Dexus Industria REIT EPS struggle with growth

10 August 2022

A delay in deploying capital and the departure of a major tenant at Rhodes Corporate Park has dragged the performance of the Dexus Industria REIT with earnings per security down 7.2% in FY22.

Statutory net profit was $169.4 million, up $50.2 million, or 42.1%, on the prior year. The increase was primarily driven by valuation gains on investment properties on a look-through basis of $100.3 million, which were $22.0 million higher than the prior year.

The industrial portfolio achieved strong like-for-like growth of 5.1%, while the entire portfolio recorded like-for-like growth of 3.1%.

57 assets were acquired during the year totalling $622 million. The assets were acquired at an average yield of 5.1% and a weighted average lease expiry of 7.4 years, with the ability to capture strong market rental growth through the 90 hectares of development land acquired. Two assets were divested during the year at an average premium to book value of 19%.

Alex Abell, DXI Fund Manager said: “This is another strong set of results, with net profit of $169.4 million being a record and FFO at the top of the guidance range, driven by contributions from acquisitions and 5.1% like-for- like growth across our industrial assets. Acquisitions during the period, including the 33.3% stake in Jandakot Airport industrial precinct – which has 53 assets with an average age of 6 years, and 80 hectares of development land, also improved the portfolio quality and enhanced the growth profile over the medium term.”

“The portfolio is well positioned towards the industrial and logistics sectors, which continues to strengthen with vacancy less than 1% across the major markets driving high rental growth. This provides opportunities to add value through existing assets and new development throughout our portfolio over the coming years. These activities, combined with the active management of our balance sheet, will continue to underpin long-term value creation for our investors.”

FY23 guidance for FFO of 16.7 – 17.5 cents per security and distributions of 16.4 cents per security, which reflects a 9.7% decline on FY22 due to the higher cost of debt expected in the forecast period.

Highlights

Statutory net profit of $169.4 million, up 42.1% on the prior year, primarily driven by higher revenue and valuation gains on investment properties
Funds from Operations (FFO) up $12.3 million (29.9%) to $53.6 million with FFO per security of 18.5 cents, at the top end of the guidance range of 18.1-18.5 cents per security
Record leasing activity, with 70,600 square metres completed, as well as 20,000 square metres of development leasing
$100.3 million of valuation gains contributing to a 40 cent (12.5%) uplift in Net Tangible Assets (NTA) per security to $3.60
Enhanced portfolio quality through $622 million of acquisitions with future potential development of a further 450,000 square metres and $35 million of disposals
1.9 million securities repurchased at a 12% discount to NTA per security

Strategy

Alex Abell, DXI Fund Manager said: “We have progressed on our strategy to leverage Dexus’s integrated real estate platform to execute our vision of becoming the first choice for investors seeking superior risk-adjusted returns from listed industrial real estate exposure in Australia.

Financial result

FFO increased 29.9% to $53.6 million. FFO per security was 18.5 cents, down 7.2% largely due to anticipated timing delays between the $350 million equity raising launched in September 2021 and capital deployment relating to acquisitions, as well as the departure of a major tenant at Rhodes Corporate Park in September 2021.

All investment properties were independently valued in the 12 months to 30 June 2022. The uplift above prior book values was 10.2% on a like-for-like basis, largely driven by industrial assets in Victoria and NSW increasing by 16.6% and 15.2% on average respectively. Valuation gains were the primary driver of a 40 cent (12.5%) uplift in NTA per security to $3.60.

Gearing was 28.9%, compared to the target band of 30 – 40%. The weighted average cost of debt was 2.4%, and the weighted average debt facility maturity increased to 3.5 years after securing $176 million of new facilities and extending $244 million of existing facilities. The nearest debt maturity is $30 million in December 2023 with 71% of debt hedged in FY22 and a weighted average hedge maturity of 2.4 years.

Property portfolio and asset management

During the period the portfolio grew from 39 properties valued at $1.1 billion to 94 properties valued at $1.7 billion.

Property FFO increased $18.4 million, or 33.4%, with contracted rental uplifts and new acquisitions contributing to the growth. The industrial portfolio achieved strong like-for-like growth of 5.1%, while the entire portfolio recorded like-for-like growth of 3.1%.

Key industrial leasing activity included 22,900 square metres at 16-28 Quarry Road, Stapylton QLD and 17,000 square metres at 89 West Park Drive, Derrimut VIC. 3,800 square metres was leased at Rhodes Corporate Park, including 2,100 square metres to Booktopia at Building A, while 5,700 square metres was agreed at Brisbane Technology Park.

The weighted average capitalisation rate for the portfolio is 5.0% and the weighted average lease expiry by income is 5.6 years. 93% of portfolio income grows at contracted rent reviews of 3% or more, with 39% of the portfolio linked to CPI rental escalations. Total occupancy remained strong at 96.2%.

Development

Post acquisitions during the year, the total development pipeline was $378 million, of which $128 million is committed with $82 million spend remaining.

At Jandakot Airport industrial precinct, 4,800 square metres were completed during the year and is fully leased to Canon Foods. 20,000 square metres of leasing was achieved in total during the year, including 16,100 square metres leased to Hello Fresh.

Environmental, Social and Governance (ESG)

DXI’s portfolio is carbon neutral, after being one of the first REITs to achieve this certification in August 2021. The average NABERS Energy rating across the portfolio increased from 4.5 stars last year to 5.0 stars this year.

DXI has made significant direct investments in solar with 2.5 megawatts of solar PV panels installed, and Dexus’s partnership with Shell Energy will be leveraged to further solar installations across the portfolio.

Pleasingly, a customer NPS of +29 was achieved, with no detractors and an average rating of 8.8 out of 10. 60 suppliers were also engaged as part of Dexus’s group-wide supplier ESG monitoring and relationship program.

DXI will continue to leverage the Dexus platform to scale its response to ESG issues.

Overview and outlook

While the macroeconomic environment is uncertain, tenant demand remains strong across the industrial market, supported by Australian retail online penetration increasing; just-in-time inventory management moving to just- in-case; and an uplift in manufacturing activity. DXI’s portfolio is well positioned to continue to benefit from these strong structural trends, while also providing a reliable income stream underpinned by a 5.6 year weighted average lease expiry.

Leasing completed this period has de-risked FY23 lease expiries to 8% of the portfolio, down from 19% as at 30 June 2021. Leasing up vacancy at the business park assets is a key focus in FY23, including 11,800 square metres at Rhodes Building A where operating conditions are more challenged.

DXI will retain a disciplined approach to capital allocation, including exploring capital recycling initiatives to repay debt, fund the development pipeline and potentially buy back additional securities.

FY23 guidance for FFO of 16.7 – 17.5 cents per security and distributions of 16.4 cents per security, based on current interest rate expectations and barring unforeseen circumstances (assumes average floating interest rates of 2.75% – 3.75% (90-day BBSW) and no further transactional activity).