Commercial property investor and funds manager Dexus (ASX: DXS) has put $1 billion worth of proposed developments on the backburner due to weaker market conditions after closing out FY23 with a $752.7 million statutory loss.
The company, which is strongly weighted to the office sector, says its current development pipeline stands at $17.4 billion, comprising $8.6 billion in the Dexus portfolio and $8.8 billion within third-party funds.
“During the year, Dexus rationalised the development pipeline by removing circa $1 billion in concept projects that are no longer being pursued in the current market,” the company says.
However, Dexus says it has about $349 million to spend on its committed development projects until the end of FY24, including Atlassian Central in Sydney and Waterfront Brisbane Stage 1 which are currently sitting at 100 per cent and 52 per cent leased respectively.
The latest FY23 loss compares with a $1.6 billion profit in FY22, with the massive earnings gap from year to year reflecting volatile market valuations for the group’s assets in recent years. Dexus has warned that higher interest rates will place further pressure on valuations in the current year.
The latest result was due to $1.18 billion in fair valuation losses on the group’s investment property portfolio as capitalisation rates softened during the year. The losses swamped the $926 million of fair valuation gains recognised in FY22.
The portfolio valuations in FY23 were 6.9 per cent lower than the previous year, which Dexus says were the main reason for an 11.4 per cent slide in the net tangible asset (NTA) backing per security to $10.88 at 30 June 2023.
Transaction costs associated with the acquisition of AMP Capital during the year added to the NTA hit to the tune of 26c per security.
The AMP Capital acquisition boosted Dexus funds under management by $18 billion, including $10.9 billion of infrastructure assets which Dexus CEO Darren Steinberg describes as ‘highly attractive’.
“This transaction has positioned Dexus as a leading Australasian real asset manager of scale with $61 billion of funds under management and new capabilities in infrastructure,” says Steinberg.
However, Steinberg notes that the upsized group still faces challenges due to the ‘uncertain economic environment’.
“In this environment, we have continued to diversify our capital sources, and grow and diversify our funds management business, while we re-weight the Dexus portfolio,” he says.
“We have announced $1.8 billion of balance sheet divestments since the FY22 result, maintaining a strong balance sheet and enabling us to recycle capital into higher returning opportunities.”
Earnings at an operating level also softened for Dexus which reported a 6.3 per cent fall in underlying funds from operations to $688.3 million. Adjusted funds from operations were 3 per cent lower at $555 million, largely due to higher finance costs.
“We anticipate that FY24 will remain a challenging period as capital flows and market sentiment continue to be impacted by inflation, higher interest rates and geopolitical risks,” Steinberg says.
“This environment is expected to put further pressure on the valuations of real assets. Higher interest rates will continue to impact our result in FY24, along with the impact of cycling a relatively strong year of trading profits in FY23.”
Pending any material changes, Dexus has forecast a distribution of 48c per security for FY24, which is down from the 51.6c announced for FY23.
“Despite the challenges, we have continued to execute on our strategy, diversifying our capital sources, growing our funds business, reweighting the Dexus portfolio and commencing next generation developments,” Steinberg says.
“Our disciplined approach to capital management has enabled us to maintain a strong balance sheet, and as the world reverts to a normalised rates regime, we are well positioned as a leading real asset manager.”
Dexus securities were trading 3.75 per cent, or 30c, lower at $7.71 at 3.30pm (AEST).
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