DEXUS Property: Interim Result 2019

A quick walk round the Sydney CBD shows why times are good for the owners of the city's office buildings. The demolition of several of them to make way for infrastructure projects and apartment buildings has seen Sydney CBD vacancies fall to historic lows.

In the six months to December, Dexus's portfolio of 1.5 million square meters of office space saw occupancy increase to 97%, with a weighted average lease term steady at 4.6 years. Sydney and Melbourne experienced vacancies of only 4%, although the picture is bleaker in Brisbane and Perth, where vacancies are at 13% and 21% respectively. These two markets only represent a small portion of Dexus' portfolio, though, with 70% of properties located in Sydney. The tight market in Sydney has enabled Dexus to raise rents on new leases signed over the past six months by 18% per square meter. Normally when investing in a property trust, near-term rent expiries are a major concern, but Dexus's management would prefer to have a greater number of leases expiring over the next few years to take advantage of the current conditions.

Overall, Dexus reported profit growth of 15% to $282 million for the six months to December, due to fixed rental increases in its office assets and the acquisition of an industrial property. As with 2018, trading profits were a feature, adding $35 million from the sale of industrial property to residential developers. Without this, property income growth was a more modest 2.3%, reflecting the low level of leases expiring over the past six months.

An upwards revaluation of asset values led to a fall in gearing (the ratio of net debt to net tangible assets) to 24%, as well as a 9.9% increase in net tangible assets per unit to $10.07.

Dexus expects conditions in Sydney and Melbourne to remain favourable and is guiding towards a 5% increase in distributions per unit for 2019, to around 50 cents. While conditions for office landlords should remain strong for the next few years, in the medium term they are likely to weaken as some of the new office towers currently under construction in Melbourne and Sydney hit the market.

Based on the guidance, Dexus is on a forward distribution yield of 4.2%. HOLD.