Dexus (ASX:DXS)

Darren Steinberg
CEO
Market Cap (AUD): 14.93B
Sector: Real Estate
Last Trade (AUD): 13.61 +0 (+0%)
Tab Bar

1. About

Dexus is an Australian Real Estate Investment Trust, with $27.2 B of assets under management. Listed on the Australian Securities Exchange, Dexus manages and directly invests in high-quality Australian office and industrial properties, and also actively manages the office, industrial, retail and healthcare properties across Australia on behalf of third-party capital partners.

With more than 1.7 M square meters of office space across 53 properties, the Company is focused on being Australia’s preferred office partner. Its office buildings are located within areas of high demand; the central business districts of Sydney, Melbourne, Brisbane and Perth. Its portfolio also includes 77 industrial properties and 16 shopping centres under its management across Australia.

2. Business model

 

The Company operates in following divisions:[1]

 

Divisions

Revenue ($M)

% of Revenue

% of Profit (Funds From Operations)

Profit drivers[2]

Office

$712.3

63.28%

92.42%

Dexus’s NPAT was $1,728.9 M, an increase of $464.7 M from the prior year (FY17: $1,264.2 M).

 

The key drivers of this movement included:

  • Net revaluation gains of investment properties of $1,201.8 M, representing a 10.5% uplift across the portfolio, were $497.1 M higher than the prior year (FY17: $704.7 M)-
  • FFO, which increased by $35.6 M resulting in FFO per security of 64.2 cents, an increase of 0.6%
  • Partially offset by lower gains from the sale of investment properties compared to FY17

Valuation gains achieved across Dexus’s property portfolio primarily drove the $1.19 increase in net tangible assets (NTA) per security to $9.64 over the year. The valuation uplift was driven primarily by the Sydney office portfolio where capitalisation rates have compressed further, and the buoyant leasing market has delivered higher market rents

Industrial

$152.0

13.50%

20.31%

Property management

$68.0

6.04%

2.46%

Funds management

$58.0

5.15%

5.50%

Development and trading

$138.1

12.27%

5.68%

All other segment

N/A

N/A

(26.37%)

Eliminations

($2.8)

(0.25%)

N/A

3. Strategy

 

Key strategies include:[3]

 

DEXUS’s vision is to be globally recognised as Australia’s leading real estate company.  

The Group’s strategy is to deliver superior risk-adjusted returns for investors from high quality Australian real estate, primarily comprising CBD office buildings.

The Group has two key strategic objectives:

  • Being the leading owner and manager of Australian office property
  • Being the wholesale partner of choice in Australian property

 

DEXUS’s strategy is underpinned by its core capabilities. This includes having the best people, strongest customer relationships, and utilising the most efficient systems and technologies, while actively managing the Group’s capital and risk in a prudent and disciplined manner.

The Group believes in the benefits of scale in core CBD office markets. Scale provides it with valuable customer insights and the opportunity to invest in people, systems, and technologies that enhance the Group’s customers’ experience, strengthening its capacity and flexibility to find the ideal workspace solution for customers in more than one location.

 

The Group’s strategy has four key elements:

Using the Group’s understanding of customer needs as a primary driver for making investments

The Group understands what drives tenant demand and focus on investing in or developing high-quality office and industrial properties in prime locations, which enables access to facilities and amenities which are sought after by its customers. The Group fosters a culture of innovation and continuous improvement leveraging its multi-sector capabilities to develop new offerings to meet the changing needs of its customers and continually improve the amenity of the Group’s assets through property enhancements. This includes leveraging its retail capabilities (used for third-party shopping centres) to activate and enhance the retail offerings at the base of its office towers.

Intense focus on investment performance

The Group has an intense focus on investment performance which ensures it is active across the real estate cycle through leasing, acquiring, developing or recycling properties. For DEXUS investors this includes generating trading profits from properties where the Group has identified a higher and better use, and involves developing or repositioning and divesting these properties for a profit.

Partnering with third-party clients to grow in core markets

DEXUS partners with third-party clients to increase its access to properties and growth in core markets. The funds management platform leverages its office, industrial and retail capabilities combined with its scale in CBD office markets to drive performance for the Group’s third-party clients.

Maintaining a conservative approach to financial and operational risk

DEXUS has a strong ‘A-’ Standard & Poor’s credit rating and ‘A3’ investment grade rating from Moody’s. These ratings are the result of measuring, pricing and managing risk in a prudent manner. The significant amounts of capital attracted from third party clients are an endorsement of the Group’s approach to investing and managing risk.

DEXUS considers corporate responsibility and sustainability an integral part of its daily business operations. The Group’s approach supports its strategy with an overarching goal of delivering sustained value for all stakeholders

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Growth Rate (annual 13-18)

Commercial and Industrial Building Construction

$37 billion

3.1%

Commercial Property Management

$2 billion

13.6%

Real Estate Services

$16 billion

5.4%

Office Property Operators

$43 billion (2016)

11.3%

5. Competition

 

Major competitors Include:[5]

 

  • GPT RE Limited (ASX:GPT)
  • Mirvac Limited (ASX:MGR)
  • Stockland Corporation Limited (ASX:SGP)

6. History

 

1984[6]   

Deutsche Industrial Trust (DIT) listed on the ASX

Deutsche Diversified Trust (DDF) listed on the Australian Stock Exchange (ASX)

 

1998   

Deutsche Office Trust (DOT) listed on the ASX

 

2001   

The Group acquired DWPF management rights

 

2004   

Completed 30 The Bond, Australia's first 5 Star Green Star office building

DDF, DIT, DOT stapled to form DB RREEF Trust

 

2006   

Obtained Standard & Poor's long-term corporate credit rating of BBB+

 

2008   

DB RREEF rebranded to DEXUS Property Group and acquired Deutsche Bank's 50% interest

 

2009   

First recognized as one of the Global 100 Most Sustainable Corporations at Davos, Switzerland

 

2010   

DEXUS Property Group opened US office in Newport Beach, California

 

2011   

Completed 6 Star Green Star developments at 1 Bligh Street, Sydney and 123 Albert Street, Brisbane

 

2012   

DXS reinvested US industrial portfolio sale proceeded into Australian office markets

US industrial portfolio sale completed

New strategy, structure, and remuneration framework announced

US central portfolio sale completed

RENTS Trust was repurchased

 

2013   

DEXUS secures $1 billion of Australian real estate on behalf of third-party funds

DEXUS and Canada Pension Plan Investment Board (Consortium) announced off-market takeover to acquire CPA

DEXUS acquires a 14.9% economic interest in CPA

European portfolio sale completed

DEXUS head office moved to Australia Square

 

2014   

DEXUS forms the DEXUS Industrial Partnership with the Future Fund

DEXUS and Canada Pension Plan Investment Board take over CPA's $3.4 billion office portfolio

 

2015   

DXS successfully completed $480 M equity raising comprising $400 M fully underwritten institutional placement and approx. $80 M by way of a non-underwritten Security Purchase Plan (“SPP”)

Dexus and DWPF jointly acquire the Waterfront Place Complex in Brisbane for $635 M (excluding acquisition costs)

 

2016   

Prime office developments open at 5 Martin Place, Sydney, 480 Queen Street, Brisbane and Kings Square in Perth

Dexus and DWPF commenced development at 100 Mount Street, North Sydney

 

2017   

Dexus established healthcare joint venture with Commercial & General

Dexus Funds Management entered into agreements to acquire two Sydney office buildings. The total consideration under the acquisition agreements together with the offer for the industrial property was $739.3 M

 

2018   

Dexus announced that it had exchanged contracts to acquire three industrial sites in Melbourne, Sydney and Brisbane with a combined end value of circa $700 M, replenishing the group’s industrial development pipeline in core locations.

7. Team

 

Board of Directors[7]

 

Richard Sheppard – Chair and Independent Director

Elizabeth Alexander (AM) – Independent Director[8]

Penny Bingham-Hall – Independent Director

John Conde – Independent Director

Tonianne Dwyer – Independent Director

Mark Ford – Independent Director

The Hon. Nicola Roxon – Independent Director

Darren Steinberg – Chief Executive Officer and Executive Director

Peter St George – Independent Director

 

Management Team

 

Darren Steinberg – Chief Executive Officer and Executive Director

Alison Harrop – Chief Financial Officer

Ross Du Vernet – Chief Investment Officer

Brett Cameron – General Counsel and Company Secretary

Deborah Coakley – Executive General Manager, Customer, and Marketing

Kevin George – Executive General Manager, Office, and Industrial

Stewart Hutcheon – Executive General Manager, Retail and New Fund Development

Graham Pearson – Executive General Manager, Third Party Funds Management

David Yates – Executive General Manager, Investor Relations, Communications and Research


read more

8. Financials

 

2019 Half Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[9]

 

Divisions

Revenue ($M)

% Change

Profit (Funds From Operations) ($M)

% Change

Office

$712.3

11.40%

$603.8

6.42%

Industrial

$152.0

10.47%

$132.7

15.59%

Property management

$68.0

11.29%

$16.1

24.81%

Funds management

$58.0

10.06%

$35.9

10.12%

Development and trading

$138.0

(40.22%)

$37.1

  (22.71%)

All other segment

N/A

N/A

($172.3)

(9.05%)

Eliminations

($2.8)

(7.69%)

N/A

N/A

Total

$1,125.6

0.57%

$653.3

5.76%

9. Risk

 

Major risks include:[10]

 

Capital risk management

The Group manages its capital to ensure that entities within the Group will be able to continue as a going concern while maximising the return to owners through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt, cash and cash equivalents and equity attributable to security holders. The Group continuously monitors its capital structure and it is managed in consideration of the following factors:

  • The cost of capital and the financial risks associated with each class of capital;
  • Gearing levels and other debt covenants;
  • Potential impacts on net tangible assets and security holders’ equity;
  • Potential impacts on the Group’s credit rating; and
  • Other market factors.

 

Market risk

Interest rate risk

Interest rate risk arises from interest bearing financial assets and liabilities that the Group utilises. Non-derivative interest bearing financial instruments are predominantly short-term liquid assets and long-term debt issued at fixed rates which expose the Group to fair value interest rate risk as the Group may pay higher interest costs than if it were at variable rates. The Group’s borrowings which have a variable interest rate give rise to cash flow interest rate risk due to movements in variable interest rates

 

Foreign currency risk

Foreign currency risk refers to the risk that the value or the cash flows arising from a financial commitment, or recognised asset or liability will fluctuate due to changes in foreign currency rates. The Group’s foreign currency risk arises primarily from:

  •  Highly probable forecast transactions denominated in foreign currency; and
  •  Borrowings denominated in foreign currency

The objective of the Group’s foreign exchange risk management policy is to ensure that movements in exchange rates have a minimal adverse impact on the Group’s foreign currency assets and liabilities.

 

Liquidity risk

Liquidity risk is associated with ensuring that there are sufficient funds available to meet the Group’s financial commitments as and when they fall due and planning for any unforeseen events which may curtail cash flows

 

Refinancing risk

Refinancing risk is the risk that the Group:

  • Will be unable to refinance its debt facilities as they mature; and/or
  • Will only be able to refinance its debt facilities at unfavourable interest rates and credit market conditions (margin price risk).

 

Credit risk

Credit risk is the risk that the counterparty will not fulfill its obligations under the terms of a financial instrument and will cause financial loss to the Group. The Group has exposure to credit risk on all financial assets included in the Group’s Statement of Financial Position