Dexus swings to $752.7m loss and trims outlook as tower values take hit

The office landlord and funds manager swings to a hefty annual loss, driven by cuts to the value of its property portfolio as interest rates hit the sector.

Office landlord and funds manager Dexus has swung to a $752.7m full year loss, driven by cuts to the value of its property portfolio as interest rates hit the listed property sector.

The company has pushed deeper into funds management as the market cycle has turned, helping diversify earnings, but will trim distributions this year as trading profits will be lower and conditions are clouded.

“Operating in an uncertain economic environment remains challenging. In this environment we have continued to diversify our capital sources, and grow and diversify our funds management business, while we reweight the Dexus portfolio,” chief executive Darren Steinberg said.

Mr Steinberg said that higher interest rates would continue to impact its results in fiscal 2024, along with the impact of cycling a relatively strong year of trading profits.

“Despite the challenges, we have continued to execute on our strategy, diversifying our capital sources, growing our funds business, reweighting the Dexus portfolio and commencing next generation developments,” he said.

Looking ahead, Mr Steinberg said that “as the world reverts to a normalised rates regime, we are well positioned as a leading real asset manager”.

Dexus boss Darren Steinberg at their offices in Sydney. Picture: Britta Campion/The Australian

Dexus flagged that demand for big companies to move into new space had been affected with the precommitment market quiet, but it said it was pressing ahead with a new headquarters tower for tech giant Atlassian in Sydney.

The developer asked the technology company if it was willing to give up some space in the under-construction tower to accommodate other interested tenants, but it declined, in a sign that big tenants are committed to office working.

Dexus is among the property groups which have billions of dollars worth of towers on the market at a time when buyer demand for larger office assets has weakened.

But the company argued that it led the way in selling early in the cycle, contrasting its performance with other managers which have attempted to ride out the cycle even as values are sliding.

The company is also repositioning as a manager of real assets, including infrastructure, and called out opportunities in areas via its funds, some of which it picked up when it bought the AMP Capital’s local real estate and infrastructure empire.

Dexus said that on an underlying basis Adjusted Funds From Operations and distributions of $555m, or 51.6c per security, slipped 3 per cent on the previous year. It forecast a drop in distributions this financial year to 48c per security, mainly driven by lower trading profits, but excluding these, earnings are expected to be broadly in line with last year.

The loss of $752.7m was a dramatic turnaround from the previous year’s $1.61bn profit, which was also driven by property revaluations.

Dexus struck $1.8bn in asset sales from its balance sheet and has more assets on the market, although it insisted its planned, higher-returning developments were fully funded.

Mr Steinberg said the company had added about $18bn to funds under management following the AMP deal, including $10.9bn of infrastructure. He said the deal positioned Dexus as a real asset manager of scale, with $61bn of funds and new capabilities in infrastructure.

JPM analysts said it was an encouraging result at first glance, with in-line earnings and Dexus’s office portfolio posting impressive metrics despite soft market conditions.

They said the performance of the office portfolio was a standout as occupancy bumped up to 95.9 per cent despite challenging conditions, and like-for-like effective income growth improved to 5.6 per cent. The company also boosted its funds earnings and raised $1.6bn in equity from institutions despite slowing fundraising conditions.

Jefferies analysts said that the company’s earnings guidance for fiscal 2024 would miss market consensus, and the shares dipped by 2.4 per cent to $7.82 in a lower market around lunchtime on Wednesday.