Rising Rates Pressure Dexus as AFFO Declines Despite Profit Recovery

Financial Recovery and Operational Highlights

Dexus (ASX: DXS) has reported a statutory net profit of $10.3 million for the half-year ended 31 December 2024, marking a significant turnaround from a statutory net loss of $597.2 million in the prior corresponding period. This recovery was primarily driven by lower fair valuation losses on investment properties amid stabilising capitalisation rates across its portfolio.

Despite this positive headline, the company’s Adjusted Funds from Operations (AFFO) fell 13.9% to $251.8 million, reflecting the impact of higher interest rates, reduced trading profits, and increased leasing incentives. AFFO per security declined to 23.4 cents, while distributions were maintained at 19.0 cents per security, representing an 81.2% payout ratio aligned with Dexus’s updated distribution policy.

Strategic Capital Management and Portfolio Activity

Dexus continues to execute its medium-term strategy focused on balance sheet transition and enhancing fund performance. The group contracted over $515 million in balance sheet divestments since the FY24 results, including key asset sales such as 100-130 Harris Street, Pyrmont, and 145 Ann Street, Brisbane. These moves support the company’s target of circa $2 billion divestments over FY25 to FY27.

The company’s pro forma gearing remains conservative at 31.3%, comfortably within its 30-40% target range, supported by $2.9 billion in cash and undrawn debt facilities. The weighted average debt maturity of 4.5 years and a high level of hedged debt (83%) provide resilience against interest rate volatility.

Portfolio Performance and Development Pipeline

Dexus’s office and industrial portfolios remain core contributors, accounting for 75% of Funds From Operations. The office portfolio occupancy stands at a robust 93.5%, with a focus on premium CBD locations in Sydney, Melbourne, and Brisbane. Industrial portfolio occupancy slightly declined to 95.7%, impacted by select vacancies and disposals, but benefits from strong leasing momentum and under-rented assets offering upside potential.

The group’s real estate development pipeline is valued at $15.6 billion, split between the Dexus portfolio and third-party funds. Key projects such as 123 Albert Street, Atlassian Central, and Waterfront Brisbane are progressing, with fixed-price contracts and significant leasing pre-commitments mitigating development risks.

Funds Management and Sustainability Initiatives

Dexus’s funds management business manages $38.9 billion in assets, delivering solid performance despite a challenging capital raising environment. The platform raised approximately $470 million in equity commitments for its Dexus Real Estate Partnership 2 (DREP2) and continues to modernise and stabilise its funds.

On the sustainability front, Dexus maintains strong momentum, sourcing 100% renewable energy for its managed portfolio and achieving multiple 5-Star GRESB ratings. The company is actively preparing for upcoming climate-related financial disclosures and advancing community engagement programs.

Outlook and Market Context

Looking ahead, Dexus reiterates its AFFO guidance of circa 44.5-45.5 cents per security and distributions of approximately 37.0 cents per security for the full year ending 30 June 2025. The company acknowledges ongoing headwinds from elevated interest rates and market conditions but remains confident in its strategic positioning to capitalise on a turning point in real asset markets.

Longer-term fundamentals remain supportive, underpinned by strong population growth and demand for quality real estate assets in Australasia.