A key objective for the Contango Income Generator is to deliver an attractive and sustainable income stream by investing in mid-cap companies with stable cash flows and consistent dividends.
In this mid-monthly update, I would like to present a stock in the portfolio that reflects these investment objectives, Dexus Property Group (DXS).
Stock in Focus: Dexus Property Group
Dexus is an Australian Real Estate Investment Trust with A$28.9bn of assets under management. They directly invest in and manage high quality Australian office and industrial properties. Dexus is also highly recognised as one of the largest owners of prime office land and buildings in Australia. Dexus originated from Deutsche Bank and had a mix of Australian and International assets across retail and office. Over the last 10 years, DXS has divested their overseas assets and focused on their core competency: developing and owning CBD assets. They also have a small exposure to the strong performing industrial sector, which is experiencing strong demand through the growth of ecommerce.
Dexus has three main divisions: property portfolio, funds management and trading.
Dexus’ property portfolio consists of two major asset classes, Office and Industrial. The company has A$11.7bn of office assets and A$2.2bn of industrial assets on its balance sheet. Their office assets mainly consist of prime Sydney and Melbourne assets.
The office market generally has long and very visible lead time for new supply. Currently Sydney and Melbourne are experiencing historically low new supply leading to higher rents and lower incentives for tenants to lock in long leases. We expect the prime CBD assets to continue to perform well over the short and medium term.
Dexus also manages funds in which they co-invest with large institutional clients which generates funds management and performance fees. As at HY2019, they have A$15bn in Funds under management from 73 different clients across 9 countries. DXS has grown funds under management (FUM) by 168% since FY12. Higher FUM means higher fees earned by DXS. Large institutions look favourably upon Australia as we have stable investment environment, strong rule of law and developed financial markets. This, coupled with a lower interest rate environment, should drive demand for high yielding property assets, which in turn should grow DXS’s FUM and result in higher earnings.
Development and Trading
DXS has a A$5.2bn development pipeline with an additional A$1bn worth of concept opportunities. FY19 trading profits have already been de-risked through sales and they have approximately A$210-270m worth of trading profits (pre-tax) from five ongoing trading projects.
DXS has a strong portfolio of office assets along with leasing expertise in the office market. We have visited their North Sydney office sites and they show encouraging rental profiles for large customers. This, coupled with our meetings with company management, enforce our view that DXS is a solid property management company with strong growth potential into the medium term.