Dexus Industrial (DXI):  industrial Real Estate Investment Trust reported their first half 2023 results which were more active than usual, with management shuffling the deck and trading assets.

Key Points:

  • Profits UP: Free Funds from operations up +9% to $27million, and Funds From Operations per share 18.5c at the top end of the guidance.
  • Operationally solid: full occupancy at 99%, 7-year weighted average lease term saw 5% rental income growth.  What was more important was the average +11% re-leasing spreads DXI received when it signed new leases.
  • Balance sheet a highlight: Despite small decreases in valuation gearing declined to 23% (below target range 30-40%) and hedged for 4 years at an average cost 3.4%, and no maturities before 2025.  We were very pleased in November to see DXI successfully sell two of their most unattractive assets – low rise office buildings with 60% occupancy at the Sydney Olympic Park for $160 million. From discussions with management, going into a tightening interest rate cycle they wanted to eliminate any potential refinancing issues ahead of other property trusts and have the capability to buy back their own stock.
  • Valuation: Net Tangible Assets $3.52 per share, a slight decrease due to asset sales and small decreases in valuation. 5.13% cap rate looks conservative for DXI’s industrial assets (though very sharp historically), with similar industrial assets in Sydney and Melbourne trading around 4%.
  • Outlook: Industrial real estate market remains tight, with a record low vacancy rate of 0.8% nationally. Guidance of FFO per share 16.7 to 17.5 cents per share typically conservative from DXI, though reflects capital being used to develop assets mainly at Perth airport and in Sydney’s West, with a $120 million pipeline. FY23 distribution 16.4 cents.  Earlier this month DXI announced a $47M on-market share buy back which should have an outsized impact on the share price given liquidity and help close the 15% discount to NTA.

Dexus Industrial is held in several of the HNW portfolios and is a well-managed industrial REIT owning a diversified portfolio of industrial real estate valued at $1.7b with a development pipeline of $380m that will deliver earnings and distribution growth in the future. DXI trades at a 15% discount to NTA and on a 6% yield paid quarterly.

DXI was flat at $3.05 – We expect to see opportunity if a buy-back is conducted this year.