Future Office And Industrial Portfolios Will Support Long Term Real Asset Income

Catalysts

About DEXUS

DEXUS manages a diversified Australasian real asset platform across office, industrial, retail, infrastructure, health care and alternative assets for balance sheet and third party capital.

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

• Large, diversified exposure across office, industrial, retail and growth markets such as infrastructure and health care, with $51b of assets under management and $36b of third party capital, positions fee income and funds management earnings to benefit as investor interest in Australasian real assets continues to build.
• High quality office and industrial portfolios that are mostly in core CBD and prime industrial locations, with occupancy above market, positive recent valuation outcomes and a significant portion of assets under-rented, give scope for future rental uplifts and support revenue and net operating income over time.
• Committed development projects such as Atlassian Central and Waterfront Brisbane are already largely pre leased on long leases with fixed annual rent increases of around 3% to 4%. This creates visibility on future contracted cash flows and supports future AFFO and earnings once projects complete.
• Access to diverse equity pools, including increasing offshore interest, growing pension capital and club style vehicles, together with the ability to introduce partners into the $13b investment portfolio, offers multiple avenues to recycle capital into new fee earning products and support funds management revenue and margins.
• Disciplined capital management, with look through gearing towards the lower end of the 30% to 40% range, significant undrawn debt capacity, long average debt maturity and high hedging, provides flexibility to fund the A$1.2b committed development pipeline and other initiatives while aiming to support AFFO per security and distributions.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on DEXUS compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming DEXUS's revenue will decrease by 14.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 39.0% today to 83.1% in 3 years time.
• The bullish analysts expect earnings to reach A$735.4 million (and earnings per share of A$1.01) by about April 2029, up from A$550.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$551.9 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.9x on those 2029 earnings, up from 11.4x today. This future PE is greater than the current PE for the AU Office REITs industry at 11.0x.
• The bullish 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 7.13%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Office earnings are already feeling pressure from lower average occupancy, elevated incentives and income decline at key assets such as 80 Collins Street and 30 Hickson Road. If hybrid work or tenant space rationalisation persists over the long term, office revenue and net operating income could stay under pressure and weigh on margins.
• The funds management business is working through a sizeable redemption queue of around A$2b and is using asset sales and debt to fund exits. If investor appetite for Australasian real assets weakens or remains cautious, lower funds under management, reduced performance fees and ongoing redemptions could drag on fee revenue and earnings.
• Trading profits and performance fees are expected to be materially lower in FY '27 compared with FY '26. If real estate and infrastructure transaction conditions remain subdued over several years, the group could face structurally lower contribution from these higher margin income streams, putting pressure on net profit and returns.
• The committed development pipeline, including Atlassian Central and Waterfront Brisbane, still requires about A$1.2b of spend over four years. If construction or leasing conditions worsen over that period or capital partners are introduced on less favourable terms, the required funding and any margin compression could affect future income and group earnings.
• DEXUS is relying on continued access to diverse equity capital and debt markets, including subordinated notes and third party partnerships, to recycle capital and support growth. Any long run tightening in credit conditions or reduced offshore interest in Australian real estate could limit refinancing options and capital recycling, affecting interest costs, funds management revenue and overall net margins.

Valuation

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

• The assumed bullish price target for DEXUS is A$9.3, which represents up to two standard deviations above the consensus price target of A$7.49. 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2029, revenues will be A$884.7 million, earnings will come to A$735.4 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$5.84, the analyst price target of A$9.3 is 37.2% higher.
• 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.