Dexus Cuts Distribution Payout Amid Market Headwinds, Eyes Growth Opportunities

Financial Performance and Market Context

Dexus (ASX: DXS) has released its half-year results for the six months ending December 2024, revealing a mixed performance amid evolving market conditions. Adjusted Funds from Operations (AFFO) declined by 13.9% to $251.8 million, reflecting the impact of ongoing divestments and higher capital expenditure. Correspondingly, the distribution payout was lowered to 81.2% of AFFO, down from 98.2% in the prior comparable period, aligning with the company’s revised distribution policy.

The underlying Funds From Operations (FFO) also decreased by 7.4% to $337.8 million, influenced by softer office and industrial property FFO, partly offset by growth in co-investments and management operations. Notably, management operations FFO rose 7.2%, driven by higher performance fees and cost efficiencies.

Portfolio Quality and Occupancy

Dexus continues to benefit from a high-quality portfolio, with office occupancy at 93.5% significantly above the market average of 86.3%, and industrial occupancy at 95.7%. The office portfolio, valued at $20.2 billion, maintains a strong tenant base with a weighted average lease expiry of 4.4 years and average incentives reduced to 26.4%. Industrial assets, worth $10.5 billion, show robust leasing activity despite a slight dip in effective income, supported by long lease terms and strategic locations.

The company’s commitment to upgrading its office portfolio is evident in ongoing developments such as Atlassian Central in Sydney and Waterfront Brisbane, with 71% of committed developments pre-leased and targeted yields between 4-6%. These projects are expected to enhance future income streams and portfolio resilience.

Capital Management and Divestment Strategy

Dexus has actively pursued capital recycling, exchanging or settling approximately $665 million in divestments since June 2024 and earmarking around $2 billion in divestments over the next three years. This strategy supports balance sheet strength, with pro forma gearing maintained at a conservative 31.3%, well within the company’s 30-40% target range. The company also executed $850 million in debt extensions and new funding, maintaining substantial headroom and a hedging profile that protects against interest rate volatility.

Sustainability and Funds Management

Sustainability remains a core pillar of Dexus’s strategy. The company has achieved global recognition, with multiple funds and investments earning 5-star GRESB ratings and ranking in the top 10% globally. Initiatives include expanding renewable energy programs, improving NABERS indoor environment ratings to 5.3 stars, and supporting community programs such as food donations equivalent to 20,000 meals.

The funds management platform, with $38.9 billion in funds under management, continues to deliver strong performance. Key funds like DWPF and DWSF outperformed their benchmarks, and the opportunistic DREP2 fund raised $470 million in equity commitments, on track for a mid-2025 close. The platform is also modernizing legacy products and exploring new fund launches to meet evolving investor demand.

Outlook and Strategic Priorities

Looking ahead, Dexus reiterates its FY25 guidance of AFFO around 44.5-45.5 cents per security and distributions near 37.0 cents per security, assuming stable market conditions. The company is well positioned to navigate the turning point in real asset markets as interest rates begin to ease and office market fundamentals improve. Strategic priorities include transitioning the balance sheet, maximizing funds contribution, embedding sector expertise, and positioning the infrastructure business for growth.

With a diversified portfolio, strong customer relationships, and a clear sustainability focus, Dexus aims to unlock potential and create tomorrow’s opportunities for investors and communities alike.