Dexus Grows Earnings by 3% & FUM by $10bn

17 August 2021

Dexus’s results released today showed recurring earnings up 3% and platform growth of $10bn as strategic initiatives work to platform.

Dexus Chief Executive Officer, Darren Steinberg said: “In a challenging operating environment, we maintained our focus on maximising property portfolio income and performance, while also supporting our small business customers impacted by the lockdowns and growing and diversifying the funds management business.

“We implemented major strategic initiatives, which strengthened the funds management business and positioned it for growth including securing approval for the merger of AMP Capital Diversified Property Fund with Dexus Wholesale Property Fund, simplifying the Dexus corporate structure, and entering into a proposal to acquire APN Property Group. We also took the opportunity to selectively recycle assets and make investments to support growth which involved $6.4 billion of healthcare, industrial and office transactions9 across the group.

“Resilient independent asset valuations contributed to an increase in net tangible asset backing per security, reinforcing the quality of our property portfolio while increasing our confidence to allocate capital towards new investment opportunities that offered strong growth prospects.”

Dexus’s net profit after tax was $1,138.4 million, up 17% on the prior year. This movement was primarily driven by an increase in Dexus’s share of net profits from equity accounted investments and a favourable net fair value movement of derivatives and foreign currency interest bearing liabilities, partly offset by lower fair value gains on owned investment properties.

Chief Financial Officer, Alison Harrop said: “Despite the ongoing challenges presented by the pandemic and the provision of rent relief to impacted customers, we delivered 3% growth in AFFO and distribution per security. This result is particularly pleasing given the initial expectation for a distribution consistent with FY20, with growth achieved predominantly through better-than-expected outcomes across the property portfolio, as well as delayed settlements of asset sales and other initiatives.”

Operationally, Underlying Funds From Operations (excluding trading profits) of $666.6 million was 4.1% lower than the prior year, impacted by divestments and continued impacts of COVID-19 across the property portfolio and management business, partly offset by income from recently completed developments. Despite the reduction in Underlying Funds From Operations, AFFO of $561.7 million was 2.0% higher than the prior year, driven by trading profits of $50.4 million (net of tax) which were $15.1 million higher than the prior year, as well as maintenance capex and incentives which were $24.4 million lower than the prior year.

On a per security basis, AFFO and distributions per security were 51.8 cents, 3% higher than the prior year, and the distribution payout ratio remained in line with free cash flow in accordance with Dexus’s distribution policy. The distribution for the six months ended 30 June 2021 of 23.0 cents per security will be paid to Dexus Security holders on Monday, 30 August 2021.

Darren Steinberg said: “Our ability to deliver long-term performance beyond the recovery is a function of our scale and capability across key real estate sectors, our funds management business which provides a capital efficient way to increase our exposure to growth sectors, and our substantial city-shaping development pipeline.

“In the year ahead, our strategic objectives of generating sustainable income streams and being identified as the real estate investment partner of choice will see us continue to implement active leasing strategies to maximise office portfolio cash flow generation. We will also invest in quality Australian real estate and developments, while leveraging the funds management and development businesses to drive an improved return on capital.”

Based on current expectations relating to COVID-19 impacts and barring unforeseen circumstances, Dexus expects distribution per security growth of not less than 2% for the 12 months ended 30 June 2022.

Dexus is on our Top Picks List.

The REIT commenced the year with a security price of $9.25 against a NAV of $10.86 (-15% discount to NAV) and closed the year at $10.67 against a NAV of $11.42 (-7% discount to NTA). The REIT provided a 51.8c distribution for FY21, equating to a 5.6% yield, which together with a 15.4% lift in unit price would provide investors with a total return of 21%.

Key financial and operational highlights for the period are:

Financial highlights:

Net profit after tax of $1,138.4 million, up 17%
AFFO and distribution of 51.8 cents per security, up 3% on the prior year
Return on Contributed Equity (ROCE) of 8.3%

Operating highlights:

Grew funds management business FUM to $25.0 billion through establishing a new office joint venture, securing approval for the merger of the circa $5.6 billion AMP Capital Diversified Property Fund (ADPF) with Dexus Wholesale Property Fund (DWPF) and entering into a proposal to acquire APN Property Group (APN)
Continued leadership in environmental, social and governance performance with Dexus retaining its number one position for the global real estate industry on the Dow Jones Sustainability Index, and maintaining a leading position in GRESB and on the CDP Climate A list
Achieved an employee Net Promoter Score of +43 and customer Net Promoter Score of +46
Rent collections for the Dexus portfolio were strong at 98.1% for FY21 and at 97.6% for the month of July 2021
Achieved high occupancy of 95.2% for the Dexus office portfolio and 97.7% for the Dexus industrial portfolio through strong leasing
Progressed planning for city-shaping projects in the group’s $14.6 billion development pipeline
Completed $881 million of developments across the group including over $450 million of industrial developments, increasing the total group industrial portfolio to 2.6 million square metres
Gearing (look-through)6 remains conservative at 26.7% $1.1 billion of cash and undrawn debt facilities

Funds Management

Dexus manages $25.0 billion of funds across its diversified funds management business, which includes 20 vehicles. Consistent with Dexus’s strategic focus on expanding and diversifying the funds management business, Dexus progressed several initiatives including:

Securing approval for the merger of Dexus Wholesale Property Fund and AMP Capital Diversified Property Fund, establishing a pathway to create an enhanced investment proposition for both sets of unitholders
Establishing the Mercatus Dexus Australia Partnership (MDAP) joint venture with Mercatus Co-operative Limited. MDAP acquired a 33.33% interest in 1 Bligh Street, Sydney for $375 million in which Mercatus holds a 90% share in MDAP with Dexus holding the remaining 10%
Growing the scale of Dexus Healthcare Property Fund (DHPF), acquiring the Australian Bragg Centre in Adelaide (in 50/50 co-ownership with Dexus) for $446 million, alongside four other healthcare property acquisitions and completion of the fund-through development of North Shore Health Hub, in St Leonards, NSW
Establishing the Dexus Real Estate Partnership 1, the first in a planned series of closed end opportunity funds

Following the approval of the merger of DWPF and ADPF by the respective unitholder bases, circa $5.6 billion of new assets have been added to Dexus’s platform, with some assets to be progressively sold down over approximately the next 18 months to provide redeeming ADPF unitholders with liquidity. This transaction provides DWPF unitholders with access to a high-quality portfolio of assets, greater diversification and introduces new investors to the platform.

Portfolio Update

Office Portfolio

Dexus manages a high-quality $26.0 billion group office portfolio, $14.0 billion of which sits in the Dexus portfolio.

Key metrics	30 June 2021	30 June 2020
Occupancy by income	95.2%	96.5%
Weighted average lease expiry (by income)	4.6 years	4.2 years
Average incentives	24.9%	17.1%
Weighted average cap rate	4.91%	4.97%

During the year, Dexus leased 184,029 square metres8 of office space across 339 transactions as well as 11,068 square metres of space across office developments, locking in future income streams.

Office portfolio occupancy reduced to 95.2% driven by Melbourne properties where leasing has been impacted by extended lockdowns, which offset occupancy increases at 25 Martin Place (previously known as MLC Centre), Australia Square and 60 Castlereagh Street in Sydney.

Face rents remain largely unchanged in the core CBD markets, however effective rents have come under pressure as incentives have increased. There is potential for incentives to decline into early CY22 in Sydney and Premium grade Melbourne assets, albeit the latest lockdowns could slow the rate of improvement.

Office portfolio effective like-for-like income growth was +2.3% (FY20: +4.7%), excluding the impact of rent relief measures and provisions for expected credit losses (including these impacts FY21: +0.9% and

FY20 +2.4%). The Dexus office portfolio delivered a one-year return of 5.7% at 30 June 2021 and outperformed its benchmark over the five-year time period to 31 March 2021.

Industrial Portfolio

Dexus manages a growing, high-quality $7.8 billion group industrial portfolio, $3.0 billion of which sits in the Dexus portfolio.

Key metrics	30 June 2021	30 June 2020
Occupancy by income	97.7%	95.6%
Weighted average lease expiry (by income)	4.4 years	4.1 years
Average incentives	19.1%	13.4%
Weighted average cap rate	4.92%	5.66%

During the year, Dexus leased 445,428 square metres8 of industrial space across 116 transactions. Portfolio occupancy increased by more than two percentage points to a three-year high of 97.7%, driven by successful leasing at Axxess Corporate Park.

Industrial portfolio effective like-for-like income growth was +3.7% (FY20: +0.1%) excluding the impact of rent relief measures and provisions for expected credit losses (including these impacts: FY21 +4.5% and FY20 -2.1%). The Dexus industrial portfolio delivered a very strong one-year return of 23.5% to 30 June 2021 and outperformed its benchmark over the three and five-year time periods to 31 March 2021.

Developments

Dexus’s group development pipeline now stands at a cost of $14.6 billion, of which $8.1 billion sits within the Dexus portfolio and $6.5 billion within third party funds. In addition, we have identified a further $1.6 billion opportunities across the group from recent platform initiatives.

Dexus has circa $350 million remaining to spend on its committed development projects until the end of FY23, including its direct 50% interest in the Australian Bragg Centre.

Acquisitions:

Dexus had an active year of transactions, being involved in $6.4 billion of property acquisitions and divestments across the group.

In December 2020, Dexus settled on the sale of its 100% interest in 45 Clarence Street, Sydney realising $530 million. Dexus also entered into agreements to sell a 100% interest in 60 Miller Street, North Sydney and a 50% interest in Grosvenor Place, Sydney (in which Dexus holds a 37.5% interest through its 25% direct interest and the Dexus Office Partnership’s 25% interest). 60 Miller Street, North Sydney settled on 3 August 2021 and Grosvenor Place is expected to settle in the first half of FY22.

In addition, Dexus settled on the sale of 436-484 Victoria Road, Gladesville on 9 August 2021 and entered into a put and call option arrangement on 13 August 2021 to sell a recently acquired trading asset at 22 Business Park Drive, Ravenhall. For FY22 Dexus has already secured trading profits of $25-$30 million (pre-tax) relating to 436 – 484 Victoria Road, Gladesville and the second tranche of the portfolio of six industrial assets sold to DALT, as well as 22 Business Park Drive, Ravenhall.

Valuations:

The external independent valuations resulted in a total $584.0 million or circa 3.5% increase on prior book values for the 12 months to 30 June 2021, with a stronger uplift achieved in the second half of the year.

These revaluation gains primarily drove the 56 cent or 5.1% increase in net tangible asset (NTA) backing per security during the year to $11.42 at 30 June 2021.

Capital position

Dexus continued to maintain a strong and conservative balance sheet with gearing (look-through) of 26.7% remaining below the target range of 30-40%, and $1.1 billion of cash and undrawn debt facilities.

Strategy

Darren Steinberg said: “Each year, our strategy review process stress tests our existing strategy with the objective of better positioning Dexus to capitalise on new opportunities and mitigate challenges. The pandemic has reinforced the importance of resilience and having a diversified business model and strategy that can deliver through the cycle.

“We have built a fully integrated real estate platform and are focused on better leveraging our cross-sector asset management and development expertise to drive more capital efficient returns for investors, while remaining true to our identity as a long-term investor in high quality Australian real estate.

“Throughout the year, we maintained our focus on the strategic initiatives of increasing the resilience of portfolio income streams, expanding and diversifying the funds management business and progressing the group development pipeline. These initiatives have now been incorporated into revised strategic objectives that will guide the next stage of our business evolution:

Generating sustainable income streams: Investing in income streams that provide resilience through the cycle
Being identified as the real estate investment partner of choice: Expanding and diversifying the funds management business

“We have invested in having a superior operating platform and will continue our focus on building a world- class business. The size of Dexus’s balance sheet, deep access to pools of capital and an agile, solution- based culture are key enablers of our strategy, supported by our prudent approach to capital management and commitment to sustainability.”

FY22 Guidance

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