Property manager and investor, Dexus (ASX:DXS), saw its shares suffer their worst day of trading in three years on Tuesday as the realities of the office property downturn caught up with the company.
Dexus shares fell as much as 8.5% to $6.86, marking their worst intraday drop since July 2021, and were among the biggest losers in a slightly firmer ASX 200. A combination of significant write-downs in asset values and a weak outlook for 2024-25 finally forced investors to focus on the group’s performance.
In fact, the big surprise for many investors was the sharp downgrade to 2024-25’s expected distribution to 37 cents per share. That’s a massive 22.95% under the 48 cents per share for 2023-24, which Dexus boasted met guidance. However, investors had to continue reading the results announcement for another dozen paragraphs before they got to the news of the sharply cut expected payout for this financial year.
Dexus reported a wider-than-expected loss for 2023-24, owing to another steep decline in its property valuations (which were flagged in June). The billions of dollars in impairments over the past year to 18 months (though the shares are down more than 40% in the past five years) had not taken as great a toll on the price of the shares as one might have thought. But that seemed to change in early July when the price dipped to a year’s low of $6.30 (in fact a five-year low!) before rebounding past $7, peaking at $7.50 on Monday. And then fell out of bed on Tuesday after Dexus revealed that its statutory net loss attributable to securityholders had widened to $1.58 billion for the year to June 30, missing market consensus of a $488.5 million loss by a very wide margin.
It was double the 2022-23 loss of $752.7 million, and the group’s average capitalisation rate across its office and industrial assets had blown out from 4.76% at June 30, 2023, to a high of 6.05%. Valuation of Dexus’s portfolio fell 13.9%, or $1.9 billion, in 2023-24, a steeper devaluation than the roughly 7% in the previous financial year—that’s a nasty 20% or so in two years. Dexus’s office assets, which make up more than two-thirds of the total portfolio, lost more than 15% of their value in the year to June alone, a massive drop.
Its adjusted funds from operations (AFFO), which excludes valuation changes and one-off charges, also slipped 7% to $516.3 million, falling short of consensus of $532.2 million. Dexus declared a final distribution of 21.3 cents per share, down 10% from a year ago, taking the full year down 7% to 48 cents per share. The company provided AFFO guidance of 44.5 to 45.5 Australian cents per share for the 2024-25 year, which missed consensus expectations by 7%, according to market forecasts.
CEO, Ross Du Vernet, was seemingly happy with the result, saying in the statement that the company had maintained high occupancy across both its office and industrial portfolios, ensuring strong cash flows, but moderated return expectations amid a “challenging environment”. He has flagged a lower distribution per share of 37 cents for FY25, representing a payout of 80% to 100% of adjusted funds from operations. That’s why the price of the shares weakened on Tuesday.
“Markets move in cycles and while conditions are presently challenging, we invest for the long term,” Mr Du Vernet said philosophically on Tuesday. But it will take more than waxing lyrical for Dexus and the property groups to overcome the combined impact of decade-high interest rates and the pressures they have put on property valuations at the same time as the growing demand for home working and e-commerce leads tenants to reconsider floor space needs—current and future.
And on top of this, while higher rates are forcing capitalisation rates higher, the high borrowing costs are making it costlier to service debt costs on buildings and projects with falling valuations. Rents are under pressure as well, a further slowing in the economy is possible, and economists reckon there could be a lot more problems to come, especially if property values stagnate at these lower levels.