SYDNEY–Australian real estate investment trust, Dexus, has announced an annual loss following a decline in the value of its property portfolio. The company has also signaled a weaker fiscal 2024 distribution due to the economy readjusting to the rapid escalation in interest rates.
In the 12 months through June, Dexus reported a net loss of A$752.7 million, a significant drop from the A$1.62 billion profit recorded in the previous year. Additionally, funds from operations fell by 2.5% to A$738.5 million.
Investors had anticipated a weak result after Dexus revealed in June that an external review showed its office and industrial properties were worth approximately A$1.0 billion less than just six months earlier.
The decline in the value of Dexus’ portfolio was mainly driven by a decrease in office property value. Shifting work-from-home habits and weaker market signals regarding asset values from transactions contributed to this decrease in demand for office space.
The value of commercial real estate is generally determined based on its capitalization rate, which is calculated by dividing the annual net income produced by a property by its purchase price. Rising capitalization rates, similar to bond yields, indicate falling values, and vice versa. Dexus reported that the weighted average cap rate across its entire portfolio increased by 32 basis points to 5.12% between January and June.
Looking ahead, Dexus has forecasted a distribution per security of 48.0 cents for the 12 months ending in June 2024. This figure is lower than the previously announced payout of 51.6 cents for the recently concluded fiscal year and is largely influenced by expectations of lower trading profits.
Dexus’ Chief Executive, Darren Steinberg, acknowledged the impact of higher interest rates on their future results, stating, “Higher interest rates will continue to impact our result in FY 2024, along with the impact of cycling a relatively strong year of trading profits in FY 2023.”
Excluding trading profits, Dexus expects adjusted funds from operations to align closely with FY 2023.
Dexus Reports Pro-Forma Gearing and Challenges Ahead for FY 2024
Dexus, a leading Australian real estate investment trust, has disclosed its pro-forma gearing ratio at 27.9% as of June, indicating a healthy debt-to-equity position. The company has hedged 86% of its debt for fiscal year 2023, with an average maturity period of 4.8 years.
Looking ahead, Dexus anticipates a challenging environment for the fiscal year 2024. Factors such as inflation, higher interest rates, and geopolitical risks are expected to continue impacting capital flows and market sentiment. These conditions are likely to further exert pressure on the valuations of real assets.
Despite facing headwinds from changing tenant behavior during the Covid-19 pandemic, Dexus has managed to maintain stable office occupancy above 95%. The company believes that prime office space in city-center locations provides greater protection compared to lower-quality spaces in outer suburbs. Long-term customers reducing their footprint has also created opportunities for new tenants to enter the market.
Currently, incentives have slightly increased to 30.0%, primarily due to a higher proportion of leasing activity in Brisbane, where the incentive market is stronger. This increase is partially offset by a higher proportion of effective deals. In the Sydney CBD, vacancy rates are higher in the Barangaroo and Western corridor markets compared to the core CBD. Market incentives are expected to remain elevated in the near term.
Dexus’s funds under management have reached a total of A$61 billion. This growth has been supported by the recent acquisition of Collimate Capital’s real estate and domestic infrastructure business from AMP. The deal for Collimate was restructured into two phases, with the first stage completing in the March quarter.
As Dexus faces potential challenges in the coming year, it remains focused on strategic management and maintaining its strong position in the market.
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