EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: Do Not Subscribe to Dexus’ Share Purchase Plan. FVE Increases to AUD 11.00

Narrow-moat-rated Dexus Property, in conjunction with the Dexus Wholesale Property Fund, or DWPF, have agreed to acquire a mixed-use CBD precinct in Melbourne for AUD 1.476 billion. Dexus will own 75% and DWPF the 25% balance of the site at 80 Collins Street Melbourne comprising the existing tower, a new south tower, a retail podium, and a 255 room hotel. To fund the purchase, Dexus is undertaking an underwritten AUD 900 million institutional placement at AUD 12.10 per security and a non-underwritten security purchase plan, or SPP, to raise up to AUD 50 million. Eligible security holders under the SPP can subscribe for up to a maximum of AUD 15,000 of new Dexus securities at AUD 12.10 per security. The SPP offer is expected to open on May 8 and close on May 29. Terms of the SPP will be set out in a SPP booklet that will be sent to eligible security holders shortly.

Adjusting for the transaction--including a 7% increase in equity at a 14% premium to our fair value estimate--results in a 4% increase in our fair value estimate for Dexus to AUD 11.00. With Dexus securities trading around AUD 12.50, we do not see long-term value in the SPP offer at AUD 12.10 and recommend eligible security holders not subscribe to the SPP.

We view the 80 Collins Street precinct as an attractive site, with the under-construction south tower and newly renovated north tower appealing to a wide tenant base due to its close proximity to major rail stations and modern tenant amenities. The initial yield on the existing North tower is around 5%, with Dexus expecting significant rental growth on existing leases that the firm attests are around 20% below current market rents.

Financial metrics are largely unchanged following the transaction, with gearing (on a look-through-basis) remaining at 24.7%. Dexus’ fiscal 2019 guidance was reaffirmed for funds from operations per security to increase by circa 3% and distributions to grow by circa 5%. Preliminary guidance was provided for a circa 5% increase in fiscal 2020 distributions, in line with free cashflow.

Once fully complete of the transaction will result in the weighting of Melbourne in Dexus’ AUD 12.9 billion office portfolio increasing from 9% to 17%. Coinciding with the transaction announcement Dexus provided an update on the Melbourne office market, the Eastern core where the acquired site is located and Dexus’ view on the outlook for the Melbourne office market. Our outlook for the Melbourne office market is far less optimistic than Dexus’ and the property advisory firms who have forecast Melbourne rents over the next three years increasing by over 15%. We think Melbourne rents will remain at elevated levels for the next 12 to 18 months then decline as buildings under construction are delivered. We see this alleviating much of the upwards pressure on rents that comes with Melbourne CBD office vacancy being at a 30-year low of 3.7%.

We are also far less optimistic than Dexus on organic job growth in the Melbourne CBD and surrounds. We think the Melbourne population will continue growing at a high rate, aided by interstate migration as Melbourne housing is significantly cheaper than Sydney. However, we think organic demand growth for CBD office space will fall below Dexus’ expectations. A leading reason is major employers (particularly in financial services) are expected to implement rounds of headcount reductions to maintain earnings against of backdrop of slowing economic growth and increased competition.