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MARCH 2023 QUARTER UPDATE

Need To Know

• Minor improvements to occupancy over the period
• Balance sheet re-enforced by an additional A$400m of debt extensions
• Distribution guidance reaffirmed at 50-51cps for the FY23 result 

Dexus released its March 2023 quarterly result which highlights slowly improving operating conditions and reaffirmed DPS guidance to 50-51cps (market at 51cps). 

Operations. The Collimate Capital deal achieved first completions which now lifts the third-party Funds Under Management (FUM) to ~A$44.5bn. A new customer was secured for Waterfront Brisbane which takes the committed space up to ~52% in the North Tower. 

Leasing and occupancy conditions are yet to fully return to its former glory but are slowly trending in the right direction. Occupancy for office increased by 0.1% to 95.4% and Industrial increased 0.4% to 98.7% with 81 leasing transactions completed over the period.

Balance sheet remains in a strong position. Gearing at 25.6% and hedging at 85%, both unchanged from 1H23 result. During the period, Dexus settled or exchanged A$300m of transactions, all of which were divestments and completed ~A$400m of debt extensions which reduced maturities by the end of FY24 to below $400m. 

Investment View

Dexus is continuing to navigate through the turbulent macro conditions currently trading at a ~36% discount to NTA, which implies a ~2.5% expansion in capitalisation rates (on Dec 2022 valuations). 

The turnaround story for Dexus is the fact that its currently being priced like a US commercial REIT that is doesn’t share characteristics with. The US property market has far higher leveraged and are seeing a significantly greater structural headwind from the workforce’s unwillingness to return back to office spaces. Both sentiments that are not reflective of Australian office conditions. 

Office valuations might not be as bad as they’re being made out to be. Peer Mirvac (MGR) is finalising the sale of 60 Margaret Street (A- grade office) and have suggested that it will be not far from the December valuation (albeit Dec 22 vals were lower than June 22). The sale should give greater insight on portfolio values and could highlight how overdone the selldown is for DXS.

Overall operating conditions remain tough but there is some light on the horizon. A-grade and premium grade (~85% of Dexus’ portfolio) offices are outperforming lower tier B-grade assets and we expect this trend should likely continue. The ~A$400m of debt extensions alongside distribution guidance being reaffirmed gives some confidence that the capital position is healthy enough. 

We are still waiting for clearer indicators that portfolio valuations aren’t at risk of a significant collapse. For now, we reiterate our Hold rating.