Morningstar | Transferring Coverage of Narrow-Moat Dexus Property Group; AUD 11.00 FVE Unchanged
We confirm our AUD 11.00 per share fair value estimate for diversified Australian REIT Dexus Property Group as we transition coverage to a new analyst. Our narrow moat, medium fair value uncertainty, and Standard stewardship ratings are unchanged. At current prices, the stock is trading 18% above our valuation. Dexus owns high-quality assets, but the high growth rate in office rents over 2016-19 looks unsustainable due to the upcoming supply-side response and moderating growth in the white-collar work force. Our valuation implies a forward fiscal 2019 P/E ratio of 16.6 and a distribution yield of 4.6%. Assumptions include office rents growing by 3.5% annually to fiscal 2021 but occupancy slipping on new supply from 2022. On balance, we believe the combination of ongoing demand for high-quality office space and some constraints on supply should lead to rent growth exceeding inflation in the long term.Dexus’ portfolio is heavily skewed to the high-grade office segment, comprising 85% of balance sheet assets. It is one of the highest-grade office portfolios in Australia, with about 90% of prime office space (premium or A-grade). The 15% portfolio balance constitutes Australian industrial assets where the long-term rent growth outlook is slower, but current high yields compensate. Rental income security is underpinned by the high-quality assets, with relatively long leases, and fixed or CPI-linked escalations. Developments and the funds-management platform can add to growth, though funds management is currently a modest earnings contributor.
Dexus is in sound financial health, with look-through gearing around 24%, below the group's target range of 30%-40%. Other financial metrics are solid, including forecast fiscal 2019 net debt/EBITDA of 4.9. While net debt/EBITDA at first glance could be considered comparatively high, Dexus can generally be considered a defensive investment, given its high-grade portfolio and relatively long average lease term.
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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