DEXUS: Result 2015
Recommendation
In response to recent market volatility, DEXUS has announced a buyback of up to 5% of its shares 'should market conditions permit'. We hope that means the buyback will only proceed if its shares fall to a material discount to the net tangible asset (NTA) value of $6.68 per share reported in its 2015 result.
Management's presentation of the result included an interesting slide that we've partially reproduced below (see Chart 1). The first circle shows where DEXUS believes prime office and industrial properties in Sydney and Melbourne are in the rental cycle. Effective rents – face rents less incentives – are beginning to rise as vacancies in both cities decline, with office rents slightly ahead of industrial rents.
However, as the second circle shows, DEXUS believes prices of these assets in both cities are near their peak, as shown by their vicinity to the 'cap[italisation] rates expanding' region of the circle (as capitalisation rates fall, prices rise. And vice versa).
In other words, DEXUS believes prices have risen much faster than fundamentals such as rents and vacancy rates would justify.
We agree with DEXUS and this is why we believe there is currently little value in the listed property trust (aka 'A-REIT') sector (see A-REITs expensive on almost every measure).
However, we could be wrong.
Commercial property prices and the shares of listed property trusts have risen in recent times for a number of reasons. One is low interest rates, which have made listed property trusts' dividends more attractive and helped push capitalisation rates lower and prices higher, while also allowing property trusts to reduce their debt costs. Another reason is the falling Australian dollar, which has increased the demand from foreign investors for high quality properties – particularly in Sydney and Melbourne – which pay higher yields than they can obtain in their home countries.
These trends may continue, to the benefit of property trust shareholders.
Looking at DEXUS specifically, however, management guided to flat like for like income in 2016. It's also counting on an improved office market in 2017 and 2018 to allow it to re-lease significant amounts of leases that expire then at better rates.
This is all well and good but, at current prices, there isn't any margin of safety should the above trends not continue or management's plans fail to come to fruition. AVOID.