The Dexus (DXS) result is a good outcome, given rolling lockdowns, and associated WFH impacts, across the office portfolio. Adjusted funds from operations was only down modestly versus the previous corresponding period.
The balance sheet remains well managed, with look through gearing at the lower end of the guided range (30-40%), and plenty of headroom to fund additional development and accretive acquisitions.
Industrial occupancy moved up to ~97%, with office occupancy declining slightly to 95% (neither number updated in the graph below). As such, the much feared collapse in office occupancy, as a function of work from home / changed end user preferences, hasn’t yet materialised in rising vacancies.
This is good news, with management themselves tabling an expectation for occupancy to have moved towards 90%. Not only have client negotiations gone better than expected, but like for like net property income has increased across both industrial (where it is quite strong) and office.
Given that the share price (what’s implied in the valuation) continues to suggest that earnings decline from here, over the next 10 years, this seems like a very supportive backdrop for DXS to surprise on the upside.
Even if office earnings do remain flat to down, then at least the funds management arm, and the combined management and development profit contribution should provide a not immaterial offset (graph below not updated to latest results) to keep overall funds from operations steady, an outcome that would be more positive than the market seems to currently expect.
As such we see DXS as a good value, generally resilient business with good growth prospects (as evidenced by the recent APN acquisition, and the AMP Diversified Core Property merger).
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