Dexus falls to $1.58b loss as office towers weigh on shift to funds management

The office group is making a move from being a landlord into more active businesses and will cut its distribution as it invests in new sectors.

Dexus chief executive Ross Du Vernet.

Listed landlord and fund manager Dexus has been slugged by sliding office values and fell to a $1.58bn annual loss but insists that its big shift into property and infrastructure funds management will bring it through the cycle.

The real estate investment trust was hid by $1.9bn of write downs on its portfolio, with the bulk falling on office towers, with their values down by about 25 per cent from their peak before the coronavirus crisis struck and interest rate hikes blew out capitalisation rates.

The value of the office portfolio was cut by 15.6 per cent last year, while the more resilient industrial portfolio was trimmed by 3.3 per cent, and the group remains confident that its strategy to push further into funds will succeed.

Dexus chief executive Ross Du Vernet was upbeat about the direction in which office towers are now headed but the investors were surprised by a change in distribution policy, partly to reflect its more active role as a funds manager.

 Dexus said that its distribution policy from fiscal 2025 had been updated to pay out 80-100 per cent of Adjusted Funds From Operations, a measure of property earnings, giving it a sustainable source of capital to invest through the cycle into new investments.

Dexus securities fell by 8.9 per cent to $6.83 on Tuesday as investors digested the unexpected switch which the company believes will give it more flexibility to chase new opportunities in other sectors.

Dexus Place, 80 Collins Street, Melbourne.

Mr Du Vernet said Dexus had shifted to a sector-aligned operating model to drive performance in the next phase of the investment cycle and flagged the group would diversify.

“With a preference to co-invest alongside capital partners, we see attractive opportunities in the industrial, infrastructure and alternative investment sectors,” he said.

The new Dexus chief executive was upbeat about where the office cycle is now headed.

“There are lots of data points that suggest that we’re nearing the bottom ... expectations of a rate cut this year, are certainly positive,” he said.

He added that with improved metrics on the occupier side and good demand in the right part of cities, there were good signs, with vacancy expected to peak in 2025.

Mr Du Vernet said there were some “early signs” among institutional investors that were also more interested in offices, though that had started in the value-add area.

“I think that’s very positive for the sector over the next 12 months,” he said.

Mr Du Vernet said there were “exciting opportunities” emerging across the platform and as it invested in those the office portfolio would be diluted from its two-thirds level on the balance sheet.

Estimated cost to complete Dexus projects.

He denied the group was putting a “sell” on office but said the move reflected the opportunities in front of the group.

“It’s quite natural that we’re going to be cycling capital out of lower returning opportunities into some of these higher returning opportunities, alongside third party clients,” he said.

While Dexus, which had a loss of $752.7m in fiscal 2023, was hit by the headline loss it delivered on its guidance for distributions of 48c per security for this financial year.

It expects AFFO of about 44.5-45.5c per security and distributions of about 37c per security this financial year - which was below market expectations.

Mr Du Vernet said that it was a “challenging environment” but the company had maintained high occupancy across its office and industrial portfolios, ensuring strong cashflows and gearing was at about 32 per cent after it sold off $1.7bn worth of balance sheet assets.

Dexus has a funds management empire standing at about $39.7bn and has bedded down its acquisition of AMP Capital’s local real estate and infrastructure platform and the APN business.

It had been trimmed back by $2.2bn in devaluations and selling off about $2.9bn of properties as it met redemptions from exiting investors.

Longer term, Dexus is looking to become a more diversified group with more earnings coming from the active side of the business.

Mr Du Vernet said that the group could get close to $100bn of assets by using both its balance sheet and funds.

UBS analysts said Dexus guidance was about 8 per cent below market expectations but reframing the payout ratio should be well received over time as it allows Dexus to seed funds growth and manage development reinvestment.

Macquarie analysts said Dexus was making the shift so that it has a sustainable source of capital to invest through the cycle into what it sees as return-enhancing investment opportunities.

It also flagged that it would eventually target no more than a 50 per cent exposure to any single sector, with 15 per cent from developments, and 7-9 per cent from its investment portfolio.

The trust wants to keep its balance sheet strength and flexibility and will seek to invest alongside capital partners, and chase deals with partners in attractive sectors.

Dexus office occupancy bumped up to 94.8 per cent from 94.5 per cent at the end of December and like-for-like income growth lifted by 0.5 per cent as some buildings dealt with vacancies.

Incentives paid to tenants last financial year moderated to 27.9 per cent.

Originally published as Dexus falls to $1.58b loss as office towers weigh on shift to funds management