Rating Action Overview

• Dexus' high-quality Australian office portfolio, enhanced by a sizeable logistics portfolio and funds management business, underpins its earnings profile.
• Prudent balance sheet management, including active divestments and asset recycling, has demonstrated the Australia-based property group's commitment to generate sufficient credit metric headroom to execute its development pipeline over the next 24 months.
• On April 30, 2024, S&P Global Ratings affirmed its 'A-' long term and 'A-2' short-term issuer credit ratings on Dexus and its related debt issues.
• The stable outlook reflects our view of Dexus' sizeable portfolio of high-quality office and industrial assets, and growing funds management platform. The outlook also reflects our expectation that management will prudently fund its development pipeline to ensure stability of its credit metrics.

Rating Action Rationale

Dexus' high-quality Australian office portfolio and sought-after locations protect against wider sector weakness.  Dexus' office portfolio has been relatively resilient to wider challenges of the Australian central business district (CBD) office market. As of Dec. 31, 2023, the company reported office occupancy of 94.5%, which was above the Australian CBD market average of 86.5%. We attribute this outperformance to the quality of the company's A$10.9 billion office portfolio, of which 95% is prime-graded.

In addition, Dexus' assets are predominantly located in core CBD districts, where tenant demand remains strong. The property group's top 10 customers accounted for 19.1% of its office portfolio income. The size of Dexus' portfolio strengthens its market position, improving tenant diversity and its lease maturity profile, helping to reduce earnings volatility.

The company's logistics portfolio and funds management business provide sector and earnings diversity.  The logistics portfolio was a meaningful contributor to Dexus' earnings with 16% of earnings in the first half of fiscal 2024 (ending Dec. 31, 2024). Occupancy remained strong at 99%, underpinned by strong tenant demand. We expect continued earnings momentum of the logistics portfolio, driven by rental reversion. The company has about 28% of its portfolio leases maturing over the next three fiscal years, which will support positive leasing spreads into the teens.

The acquisition of AMP Capital in March 2023 bolstered Dexus' funds management business, enhancing its revenue and earnings diversity. The acquisition increased funds under management by about A$17 billion, providing exposure to infrastructure assets, while down-weighting the funds management platform's exposure to the office sector.

Our rating thresholds reflect the enhanced diversity of Dexus' earnings contributed through non-office exposed sectors. Non-office earnings accounted for 40% of the company's results in the first half of fiscal 2024 compared to 26% during the first half of fiscal 2022. Relative to other office peers, Dexus' cash flow is more resilient to the current sector challenges, in our view.

Dexus has sufficient balance sheet capacity to fund its committed capital expenditure (capex) pipeline including forward commitments.  Dexus' A$1.3 billion of divestments over the six months ended Dec. 31, 2023, helped strengthen and shore up the company's balance sheet ahead of a A$2.1 billion committed development pipeline. The development pipeline is relatively de-risked as the two anchor projects--Atlassian Central and Waterfront Brisbane--are premium office developments with 100% and 52% pre-leasing commitments, respectively. These projects have long lead times, with Dexus expecting Atlassian Central to be complete in late 2026 and Waterfront Brisbane to be complete in early 2028. We expect Dexus to be disciplined with any future capex commitments, with potential developments likely to involve a capital partner.

The strong divestment outcome contrasts with anemic transaction volumes in the office sector, where Dexus transacted on A$900 million of assets. We expect the company to maintain a prudent financial policy, backed by capital recycling over the next 12-24 months. We project the company will operate with a ratio of funds from operations (FFO) to debt of between 12%-13% over the same period. This is contingent upon Dexus executing its capital recycling strategy and continued commitment to the 'A-' rating.

Outlook

The stable outlook on Dexus reflects our expectation that the group will maintain its ratio of FFO to debt above 11% as it executes its development pipeline over the next two years. The company's enlarged earnings base, asset diversity, and diverse revenue streams should provide the resilience to weather headwinds in the office sector.

We believe Dexus will prudently manage its balance sheet. We expect the company to utilize a mix of capital recycling, ongoing access to third-party capital, and other capital management initiatives to support credit metrics in line with the 'A-' rating level.

Downside scenario

We could lower the rating if we expect the company's FFO-to-debt ratio to fall below 11% on a sustained basis or debt to EBITDA increases to above 6.5x for a meaningful period. This could occur if the funding requirements of the group's development pipeline or potential acquisitions pressure the group's credit metrics and are not offset through capital recycling, third party capital, or other capital management initiatives.

Upside scenario

We consider an upgrade as unlikely considering financial policy objectives. We could raise the rating if Dexus materially improves the diversity and quality of its asset base, strengthening its business risk profile. Rating upside could also occur if the group adopts more conservative financial policies, such that the group sustains its FFO to-debt ratio at more than 14% at the top of its gearing (net debt to tangible assets) range.

Company Description

Dexus is an Australia-based property group with A$57.1 billion of total assets under management across its property (A$15.8 billion) and funds management (A$41.3 billion) portfolios. The majority of Dexus' property portfolio comprises office (A$10.3 billion), and industrial (A$3.6 billion) assets. The company manages and directly invests in Australian office and industrial properties, and manages office, industrial, retail, and healthcare properties across Australia in funds and on behalf of third-party capital partners.

Our Base-Case Scenario

Assumptions

• Australian GDP growth of 1.4% in 2024 and 2.3% in 2025; unemployment rate of 4.3% in 2024 and 4.4% in 2025;
• Australia's population to grow 1.0% in 2024 and 2025;
• Dexus' revenue growth to be subdued, absent additional acquisitions, at low single digits over the next 12 months, driven by asset sales and incentives remaining elevated as CBD office market rental conditions remain uncertain;
• High occupancy rates to continue with solid levels of tenant retention;
• Higher weighted-average cost of debt than previous years;
• Reduced debt levels considering recent divestments;
• No on-market distribution buyback in the base case.
• Total capex of A$500 million-A$525 million in fiscal 2024, increasing to A$660 million-A$685 million in fiscal 2025.

Key metrics

Liquidity

The short-term rating on Dexus is 'A-2', reflecting the long-term issuer credit rating, and our assessment of the property group's liquidity as strong. We forecast Dexus' sources of liquidity would exceed its uses by more than 1.5x over the next 12 months and remain more than 1.0x over the next 24 months. We estimate net sources and uses of liquidity would remain positive, and the company would remain compliant with financial covenants, even if EBITDA decreases by 30%.

In our view, Dexus has solid relationships with banks, a high-standing in credit markets, and can absorb high-impact, low probability events without the need for refinancing. In addition, we believe its undrawn committed bank facilities and cash of about A$2.8 billion as of Dec. 31, 2023, support liquidity.

As of Dec. 31, 2023, we assess Dexus as having the following sources and uses of liquidity for the following 12 months:

Principal liquidity sources:

• Cash and liquid investments of about A$77 million;
• FFO (unadjusted) of A$600 million-A$650 million;
• Undrawn committed credit facilities maturing in more than one year of about A$2.8 billion;

Principal liquidity uses:

• Debt maturities in the next 12 months of about A$665 million;
• Capex of A$575 million-A$600 million
• Distributions of A$525 million-A$550 million in 2024.

Covenants

Dexus maintains significant headroom against its financial covenants: Gearing less than 55% (28.1% as of most recent balance date of Dec. 31, 2023); EBITDA interest coverage greater than 2.0x (4.0x as of Dec. 31, 2023); and ratio of priority debt to total tangible assets less than 20% (0% as of Dec. 31, 2023). We expect the company to maintain ample cushion under its covenants.

Group Influence

Under our group rating methodology, we believe Dexus Office Trust Australia (formerly Commonwealth Property Office Fund) to be a highly strategic subsidiary of the Dexus group. The combined group, incorporating 50% of Dexus Office Trust Australia, constitutes the group credit profile.

The rating on Dexus Office Trust Australia incorporates the pro rata earnings and obligations from a joint venture with Canada Pension Plan Investment Board (CPPIB). We expect minimal debt will remain within Dexus Office Trust Australia.

In arriving at our assessment of the group, we considered the operations of the joint venture, whereby Dexus undertakes the day-to-day operations of the properties. In addition, we believe CPPIB is a stable and complementary partner that has a long-term investment horizon. We did not incorporate the credit quality of CPPIB in our assessment of debt support for Dexus Office Trust Australia.

Issue Ratings - Subordination Risk Analysis

Capital structure

Dexus' capital structure consisted of about A$4.69 billion of unsecured debt with a weighted average debt maturity of about 4.6 years as of Dec. 31, 2023. The funding is diversified through a mix of bank facilities, medium-term notes, exchangeable notes, and U.S. private placement notes.

Dexus had about 95% of its outstanding debt hedged as of Dec. 31, 2023, with a weighted average maturity of hedges of 4.2 years. This provides meaningful protection against rising global interest rates, in our view.

Analytical conclusions

We rate Dexus' debt at 'A-', in line with the issuer credit rating, given that no significant elements of subordination risk are present in the capital structure.

Ratings Score Snapshot

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