Dexus Reports Net Loss in Challenging Office Property Market

SYDNEY--Dexus, a leading property investment company in Australia, has reported a net loss due to negative revaluations of its property portfolio. The overall office property market in Australia remains stagnant, although properties in prime city center locations have performed slightly better compared to those on the urban fringe.

For the six months through December, Dexus reported a net loss of 597.2 million Australian dollars (US$385.3 million), a significant decline from a profit of A$23.1 million in the same period the previous year. The net loss includes a decline of A$687.3 million in property valuations at the end of December, representing a 4.7% decrease from prior book values.

In addition, Dexus experienced a 6.2% decline in funds from operations, reporting A$364.8 million. Adjusted funds from operations per security were down 5.9% at 27.2 cents compared to the previous year.

Despite the challenging market conditions, Dexus reaffirms its forecast for a payout of approximately 48.0 cents per security in the 12 months through June. An interim distribution of 26.7 cents has already been declared.

Commercial real estate values are typically assessed using the capitalization rate, which divides the annual net income generated by a property by its purchase price. Similar to bond yields, rising cap rates indicate falling property values, and vice versa.

The weighted average cap rate for Dexus's total portfolio increased by 34 basis points to 5.45% at the end of December, compared to 5.11% at the end of June. Notably, the value of Dexus's office properties recorded the largest decline, down approximately 6.0% from prior book values.

The recently announced net loss is Chief Executive Darren Steinberg's final report before he steps down next month. Steinberg will be succeeded by Ross Du Vernet, currently serving as the company's chief investment officer.

"Markets remain challenging as capital flows and sentiment continue to be impacted by inflation, interest rates, and geopolitical risks," commented Steinberg. "Despite these challenges, our property portfolio continues to benefit from the flight to quality, and our disciplined approach to capital management has allowed us to maintain a strong balance sheet."

Dexus: Resilient Amidst Challenging Times

Introduction

Shares in Dexus have experienced a resurgence following a period of underperformance compared to its peers in the 2023 fiscal year. As caution grows among investors regarding stocks with large office portfolios, Dexus has managed to weather the storm and maintain a positive outlook. While the U.S. commercial property market has been hit hard, Dexus Chairman Warwick Negus believes the situation in Australia is different and offers potential for growth.

Global Impact

The ripple effects of the U.S. property sector's turmoil are being felt worldwide. Several banks across three continents, including New York Community Bancorp, have suffered significant losses due to declining office-building usage and property devaluations. These challenges have only compounded the difficulties faced by property owners in Australia.

Australian Challenges

Australian property owners have had to contend with adverse conditions such as high interest rates, which increase the cost of servicing debt. Additionally, changes in tenant behavior, with more people opting to work from home in the aftermath of the pandemic, have presented new obstacles. However, despite these headwinds, Dexus remains optimistic about the future.

Dexus's Resilience

Dexus maintains that well-located offices continue to be attractive to tenants. Furthermore, the decrease in floor space required by existing customers has created opportunities for a fresh wave of tenants to enter the market. Consequently, Dexus was able to achieve an impressive 94.5% office occupancy rate by the end of December. Throughout the six-month period, the company successfully leased 66,600 square meters of office space across 135 transactions.

Securing Future Income

In addition to leasing existing office spaces, Dexus has also focused on securing future income streams through office development deals. During the same six-month period, they secured 8,700 square meters of space across four such deals. These forward-looking initiatives have positioned the company well for sustained growth.

Financial Position

Dexus remains in a favorable financial position, with a gearing ratio of 29.4% as of December – comfortably below their target range of 30-40%. Furthermore, approximately 95% of their debt was hedged over the past six months, with an average maturity period of 4.2 years. This prudent approach ensures stability and mitigates potential risks.

In conclusion, Dexus stands out amidst the challenges faced by the property market. By focusing on well-located offices and adapting to evolving tenant needs, the company has demonstrated resilience. With a sound financial position and a strategic outlook, Dexus is well-positioned for continued success.