Trading old for new
SALE OF 44 MARKET STREET
Need To Know
- DXS to sell its 44 Market Street asset to realise ~A$393m (~17% discount to Dec 22 valuation)
- The sale is part of Dexus’ process toward removing old capital-intensive assets
- We believe the decline in asset valuations is being overstated at the current share price
Overview
Dexus announced that it has exchanged contracts for the sale of 44 Market Street (Sydney). The sale is expected to realise ~A$393.1m (~17% discount to Dec 22 independent valuation).
3 Important Things to Note:
- 44 Market St was an underperforming asset that worked against the group’s “flight to quality” thematic: 85% occupancy (2nd lowest for Dexus’ NSW offices). Old asset, acquired in 1987 (built 1978). DXS has noted that its focus remains on removing old capital-intensive assets to fund new quality assets.
- There is still a share price to book valuation disconnect: The current price to book value discount of +35% remains far too significant, even if we believe the portfolio will decrease by ~17%.
- The balance sheet position is not dire enough to warrant significant discounts for quality assets: Gearing is at ~25.4% pre-sale (well below 30-40% target range) which we estimate moves down to ~23.2% post-sale. Even at a ~17% discount to the portfolio, we estimate the gearing will only shift to the lower end of the target range.
Key Take Away
The sale of this asset, in our view, has not been done out of necessity and the group is more so looking towards re-allocating capital to stronger growth opportunities. We expect there will be more to come as Dexus continue to focus on funding its extensive pipeline.
Whilst ~17% is a notable discount, we believe there is some degree of specificity for the asset given its underperformance and capital intensity. In contrast to this discount, Challenger (CGF) only flagged a ~5% reduction in office valuations in its most recent release (30th May 23).
There are currently still 3 key transactions that the market is watching for further information on market valuations. Two of these follow a similar theme of being old capital-intensive assets, as outlined in our previous report.
Our view is that this transaction further solidifies the thesis that the share price is overstating the decline in asset values. We re-affirm our Buy rating.
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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