Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages

Business Strategy & Outlook

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading. Rent is the biggest revenue driver with the office and industrial divisions accounting for over 90% of funds from operations, or FFO. High-quality offices in Sydney dominate, with Dexus having interests in many trophy assets including Sydney’s Australia Square, 1 Farrer Place, and 1 Bligh Street. It also owns or manages a seasoned industrial portfolio, including the massive Dexus Industrial Estate in one of Australia’s fastest-growing industrial precincts, Truganina, Victoria. It also has a small retail portfolio, mostly retail sites attached to offices, and a small healthcare portfolio. Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages.

Funds management is the smallest but fastest-growing portion of revenue, and more developments being rotated into funds management vehicles, adding capital efficiency and management fees. It accounted for about 6% of revenue in fiscal 2019, and the funds management grows by about a third by the end of the discreted 10-year forecast period. The high-quality portfolio should see Dexus perform better than most, with about 90% of its office portfolio either premium or A-grade by Property Council of Australia guidelines. Dexus’ portfolio has held up relatively well in major downturns compared with rivals with lower-quality portfolios. It’s hard to imagine a worse scenario for an office property than that experienced in 2020-21. In those years, Dexus reduced rents somewhat on the small portion of leases that expired, but occupancy remained high.

Financial Strengths

Dexus is in solid financial health, with look-through gearing of 26.9%, below the group’s targeted range of 30%-40%. The group has substantial buffers to its banking covenants. However, gearing is likely to rise as Dexus commences development projects. Gearing ratios are also likely to rise as asset prices fall, given remarkably low capitalisation rates of 4%-5% being seen on CBD office transactions in fiscal 2022, and bond markets pricing in meaningfully higher interest rates. The group has a large pipeline of developments, and could make debt-funded acquisitions during the downturn, or a buyback, which could also push up gearing. This can be offset by divestments, including rotating some assets into its fund’s management vehicles, thereby taking them off the group balance sheet. On balance though, it is still expected gearing to rise from current levels. The Dexus’ reasonably conservative management team, and the health of other financial metrics look comfortable. Interest cover is 6.0 times on a look-through basis, compared with covenant of 2 times. Interest rate sensitivity is modest, with about two thirds of debt being hedged, and debt maturities are staggered. If inflation intensifies, further rate

rises could increase the cost of rolling over maturing debt facilities and put pressure on Dexus’ earnings and distributions in the near term. However, consistently it can be assumed a long-term cost of debt of 5.8%, significantly above current levels.

Bulls Say

Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
Population growth boosts the value of Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low-quality sites potentially switching to higher-value uses.
Lower credit spreads and improving rental collections could offset potential interest-rate rises.

Company Description

Dexus is a major Australian property owner, developer, and manager. It owns a large, high-grade office portfolio and a smaller industrial portfolio in Australia. It also manages properties on behalf of third-party investors. Dexus was formed by the merger of Deutsche Office, Industrial and Diversified Trusts. Management is internal, as opposed to external, as it is for some peers.

(Source: Morningstar)

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