2020 a year in review_bourse | Page 9

COMPANY NEWS & UPDATES

Dexus ( DXS )

Hold Valuation $ 9.70

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

Lift in Valuation

We increase our valuation for Dexus to $ 9.70 . Nearly 25 cents of the increase is due to the resilience demonstrated in Dexus ' industrial property portfolio . About 10 cents is driven by lower debt costs that are locked in . The balance is due to Dexus buying back a small number of securities at prices below our valuation .

The group recently confirmed book values for its industrial portfolio have been marked upward by 4.5 %. This doesn ' t affect our valuation directly as we make our own assessment of the assets . However , the primary reason for the uplift in book values is strong leasing outcomes , which does affect our valuation . We view the securities as fairly priced at current levels .

Earlier in 2020 we assumed that coronavirus effects would see industrial property demand and rents decline , however demand has actually increased , with tenants investing in their supply chain and e- commerce capabilities . Dexus leased about 88,000 square metres of industrial space over the September 2020 quarter , across 25 transactions ( well over triple the floor space it leased in the 2019 September quarter ).

We still think there is froth in the industrial property segment though . Rental growth has lagged the growth of market prices for industrial property . That suggests new supply has satisfied tenant demand , but not necessarily investor demand from institutions wanting to own industrial property . In the long run , tenant demand is what should drive investor demand , and we see challenges for the supply / demand balance in the medium term ( for tenants ).

Retailers are investing in their supply chains and e-commerce capabilities , but we think there will be an element of " winner-takes-all " with not all retailers likely to succeed in a very competitive environment .

We envisage a smaller number of very large well-located facilities , managing very efficiently . However , we are seeing a mushrooming of small and medium-size new developments from a wide range of retailers , some of which , we think will eventually fail . Even though Dexus ' tenant book is strong , the failure of rivals would eventually constrain rents and valuations for the sector .

We haven ' t changed our views on the office sector or portfolio . Valuations seem to have held up there , but there are signs of stress in the sector .

We recently examined GPT ' s sale of its stake in 1 Farrer Place , an asset in which Dexus also owns a stake . GPT sold its stake in December 2020 in line with its June 30 , 2020 book value , suggesting office values have held up . But the price was 3 % below the Dec . 31 , 2019 book value , or 3.5 % below if counting capital expenditures and lease incentives over first-half 2020 . Interest-rate cuts and offshore institutional demand have cushioned price falls so far , particularly for good quality assets with high occupancy and leases lasting beyond the coronavirus period . 1 Farrer Place is an iconic Sydney asset , hosting the Governor Phillip and Macquarie towers with harbour views , 98.4 % occupancy at June 30 , 2020 , and a 4.2-year average lease . We expect further declines in physical office prices , especially for lower-quality buildings or those with leasing challenges .

Dexus recently sold its 50 % interest in Grosvenor Place at an approximate 5 % discount to book value . The difference is that Grosvenor Place had an 11 % vacancy and 60 % of leases expiring by November 2023 . While most of Dexus ' portfolio has better occupancy and lease expiry profiles than that , ultimately all leases expire and need to be renewed , and we continue to factor in challenging leasing conditions in the office segment for the next 12-24 months .

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