vision of being globally recognised as Australia’s leading real estate company. Urbanisation continues to drive demand for quality space in Australian cities and the growth in pension capital is increasingly chasing the favourable returns that real estate can offer. We are responding by remaining focused on enhancing the attractiveness of our properties, while leveraging our market intel and capabilities to create spaces where our customers want to be, while at the same time partnering with like-minded third party capital to invest alongside in our core markets.
“For the first six months of the financial year we have continued to benefit from office occupier and investor demand for quality properties in our core markets, achieving record Melbourne rents and strong asset valuation uplifts. Our funds business has seen a significant increase in interest from offshore investors seeking to invest directly in quality office properties. These factors combined with recent transactional evidence and the lower for longer interest rate environment, reinforce our view that there will be further increases in asset values.”
Financial Highlights
- Net profit after tax of $994.2 million, up 36.9% primarily due to net revaluation gains of investment properties being higher than those recognised in the previous corresponding period
- Underlying Funds From Operations (FFO) per security of 31.9 cents, up 1.9% on the previous corresponding period
- Distribution per security of 27.0 cents, consistent with the previous corresponding period
- NTA per security increased by 5.9% over the six-month period to $11.10
- Gearing (look-through)3 remains conservative at 25.5%
- Successfully completed the issue of $200 million of Medium-Term Notes with a 10-year tenor and post 31 December 2019, completed a further $500 million issue of Medium-Term Notes with a 12-year tenor at an attractive all-in rate
Operational Highlights
- Maintained high occupancy of 97.4% for Dexus office and 96.0% for Dexus industrial portfolios
- Completed the 240 St Georges Terrace development in Perth and progressed the group’s $11.2 billion development pipeline
- Dexus Wholesale Property Fund (DWPF) raised circa $180 million of new equity and continued to outperform its benchmark across all time periods
- Exercised the second tranche rights for GIC to acquire an additional 24% interest in the Dexus Australian Logistics Trust (DALT) core portfolio
- Realised $27.8 million of trading profits (net of tax), driven by the sale of the first tranche of 201 Elizabeth Street in Sydney
- Recognised as the Global Industry Leader for the Real Estate Sector by DJSI, Global Sector Leader in GRESB and achieved A list status in the latest CDP results
Financial results
Dexus’s net profit after tax was $994.2 million, up 36.9% from the previous corresponding period and driven by net revaluation gains of investment properties of $724.4 million, which were $267.9 million higher than the previous corresponding period. At 31 December 2019, 109 of Dexus’s 118 office and industrial assets were externally valued, including 43 office properties and 66 industrial properties.
Valuation gains across the total property portfolio since 30 June 2019 were the primary driver of a 5.9% increase in NTA per security to $11.10 at 31 December 2019.
Distribution per security for the six months ended 31 December 2019 was 27.0 cents, with the distribution payout remaining in line with free cash flow in accordance with Dexus’s distribution policy. The distribution will be paid to Dexus Security holders on Friday, 28 February 2020.
Although underlying FFO per security increased by 1.9%, Adjusted Funds From Operations (AFFO) per security reduced to 26.9 cents as a result of lower trading profits. All FY19 trading profits were recognised in the six months ended 31 December 2018. Further trading profits are expected to be received over the remainder of FY20.
Dexus’s gearing (look-through) of 25.5% at 31 December 2019 remains below the target range of 30-40%, with the average cost of debt reducing to 3.5%.
Office Portfolio
The Dexus office portfolio continues to outperform its benchmark over the three and five year time periods. Average incentive levels ticked up as a greater proportion of leasing was undertaken in the Brisbane and Perth markets this period, with face deals also representing a higher proportion of leasing. The office portfolio achieved like-for-like income growth of 8.9%, enhanced by positive re-leasing spreads at Sydney properties such as Australia Square and MLC Centre, and leasing success at other properties. Like-for-like income growth is expected to be in the range of 4.5-5.5% for FY20, impacted by downtime at Grosvenor Place as the space vacated by Norton Rose in December 2019 is refurbished.
Executive General Manager, Office, Kevin George said: “Our office portfolio occupancy remains very high and we continue to capture the upside in the Sydney CBD market, achieving 18% re-leasing spreads this period. Up to the end of FY22, we have the opportunity to reset rental levels across 139,677 square metres of vacant or expiring space across our Sydney portfolio, which remains under-rented. This represents approximately 19% of our total office income.
“In Melbourne where prime office vacancy has tightened to a record low of 1.8%, our leasing focus at 80 Collins Street has resulted in record rents and set new benchmarks for the Melbourne CBD with metrics exceeding our acquisition underwrite. Six new tenancies were secured across 15,418 square metres, increasing leased space at the South Tower from 63% to 97%, and leaving only one floor available to lease.
“The December 2019 quarter has seen increased enquiry levels across a broad range of industries compared to the previous corresponding period and we expect that continued solid employment growth in Sydney and Melbourne combined with positive conditions in the business services sector will positively influence occupier demand over the next 12 months.”
Industrial Portfolio
The Dexus industrial portfolio is now outperforming its benchmark over both the three and five-year time periods. During the half year period, occupancy remained high at 96.0% and like-for-like income growth was 3.5%. Average incentives increased as a result of leasing at office park suites in South East Melbourne.
Executive General Manager, Industrial, Retail and Healthcare, Stewart Hutcheon said: “The industrial sector has some good tailwinds with continued asset value appreciation and strong support from institutional investors. We see further opportunities within the sector as businesses seek to drive efficiencies in their supply chains and online retail demand continues to rise.
Valuations
The weighted average capitalisation rate across the total property portfolio tightened 17 basis points over the past six months to 5.09%. The weighted average capitalisation rate of the Dexus office portfolio tightened 17 basis points from 5.15% at 30 June 2019 to 4.98% at 31 December 2019 and the Dexus industrial portfolio weighted average capitalisation rate tightened 14 basis points from 5.92% to 5.78%.
Developments and Transactions
During the period, Dexus completed its office development at 240 St Georges Terrace in Perth (now 94.7% committed with 7.3 year WALE) in addition to two city retail projects, a 9,200 square metre distribution and office facility for Dunlop Flooring at 380 Doherty’s Road, Truganina and the Healthcare Wholesale Property Fund’s (HWPF) new Calvary Adelaide Hospital.
Dexus’s group development pipeline now stands at a cost of $11.2 billion, of which $5.7 billion sits within the Dexus portfolio and $5.5 billion within third party funds. Construction commenced at the $84 million Richlands project in Queensland and the $142 million South Granville project in NSW, both held within DALT. Construction continues at five other industrial properties taking the total committed group pipeline to over 250,000 square metres.
Chief Investment Officer, Ross Du Vernet said: “We’ve made solid progress across our development pipeline and reached agreement to move forward with the development scheme for Eagle Street Pier and surrounds at the Waterfront Precinct after an extensive engagement process with Queensland Government and Brisbane City Council. We have significant embedded value in our pipeline from the anticipated development margins and fees associated with key projects in the eastern core CBD markets of Sydney, Melbourne and Brisbane.”
Dexus exchanged contracts to sell its 100% interest in Garema Court, 140-180 City Walk, Canberra. Gross proceeds achieved from the sale are $71.5 million, consistent with the property’s book value, and will be used to reduce debt. Settlement is expected to occur in late February 2020. Garema Court was Dexus’s remaining Canberra property and its sale is consistent with the strategy of divesting assets from non-core markets, enabling Dexus to recycle capital and focus on the core office markets of Sydney, Melbourne, Brisbane and Perth.
Funds Management
Dexus manages $17.0 billion of funds on behalf of 79 third party clients.
Executive General Manager, Funds Management, Deborah Coakley said: “We’ve seen a significant increase in engagement from existing and potential new unlisted investors and capital partners, driven by the attractiveness of real assets as an investment class, the growth in pension fund capital and a lower for longer interest rate environment globally. We are working with these investors to satisfy their needs.”
DWPF raised circa $180 million of new equity from existing investors to fund its future development pipeline and DWPF achieved a one-year total return of 8.2%, outperforming its benchmark over one, three, five, seven and ten years. All funds delivered strong performance with the Dexus Office Partnership delivering a one-year unlevered total property return of 13.3% and an annualised unlevered total property return of 14.4% since inception.
Summary and guidance
Darren Steinberg said: “These results have been underpinned by our high-quality property portfolio, with its diversified expiry profile and fixed annual rental increases of 3.5-4%. When combined with our significant development pipeline and strong balance sheet we are well positioned to continue to deliver value for investors over the long term.
“While issues such as the Australian bushfires and the Coronavirus have increased uncertainty about the short-term economic outlook, there are reasons to be positive about the white-collar industries which underpin office demand. Conditions in the technology, finance and business services sectors are much more positive than in many other sectors, and interest rates are expected to remain lower for longer, supporting investment demand for real estate.”
As a result of progress this period, Dexus upgrades its market guidance for distribution per security growth from circa 5% to circa 5.5% for the 12 months ending 30 June 2020.
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