Morningstar | Dexus Gets Full Control of MLC Tower and Lower Retail; Fair Value Estimate Increases to AUD 10.60
The purchase by Dexus and the Dexus Wholesale Property Fund, of DWPF, of the 50% balance of the MLC office tower for AUD 800 million will provide a kick to short-term earnings. However, it is low quality growth, as Dexus is funding its stake through abnormally cheap debt, 7-year exchangeable notes paying a coupon of 2.3%. Benefits will mostly accrue over the longer term via higher fund management fees and flexibility to autonomously redevelop the lower retail levels of the site. Dexus has little scope to develop the 67,000 sqm of office over 67 floors or the underground car parking. But, significant value could be created from enhancing the 5,600 sqm of retail to benefit from increased traffic flow when the new Martin Place Metro Station completes in 2024.Adjusting for the acquisition and increased funds under management results in an increase in our fair value estimate to AUD 10.60 from AUD 10.30. Narrow-moat Dexus screens as overvalued, currently trading around AUD 12.50.
Funding for the acquisition is exceptionally cheap, with Dexus issuing AUD 425 million of 7-year guaranteed exchangeable notes maturing in June 2026, with a coupon of 2.3% and a fixed exchange price of AUD 15.05 per Dexus security. The yield implies a tight spread of 50 basis points to AAA-rated Australian Treasuries. The notes rank as unsubordinated and unsecured obligations of Dexus, and noteholders receive a put option at five years (19 March 2014) allowing them to redeem for the outstanding principal balance with any accrued but unpaid interest. Post the acquisition, Dexus’pro-forma gearing increases by 0.9% to 24.6%.
DWPF’s AUD 400 million investment will increase external assets under management, or AUM, by 3% to AUD 15.4 billion. We forecast AUM to continue growing over the long term but at a slower rate as asset values are unlikely to get boosted by further declines in capitalisation rates. Long-term AUM growth is underpinned by the AUD 820 million of projects underway and AUD 1.75 billion of planned but uncommitted projects.
Dexus Property Group owns, manages and develops real estate assets and manages real estate funds on behalf of third party investors. Co.'s operating segments include: office, which comprises domestic office space with any associated retail space, as well as car parks and office developments; industrial, which comprises domestic industrial properties, industrial estates and industrial developments; property management, which comprises property management services for third party clients and owned assets; funds management, which comprises funds management of third party client assets; development and trading, which involves its development and inventory: and all other segments.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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