This article is from the Australian Property Journal archive
AUSTRALIA’S largest owner of office buildings, Dexus swung to a first-half loss as another $687 million was wiped off the value of its portfolio as changing workplace habits continued to bring uncertainty to the sector.
Dexus booked a $597.2 million statutory net loss for the period, compared to a $23.1 million profit in the prior corresponding period (pcp). External independent portfolio valuations resulted in a total of $687.3 million, or circa 4.7% decrease on prior book values over the six-month period. Weighted average cap rates lifted from 5.21% to 5.53% over the period.
That followed a $1.184 billion devaluation in the previous half. Asset value losses were seen across the commercial real estate sector in 2023 as rising interest rates have affected yields and the office sector grapples with structural headwinds such as working from home.
“Markets remain challenging as capital flows and sentiment continue to be impacted by inflation, interest rates and geopolitical risks,” said CEO Darren Steinberg, in his last results before stepping down next month with chief investment officer Ross Du Vernet to take over.
“Despite these challenges, our property portfolio continues to benefit from the flight to quality and our disciplined approach to capital management has enabled us to maintain a strong balance sheet,” Steinberg said.
“With the integration of the AMP Capital platform to complete during FY24, our funds platform is set up to grow as we revert to a normalised rates regime.”
The revaluation losses primarily drove the 84c or 7.7% decrease in net tangible asset backing per security during the period to $10.04.
Dexus posted a resilient adjusted funds from operations (FFO) result of $292.4 million, 5.9% lower than the pcp, while underlying FFO (excluding trading profits) of $355.8 million was 4.5% higher, driven by growth in management operations FFO and fixed rent increases, partially offset by higher cost of debt and group corporate costs. Distributions were down 4.6% to 26.7c.
Dexus expects distributions of circa 48.0c per security.
Dexus’ results were in line with expectations, said Moody’s Investors Service senior analyst Saranga Ranasinghe.
“They highlight the resilience of the REIT’s good-quality portfolio of assets across the office and industrial segments, despite a challenging environment.”
Dexus carried out around $2.6 billion of asset divestments during calendar 2023, which Ranasinghe said that in a challenging market for transactions reflected the quality of its portfolio.
“The REIT’s financial profile remains well positioned to withstand any further asset value declines as well as fund its committed developments, with gearing remaining below its target level of 30% to 40%,” Ranasinghe said.
Office income growth to soften
Office portfolio like-for-like income growth was 4.0%, higher than the 3.2% in the pcp, supported by fixed rent reviews.
“Like-for-like growth is expected to soften in FY24, due to lower average physical occupancy in the second half in metro markets, as well as the Melbourne CBD and assets going through a releasing cycle such as Australia Square.”
During the half, Dexus leased 66,600 square metres of office space across 135 transactions. That included of 7,100 sqm at Martin Place and 6,300 sqm at 1 Blight Street in Sydney; 5,000 sqm at 180-222 Lonsdale Street in Melbourne; 6,800 sqm at Brisbane’s 480 Queen Street and 6,300 sqm at Mounts Bay Road in Perth.
Occupancy by income fell over the six-month period from 95.9% to 94.5% and weighted average lease expiry by income from 4.8 to 4.6 years, while incentives came down.
“Incentives were 29.4%, below the market average, reflecting the quality of the portfolio and a higher proportion of city retail and effective deals. Incentives are expected to stay elevated in the near term,” said executive general manager, office, Andy Collins.
Another 8,700 sqm of space was secured across four office development deals.
Strong industrial performance
Dexus has an $11.0 billion across its platform, which enjoyed like-for-like income growth of 5.5%, an acceleration on the 2.4% in the pcp, benefiting from positive reversions.
“Occupancy of our core industrial portfolio remains high and rent growth remains strong,” executive general manager, industrial, healthcare and alternatives, Stewart Hutcheon said.
“The fundamentals of the Australian industrial sector remain positive although demand is moderating from the high levels of recent years, most notably from discretionary retail segment customers. Non-discretionary customer segments of food, groceries and pharmaceuticals as well as e-commerce remain stable.”
He said vacancy rates in most precincts have increased from the record lows of last year but remain well below global averages.
“Our portfolio is 14.9% under-rented, benefiting from continued market rent growth across our key markets. This should underpin future income growth by resetting the rents on upcoming lease expiries across circa 28% of the portfolio by FY26.”
