Summer Series: Dexus Property Group (ASX: DXS)

Bryce: [00:00:52] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I am joined by my equity buddy Ren. How's it going, bro? [00:01:31][39.2]

Alec: [00:01:32] I'm good, Bryce. How are you? [00:01:33][1.0]

Bryce: [00:01:34] Very well. Ready to continue with our shallow dive of 10 stocks over the Australian summer. Ten Australian stocks publicly listed on the Australian Stock Exchange suggested by the Equity Mates community. And what a range we've had so far Ren [00:01:47][13.2]

Alec: [00:01:47] we have now. Before we talk about the stock that we're talking about today or another stock or whatever, we haven't been doing any admin at the front of our episodes and classic order in which we recorded them. We haven't done any who knows how we're going to release them. So we should do some admin admin. [00:02:05][18.1]

Bryce: [00:02:06] So house-to-house admin, housekeeping, Equity Mates Mirch Ren flying off the shelves. We've only got a few T-shirts left. So if you want to get your hands on perhaps Australia's hottest T-shirt brand at the moment, head over to Equity Mates dot com forward slash shop and you can pick up an original Oji Limited edition T-shirt, Equity Mates t shirt, men's and women's sizes. Twenty five bucks Ren put a lot of effort into the design. [00:02:32][26.5]

Alec: [00:02:33] So I wear it at Christmas, wear it to New Year's, wear it every day and twenty twenty and all your dreams will come first. [00:02:39][5.7]

Bryce: [00:02:39] Yes. You will not choose a losing stock if you if you buy an Equity Mates T-shirt. So make sure you do that. Any other housekeeping from your own [00:02:47][7.3]

Alec: [00:02:47] Ren Get Started Investing feed will be out because we're releasing these Afterpay Get Started Investing feed has been released. So if you want to start twenty twenty of right. If you want to escape your extended family this Christmas, plug in and listen to our twelve part series on everything that you need to know to get started investing, everything from saving to figuring out what brokerage you need to sign up for, to the jargon that you need to understand or that you need to ignore to buying your first ATFP buying your first stock. It's all in there. If you're interested in setting yourself up for a big twenty twenty financially, you're not going to find a better way to start. [00:03:27][40.2]

Bryce: [00:03:28] Absolutely. Get Started Investing feed in your podcast feeds now. So head over there and subscribe and tell your mates about it as well, because we obviously want to get as many people on the journey of investing as we can. [00:03:37][9.7]

Alec: [00:03:38] All right. Without any further ado. Yes. Let's move to our stock of today, Texas. [00:03:44][5.8]

Bryce: [00:03:44] Texas desexed is its ASX ticker code. Search it in your broker and join as long as we have a shallow dive into an Australian real estate investment trust or otherwise known as a rate. Now, we have done a few episodes where we discuss what rates are. [00:04:01][16.9]

Alec: [00:04:02] And we spoke about JP T in our last summer series last year, but it's probably worth a refresher. Yes. So a trust is essentially it's a holding vehicle for property. It's corporate structure is different to a company. We don't need to worry about too much about that. Essentially, all we need to know is that we can buy and sell it like we do a normal share on the share market. It's got to take a card. You put your order in and you buy it. And what it does is it buys and manages property. [00:04:32][30.6]

Bryce: [00:04:33] So we get questions in Ren from our audience. You know, how can I get access to the Australian property boom or through commercial property or whatever it may be through the stock market and it's through rates that you can do. That is real estate investment trusts. Essentially, you're giving your money to someone, a company, to go out and then manage that money through property. [00:04:54][20.9]

Alec: [00:04:54] Yes. Yeah. So Texas is massive. It it manages a portfolio of thirty one point eight billion dollars worth of property, very heavily skewed to office space and then also some industrial property. Not a lot of Australian residential property in there. [00:05:11][16.9]

Bryce: [00:05:12] Important to note, though, that all of their property is Australia only. Yes, no investments outside of Australia. So keep that in mind when you think about diversification. But, yes, heavy focus on office and industrial properties. In fact, I've got, I think, fifteen point six billion dollars worth of office and industrial property. [00:05:31][18.9]

Alec: [00:05:31] So it's an important distinction. So their portfolio is worth thirty one point eight billion. Yes, but they own fifteen point six billion of it and then they manage another sixteen point two billion. Now, that's a really important distinction because what it means is for the property that they own, they get rental income from tenants for a lot of the property that they manage. They'll get management fees from the actual owners. So it is a distinction that's worth noting. Absolutely. [00:06:00][28.9]

Bryce: [00:06:01] It's also worth noting that they are the largest office owner and manager in Australia. So if you're looking to get access to the big dogs, you can't get much bigger than Texas. No. And yeah, where the money flows, follow them and you'll get a bit of an idea. So they have three key revenue drivers, Ren, and that is their property portfolio, which you explained, they have a funds management business [00:06:24][23.2]

Alec: [00:06:25] which invests in property, invests in properties, [00:06:27][1.8]

Bryce: [00:06:27] and they also have a distinction between their trading side as well, the buying and selling, packaging up one of the biggest, I guess, important key factors when you're looking at companies like this is the occupancy right now, Texas occupancy rate, meaning of the property that they own and also lease out what percentage is actually being leased because you're not going to get a return. If you're looking at getting rental returns from property, you're actually not going to get a return if you don't have anyone in there renting. So with a focus on industrial and office buildings, they're obviously expecting and hoping for the likes, you know, big businesses to come in and rent those spaces. And they have a 98 percent occupancy rate, which you would assume that that's you probably can't really get much better, 100 percent. I don't know if that's unusual or not, but. [00:07:14][46.6]

Alec: [00:07:15] Yeah. So decent. Yeah. Yeah. You'd be happy with that to go with the fact that they've got 98 percent occupancy right there guiding for F 20. So the financial year that we're in, that ninety five percent of the money that they're going to make is already locked in. And that's because people sign multiyear leases with fixed rental increases or no rental increases, whatever the lease says. But it means that for a company like Dex's, they can say, well, all of this stuff is guaranteed and then it's just about the places that are ending or the office and or industrial space that isn't occupied that they need to worry about filling to fill their book for the year, essentially. And so what you can do is if you want to compare rates, one way that you can compare them is you can look at the the portfolio expiry, I guess I'm sure there is a technical term for it. But you can say that lease expiry. Yeah. You can say in F twenty 10 percent of these rates lease is going to be expiring in F 20 to this march. And the longer a lot of those lease expiries are out, the less risk there is in earnings fluctuations. [00:08:24][68.9]

Bryce: [00:08:25] You know, the average length of their leases, [00:08:27][1.9]

Alec: [00:08:28] it looks like as of the end of the last financial year, two percent is available. As you touched on before, seven percent is up for expiry in this financial year, 12 percent a year after six percent the year after that, 13 percent the year after that, and 13 percent in F twenty four. So pretty evenly spread. I'm not sure what the Ivin compared that to the shape of other rates. But if you wanted to do an apples to apples comparison on a bunch of, you know, Sydney, Melbourne, Brisbane office and industrial rates, that might be a factor that you look at. So one other interesting thing we work has obviously thrown a spanner in the works, pun intended, of a lot of property owners, because in some cities, the penetration of flexible working spaces, not just wetwork, but a bunch of others, is really high. In Amsterdam and London, it was above six percent of office space. In New York, it was about three percent. Australia is a little bit lower. But still, given the challenges with wetwork, that would have created a risk. Texas zero point six percent of their portfolio was wetwork. So not a massive number when you think about the overall portfolio, but still zero point six percent of thirty one point eight dollars billion. It's not it's not small. [00:09:47][79.1]

Bryce: [00:09:47] It's an interesting point. You make Ren. So with the market cap of thirteen point two billion, this falls in the realm of some of the big investment banks coming in and doing some some research papers. So I had to look at a research paper done by Goldman Sachs, and they're of the belief that demand for office space, longer term office space where Texas traditionally play is actually going to be shrinking over the next few years into 2022 with vacancy rates increasing. And to your point, it's going to be interesting to see how Texas changed there, I guess, proposition there, mix of products to accommodate for more demand for shorter term leases, and especially as supply is apparently going to be rising across both Sydney and Melbourne in terms of office space, it's in terms of an outlook, point of view, something to consider for FedExes. So, yeah, interesting point regarding rework. [00:10:39][51.7]

Alec: [00:10:39] Yeah. So if we move to their financials, we can say that some of the numbers are a little bit concerning. Their revenue has dropped five percent to seven hundred and ninety five dollars million and their net profit after tax has dropped twenty six percent to one point to a billion dollars. [00:10:58][19.0]

Bryce: [00:10:59] Hold on. You're telling me that they have revenue of seven hundred and twenty [00:11:05][6.4]

Alec: [00:11:06] seven hundred ninety five million. Yeah. [00:11:07][1.6]

Bryce: [00:11:08] And you're telling me that they have a profit of one point two billion. Yes. Go it'll be that. Don't get it. I'm assuming I'm assuming it's to do with how they incorporate valuation of their properties into this. [00:11:22][13.8]

Alec: [00:11:22] No, they have negative costs, so they earn seven hundred ninety five million and then their employees pay them another five hundred million for the pleasure of working at the business model. And then they have one point two billion in profit. [00:11:36][14.0]

Bryce: [00:11:36] That makes sense. Yeah. So they don't pay their employees and employees pays them. [00:11:39][2.9]

Alec: [00:11:39] Exactly. And they have a lot of employees, not [00:11:42][2.9]

Bryce: [00:11:43] everyone who takes Ren so seriously. That is not true. But they might. [00:11:50][6.8]

Alec: [00:11:51] So, yes, you're right, it is because of the property values now, it was down twenty six percent from the previous year, and that's because property had a pretty rough run for a little bit of twenty nineteen, although it seems we're right back to where we started as of December. Twenty nineteen for [00:12:08][17.2]

Bryce: [00:12:08] residential. [00:12:08][0.0]

Alec: [00:12:09] Yeah. Yeah. But yeah, that's why the profit number can be higher than the revenue number. Now there's an important concept in rates that we should talk about, which is metrick funds from operation. And it's something that is unique to rates because of the way the rules around different accounting treatment works. It means that essentially they've invented this metric. Rates have invented this metric to make it easier for investors to understand what cash is actually coming and going from the business. Yeah, so funds from operation takes the net profit after tax number. So you have final profitability? No, it adds back in depreciation and amortisation and then it subtracts gains from property. And so we'll step through why that's the case. From an accounting perspective, if you own an asset, you're meant to depreciate that asset over whatever period of time, generally sort of 10 years. You whittle the value of that asset down to zero on your books because assets get old and they retire. And so rather than industrial factory having to write the value down in one year, they write it down over a number of years. But for Texas and for real estate investment trust, their assets generally appreciate in value their property. They get more valuable rather than less valuable. But from an accounting perspective, they still are meant to write it down and depreciate it. So the first step of this is adding back in that depreciation to the profitability number, because whilst you're forced to depreciate the asset, in actuality, it's not actually depreciating in value. The second part of it is around subtracting the gains from the sale of property, and that's because selling the property is a one off event. So whilst it counts to your revenue line because it is money that's coming into your business, it's not going to be reoccurring. And so what it does is muddy the waters for investors who are trying to assess the underlying business. So you take the profitability number, you get rid of the depreciation, you add that back into the profitability number, but then you subtract the sales of the property. And what you get is are funds from operation number. And if we look at how Texas went in that and its funds from operations, it actually rose four point three percent from twenty eighteen to twenty nineteen. [00:14:32][142.9]

Bryce: [00:14:32] Yeah. And they often display funds from offshore operation. You might see it as a double FFO [00:14:38][5.9]

Alec: [00:14:39] or just double [00:14:40][0.5]

Bryce: [00:14:40] double FFO on a per security basis per share. And in this case we're talking in the sense. So yeah. To Ren point forty seven point seven cents, up to fifty point three cents for AFFO. [00:14:51][10.4]

Alec: [00:14:52] You tested [00:14:52][0.1]

Bryce: [00:14:52] AFFO adjusted. So yeah. And interesting and unique way of comparing. It's just like in retail where you look at comp sales, you want to take out all the abnormal abnormalities that have gone on through the year and create a baseline. Otherwise it's just too difficult to assume or understand growth rates on a year by year basis. So pretty important measure to understand when you're looking at rates. [00:15:14][21.6]

Alec: [00:15:15] Yeah, 100 percent. And I guess because that's the actual sustainable cash flow from the business, that's the thing you should use when you're valuing the business as well, just because it takes a lot of the noise out of some of the other numbers. So in saying that, should we have a look at valuation, we should [00:15:30][15.0]

Bryce: [00:15:30] have a look at valuation Ren. Let's jump into it. So let's start with our classic P. Yes. Price to earnings. So I've got price to earnings for Dex's coming in at nine point ninety three. [00:15:42][12.5]

Alec: [00:15:43] And how does that compare to its industry peers, industry peers? [00:15:46][3.0]

Bryce: [00:15:46] It actually comes in relatively cheap. So from my end, I have the industry at seventeen. So yeah, it comes in cheaper than industry. [00:15:54][7.9]

Alec: [00:15:55] Now, the important thing to keep in mind is that because we're talking about earnings and we explain the depreciation thing and all that, there might be some noise in those numbers. But if you comparing them to other rates, then if it's apples to apples, then it's a good start. Yeah, you can also look at price to book and you can compare that to its peers because the book value of the company is really going to be driven by the assets that it holds, which in this case is that property. And so you would expect the price to book wouldn't be too far outside of one to one. So you would say price to book one. So that's another one you can look at. And if you did want to value the company based on its assets. So you basically said that I want to buy right where the property that it owns is worth more than what I'm paying for it. Texas would fit the bill. I've got its current market. At thirteen point two billion. And as we said before, it owns fifteen point six billion dollars worth of property. So by that logic, if Texas went to shit and they decided they were going to shut down their operations, sell all their property and then return the money to the owners of the rate, they would get fifteen point six billion dollars worth of money for the property that has just sold. And the market cap it's trading at is less than that. So you would make money. So that's another way you can value it then you can value it based on its cash flow, which is where we get to that funds from Operation Metric. Let's do it. So we said that funds from operation were point six six three of a dollar or sixty six point three cents. So if we if we start with discount cash flow and we plug that number in and then we say that it grew at about four and a bit percent last year. So we say, let's say for the next 10 years, it grows of five percent and then it just grows in inflation after that, and with a discount rate of 10 percent, we get eight dollars and 13 cents. So if you're trying to value it on its cash flow, it's potentially a little bit expensive. [00:18:06][130.8]

Bryce: [00:18:06] That correlates with, as I said, some big investment banks did some work on this. Goldman Sachs have a target price, a bit different to current valuation, but a target price of ten point eighty three. And Morningstar has this coming in at fair value of eleven dollars and seven cents. So it's currently trading at twelve point fifteen. So not too overpriced. I would say it falls within the fair value range, to be honest. [00:18:33][26.6]

Alec: [00:18:33] Yeah, that's one. I guess the question that you've been ending all of these with. Does this fall within your circle of competence from [00:18:41][7.6]

Bryce: [00:18:41] an understanding of how the business works, operates revenue, that sort of stuff? You know, real estate investment trusts, pretty straightforward. So, yeah, and I understand occupancy rates and that sort of thing. So, yeah, it's not a complicated business really to get my head around. [00:18:56][14.8]

Alec: [00:18:56] No, I don't. I tend to agree with you. I think we can understand the cost drivers of this business. We can understand it's really just a valuation play. As with anything in property, fun facts [00:19:06][10.3]

Bryce: [00:19:07] to close with Ren. Well, firstly, interestingly, if we're talking about RSJ, Texas has set a goal of net zero emissions across its managed portfolio by 2030, it could play what percentage of the Melbourne CBD. Do you think they own or lease [00:19:20][13.0]

Alec: [00:19:20] out just on that first point? So I'm pretty sure you've done the same thing. Well, property is in some ways a cleaner business to do some of those things. Not too difficult, but still, yeah, it's a good effort. What percentage of the CBD are in Melbourne? Well, I mean, the fact that you're asking it means that it's going to be a big number. So I'll say 15 percent, 16. [00:19:42][22.2]

Bryce: [00:19:43] No, you guys are pretty good. Pretty big [00:19:46][3.1]

Alec: [00:19:47] exposure. Yeah, not bad. Not bad. [00:19:48][1.5]

Bryce: [00:19:48] Heidi Collins Street. You know Heidi Collins [00:19:50][1.6]

Alec: [00:19:50] right off the top of my head. [00:19:52][1.8]

Bryce: [00:19:53] Well, I'm not going to rattle off all their addresses. They own the MLC centre in Sydney. [00:19:59][5.4]

Alec: [00:19:59] OK, I couldn't tell you what it is I got, [00:20:02][2.0]

Bryce: [00:20:02] I guess, fresh back. [00:20:03][1.1]

Alec: [00:20:04] Yeah, I know. The Barangaroo towers, they're nice now. They do [00:20:08][4.0]

Bryce: [00:20:08] not [00:20:08][0.0]

Alec: [00:20:09] find out who owns them. I've got a funny, slightly depressing fact for you. OK, I have a guess of how much of office work areas are now open plan rather than world or partitioned. [00:20:21][12.1]

Bryce: [00:20:22] I'm going to say forty percent. [00:20:24][2.1]

Alec: [00:20:25] Seventy eight percent. Wow. So better get used to working in open plan offices. I do. Is well so do I. Yeah. [00:20:32][6.8]

Bryce: [00:20:32] OK, why is that depressing. [00:20:33][0.7]

Alec: [00:20:33] I'm not a big fan of open plants. Really. Yeah. Yeah, yeah I like it. [00:20:37][4.0]

Bryce: [00:20:38] I, I couldn't imagine working in my own office. [00:20:40][2.5]

Alec: [00:20:41] Yeah. [00:20:41][0.0]

Bryce: [00:20:41] I've actually never done, I've never done it. [00:20:43][1.6]

Alec: [00:20:43] Yeah. I don't know, it's just quite isolated. I mean you're you're one hundred percent hot desks. [00:20:47][4.1]

Bryce: [00:20:48] Yeah yeah yeah yeah yeah. Work from home you know [00:20:50][2.3]

Alec: [00:20:51] daily work it all. [00:20:52][0.7]

Bryce: [00:20:54] Hang on. Yeah. Interesting. Seventy eight percent and rising. I mean. [00:20:58][4.4]

Alec: [00:20:58] I imagine so. Yeah. [00:20:59][0.8]

Bryce: [00:21:00] A nice Ren. Well we'll leave it there. Always good to chat stocks and looking forward to our shallow dive exploration continuing next week. [00:21:07][7.7]

Alec: [00:21:08] Sounds good. [00:21:08][0.0]