Office Headwinds And Development Commitments Will Shape Future Earnings Resilience

Catalysts

About DEXUS

DEXUS is an Australasian real asset manager with an investment portfolio and third party funds platform across office, industrial, retail, infrastructure, health care and alternatives.

What are the underlying business or industry changes driving this perspective?

• Although DEXUS has a large office footprint in core CBDs and is seeing strong leasing volumes, the shift in occupier preferences and incentives toward prime space increases reinvestment needs in existing assets, which can pressure net margins if incentive and maintenance spend remains elevated.
• Although logistics demand is supported by population growth and e commerce, the portfolio is already 8.9% under rented with 20% due for reversion by FY '27, so capturing that upside will likely require higher incentives and potential downtime, which could temper the impact on near term earnings.
• Although the committed office and industrial developments are largely pre leased with fixed annual rent increases, the A$1.2b of remaining development spend over four years, including A$610 million on Atlassian, ties up capital at a time when performance fees and trading profits are expected to be materially lower in FY '27, which may weigh on AFFO growth.
• While the funds management platform benefits from growing pension and offshore interest in Australian real assets, the ongoing need to meet redemptions, rationalize subscale funds and provide liquidity is reducing FUM driven fee income in the near term, limiting the contribution of management fees and performance fees to overall earnings.
• Although access to diverse equity capital and the push to bring partners into the A$13b investment portfolio can release capital, moving from balance sheet ownership to lower co investment stakes rebalances the business toward fee based income, which may moderate absolute rental revenue even as funds management earnings become a larger share of the total.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on DEXUS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DEXUS's revenue will decrease by 14.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 39.0% today to 59.8% in 3 years time.
• The bearish analysts expect earnings to reach A$535.1 million (and earnings per share of A$0.57) by about April 2029, down from A$550.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$736.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.9x on those 2029 earnings, up from 12.0x today. This future PE is greater than the current PE for the AU Office REITs industry at 11.6x.
• The bearish analysts expect the number of shares outstanding to grow by 4.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Office and industrial development projects such as Atlassian Central and Waterfront Brisbane are largely pre leased on long dated contracts with fixed annual rent increases. Once these assets complete and begin contributing fully, the additional rental streams could lift group earnings and net margins above what a flat share price would suggest, particularly if yields on cost exceed current implied valuations.
• The industrial portfolio is 8.9% under rented with 20% of space set for reversion by FY '27. Recent re leasing spreads of 33% and like for like income growth of 8.7% show that contractual roll ups and market rent resets could support stronger rental revenue over time than a stagnant share price would reflect.
• Funds management already oversees A$36b of third party capital, has raised more than A$950 million of equity and is seeing growing offshore interest. Flagship funds such as DWPF and the Shopping Center Fund are outperforming benchmarks, so sustained inflows and performance fees from this platform could increase fee income and diversify earnings faster than implied by an unchanged share price.
• Management is actively recycling capital through A$1.4b of divestments since June 2024 towards a A$2b target, issuing subordinated notes with partial equity credit and bringing partners into the A$13b investment portfolio. If this capital is redeployed into higher returning uses or on market buybacks, the impact on earnings per security and net asset value could be stronger than a flat share price assumes.
• Underlying markets are currently supported by constrained new office and industrial supply, recovering transaction and fundraising activity, positive business confidence and interest from pension and offshore investors in Australian real assets. If this supportive backdrop persists, portfolio valuations, rental revenue and AFFO per security could trend higher than would be consistent with a stable share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for DEXUS is A$6.1, which represents up to two standard deviations below the consensus price target of A$7.35. This valuation is based on what can be assumed as the expectations of DEXUS's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.6, and the most bearish reporting a price target of just A$6.1.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be A$894.2 million, earnings will come to A$535.1 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of A$6.17, the analyst price target of A$6.1 is 1.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.