Dexus defies office gloom with guidance kick

The office landlord and funds manager is closing out the purchase of a funds business from AMP and says the best towers are performing.

Office landlord and funds manager Dexus remains upbeat about the future of big city towers, saying it will hit the upper end of its earnings guidance this year as it also closes out the purchase of AMP’s local real estate and infrastructure operations.

City offices have been battered by rising vacancy levels and investors pulled back from a series of deals last year, but Dexus believes that the best portfolios will come through the cycle.

“The more sustainable assets that are modern and better managed are attracting more customers,” chief executive Darren Steinberg said. “It becomes a lot more challenging to lease B and C grade buildings in this kind of environment.”

Dexus remains a believer that cities will bounce back with Mr Steinberg saying that in the last six months there had been a resurgence of the central business districts.

“Particularly post Christmas we’re seeing a lot more people back in the core of the CBD,” he said. ”We’re seeing inquiry at the agency level pick up.”

Mr Steinberg said that despite “subdued” market conditions, the company had an active six months in which it sold off $773m of property and pumped it into higher returning opportunities, including the new Atlassian headquarters in Sydney.

“The macroeconomic environment remains challenging with rising interest rates, ongoing supply chain disruptions, a global energy crisis and geopolitical risks contributing to continued economic uncertainty. Higher interest rates will continue to impact our results in fiscal 2023,” he said.

But the company is defying the tough environment and said it would deliver distributions of 51-51.5c per security in this financial year, reflecting the higher end of its earlier guidance range.

The company remains bullish about growing in funds, despite rivals picking up some key ex-AMP funds. Dexus paid a lower price for the business and Mr Steinberg said that with the upcoming addition of AMP’s real estate and infrastructure platform, the company had refined its vision to be recognised as the leading “real asset” investment manager in Australia.

“Our balance sheet provides resilient cash earnings from a portfolio of high-quality investments, and our funds business adds capital efficient, higher growth exposure within the overall risk profile of the business,” he said.

As the deal has been pushed back, Dexus had renegotiated terms with AMP and the maximum payable by Dexus has been cut to $225m, equating to 1.2 per cent of funds. The deal will even go ahead even while offshore approvals are obtained.

Dexus generated adjusted funds from operations of 28.9c per security, a 2.8 per cent lift on the first half last year, and distributions were flat at 28c per security.

Net profit fell to just $23.1m as the company took property writedowns as its portfolio was off by 1.4 per cent, while a year ago office values were rising. The trust is geared at 25.6 per cent, and Dexus said it has $3bn of headroom to its covenants.

The office portfolio is ahead of the market with occupancy of 95.3 per cent and the industrial portfolio is surging as it is 97.4 per cent full.

Dexus remains upbeat about the future of big city towers, saying it will hit the upper end of its earnings guidance this year Picture: Dylan Coker/NCA NewsWire

In funds, Dexus raised $553m of new equity across its funds platform, including $200m for the Dexus Real Estate Partnership 1 and $220m for Dexus Healthcare Property Fund.

The company’s early moves on property sales won it $48.7m in trading profits for the half, and it is also winning more tenants interest in the massive Waterfront Brisbane project.

Operationally, underlying Funds From Operations, excluding trading profits, slipped by 9.3 per cent to $340.4m, driven by higher net interest costs, the impact of sales and as some properties went offline for development. But on an adjusted basis, including lower capital expenditure, AFFO bumped up by 2.8 per cent to $310.8m.

Dexus now manages $26.3bn of funds across 19 funds and is pushing further into healthcare, while also flagging it will launch another opportunistic fund. The company is selling more towers, with Sydney holdings 44 Market St and 1 Margaret St to also hit the block.

Dexus securities added 20c to close at $8.50.

Mr Steinberg said the company had shown “resilience” in a challenging environment as the portfolio had kept up strong occupancy and was benefiting as tenants sought out quality office space.