The first thing that became immediately apparent to me upon reading DEXUS Property Group's (ASX:DXS) result this morning was its remuneration report – this monstrosity takes up nearly one-quarter of Dexus' 100-page announcement.
On the plus side, management looks to be paid quite modestly and the total pool of money available to pay directors increased by $450,000 to $2.2 million, the first such increase since 2008.
It's a modest fee for such outstanding results:
- Revenue up 22.7% to $858.9m
- Net Profit After Tax (NPAT) up 52.2% to $618.7m
- Earnings Per Share (EPS) up 36.3% to 67.58 cents per share
- Dividends rose 9.3% to 41.04 cents per share
- One-for-six consolidation and subsequent capital raising (more on this below)
- Net Tangible Assets of $6.68 per share
- $2.774 billion in debt, with average duration of 5.7 years at a weighted average interest rate of 5.2% p.a. (gearing of 28.5%, interest cover of 4.5x)
- 89% of FFO* from Dexus' Property Portfolio, 5% of FFO from managed properties for third-party clients and 6% of FFO from its property trading business
*FFO = Funds From Operations, which is NPAT adjusted for property revaluations, foreign exchange impacts, profit/loss on asset sales and other factors which can be found on page 54 of Dexus' Appendix 4E release
So What?
Well, there were a few items that jumped out at me. First, despite strong occupancy of above 90%, Dexus experienced some trouble raising rents. Total office property rent increased by 0.1% for the year, while industrial property rents fell 4.6%, after a further 8.6% fall in the previous year. Office space makes up roughly 80% of Dexus' own property portfolio by value.
Rent rises are a key driver of growth in property businesses and an inability to achieve them could indicate a weakening market.
During the year, Dexus also conducted a one-for-six consolidation (for every 6 shares you held, you now hold just one) and subsequently raised capital equal to 7% of its shares on issue. This may lead to some confusion when investors examine the earnings per share numbers since the previous year's figures have been adjusted to take the reduced shares on issue into account.
It's not a good look to consolidate your securities and then immediately issue a bunch of new ones – especially when institutional buyers got most of them. However, the funds were used for a major acquisition and Dexus has a positive track record in this regard so it is something I would be content to let go for the moment.
Now What?
The big question is whether Dexus will continue to deliver such strong performance in future years. While acquisitions and property management have served it well, I'm not sure the stock is a buy at today's prices.
I'm particularly concerned about stagnant rental increases and a Weighted Average Lease Expiry (WALE) of around 4 years on Dexus' properties. Combined with tenant retention rates of 61%, it is possible that over the medium term Dexus could find itself taking a hit on rents in order to attract new tenants or re-sign old ones.
There is also the potential for further problems if the economy weakens and supply rises, though in Dexus' defence it owns a portfolio of fairly desirable CBD properties.
(Readers looking for an in-depth look at Dexus' portfolio should check the '2015 Property Synopsis' also released this morning).
With Dexus trading at a 15% premium to its Net Tangible Assets, I don't believe it is a great opportunity despite its strong results. It's not necessarily a poor one either, but investors seeking dividends and growth can find better choices elsewhere.
