DEXUS Property Group (ASX: DXS) has only lost half a percent in trading today, sparing investors from the carnage that usually hurts shareholders in quality businesses that see a steep drop in earnings. One thing that saved the REIT from a similar fate is that the profit decline came primarily off the back of revaluation changes. As net profits are only a small percentage of the total value of all the real estate in a REIT, small changes in asset values can have a big effect on profits. Investors understand this, and the REIT held up reasonably well after the profit fall as a result.
One other negative out of the result was a small decline in the WALE of their office portfolio to 4.4 years (FY18: 4.6 years), which came alongside an additional fall in the industrial portfolio WALE to 4.7 years (FY18: 4.8 years). The company has announced extending the WALE as a core priority for FY20. This is to be expected, given the WALE is well below other REITS and holds multiples down. WALE is the weighted average lease expiry, the number of years until a client ends their lease. This measure is seen as a proxy for earnings and asset quality by many investors.
One positive change in Dexus’ portfolio is the acquisition of the remaining 50% share in Sydney’s MLC Centre. This gives them control of the asset and increases the quality of Dexus’ book. It has however contributed to a fall in cap rates for Dexus, a trend which is set to accelerate this year after two interest rate cuts from the RBA.
Dividends rose by 8.8% to $529.0 across Dexus as a whole, while distributions per security rose by a 5% to 50.2c. This was impressive for a low inflation environment and was backed up by a healthy 3.3% growth rate in FFO per security.
Balance sheet gearing declined by 10 basis points to 24.0%, slightly improving cash flow sustainability. While real estate is often looked on positively by investors, high gearing can remove underlying asset outperformance in a financial crisis. As an example, a REIT that has 34% equity and 66% debt will decline by around 75% if the underlying real estate falls by 25%, a major source of REIT underperformance in the GFC. By having low gearing, Dexus is positioning itself as a more defensive holding for investors.
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