Dexus Property (DXS)
HOLD

Office resilience

 14 Feb 2023
Sector: Real Estate

1H23 RESULT

Need To Know

  • Low quality beat on earnings propped up by trading profits.
  • Minor adjustment to DPS guidance range, a reflection greater certainty on market conditions. 
  • Asset values largely flat. NTA down 2.2%.
  • Re-affirm our Hold rating.

Result Highlights

1). Group Revenue A$463.5m vs A$458m consensus. 2). Funds from Operations (FFO) ahead at A$389m vs A$369m. 3). FFOps 36.2cps vs 34cps. 4). AFFOps 28.9cps vs 25.9cps. 5). DPS 28cps vs 27cps. 6). NTAps fell 2.2% from A$12.28 to $12.07 7). Gearing decreased from 26.9% to 25.3% (below the 30%-40% target range). 8). Average hedging for the period was 85%. 9). Office occupancy decreased 0.3% to 95.3%. 

Investment Thesis

A low-quality beat propped up by trading profits of A$48.7m (post tax). Adjustments to the DPS guidance range was a product of trading profits and a greater certainty around the groups position for FY23. We expect DXS to meet this guidance range given the DPS is AFFO driven and can be adjusted via flexing CAPEX spend

The Industrials segment appears to be operating well. Occupancy remains high and rental growth has largely offset the expansion of cap rates. Office, however, remains the weaker area as hesitance persists toward the structural shift to hybrid work. Office occupancy rates for the period fell lower to 95.3% (-0.3%), representing a similar level to June 2021 (Covid impacted period).

The share price is implying a 30%-35% decrease to book value, we believe is harsh given the resilience of offices and expected growth from the industrials segment. The discount to book value remains the largest of the AREITs. 

At a Price/FFO of ~12.9x, DXS is trading at a discount to the AREIT average of ~15.2x. It’s clear that the office exposure still causes concern for Australian investors and operating conditions are not yet strong enough to give reassurance that Australians offices are ‘here to stay’. 

Dexus has managed to dodge a downgrade, making it through the beginning of tougher market conditions relatively unscathed. Cap rate expansion is yet to have a significant impact on the balance sheet and the group remains well positioned for 2H due to A$800m of divestments over the first half. 

The share price trades at a significant discount to NTA and we are yet to see earnings that show the office environment is materially improving in the near term.

We reaffirm our HOLD rating.  

Figure 1: Dexus offers the largest discount to book value of the AREITs

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Stock Overview

Share Price

Company Overview

DXS is an Australia-based real estate company. The company’s segments include Office, Industrial, Co-investments, Property management, Funds Management, and Development and Trading

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