Dexus: Result 2018

The 2018 financial year was kind to Australia's largest office tower landlord, as tight CBD office markets in Sydney and Melbourne put it in the driver's seat when negotiating with tenants looking for office space.  The trust continues to benefit from space being taken out of the market from both the conversion of office towers into apartment buildings and, in Sydney's CBD, the demolition of a number of office towers to make way for new railway stations.

Management noted that when re-leasing office space in Sydney and Melbourne in 2018, they were receiving, on average, a 15% jump in rent per square metre – even while the office portfolio saw occupancy slip from 97.2% to 96.0%.

In its industrial portfolio, however, Dexus enjoyed a rise in occupancy from 96.5% to 98.3% – its highest for the past ten years. There will be relatively few lease expiries over the next year, which is normally a good thing. However, given current market conditions, management would probably prefer to be negotiating leases today, rather than in a few years' time when tenants may have greater options.

Underlying profits increased 14%, although after a 23% fall in trading profits – from selling industrial property to developers – the overall distributable profit rose 10% to $486m.

Dexus's balance sheet looks healthy with gearing declining to 24%, though this reflects the upwards revaluation of office assets, which also saw net tangible assets per unit rise 14% to $9.64. 

Management expects to increase distributions by 5% in 2019, with continued strong performance from the Sydney and Melbourne office markets. We'd also expect conditions to remain robust for the next couple of years, although they may weaken after that, as new office towers under construction come onto the market. We're increasing our price guide a little to account for time value and the growth achieved over the past two years since we last adjusted it, but the stock remains a HOLD.