EQS-Adhoc: Dexus Finance Pty Limited: Dexus 2024 AGM Chair and CEO address

Dexus (ASX: DXS)

ASX release

30 October 2024

2024 AGM Chair and Group CEO address

Dexus provides its Chair and Group CEO address for the Dexus Annual General Meeting (AGM) which is being held today at 2.00pm (AEDT).

The meeting will be webcast and can be viewed by using the following link:
https://meetings.linkgroup.com/DXS24

The full release including the presentation is available at www.dexus.com/asx

Authorised by the Board of Dexus Funds Management Limited

For further information please contact:

Chair address

Good afternoon everyone and welcome to our 2024 Annual General Meeting. I’m Warwick Negus, Chair of the Board of Directors of Dexus Funds Management Limited.

I would like to acknowledge the Traditional Custodians of the land on which we are presenting from today and pay our respects to their Elders past and present. I would also like to extend that respect to, and welcome, any First Nations people who are joining our meeting today.

On behalf of the Dexus Board, I welcome you to our AGM. It’s great to see some of you in person again. Before we start the meeting, can I ask our audience in the room to ensure your mobile phones are switched off or silenced. In the event of an emergency the fire exits are located along the corridor outside this room. This is also where you will find the rest rooms.

I’ll table my appointment as Chair of today’s meeting and open the meeting.

We appreciate that not all Security holders can attend in person and have provided the opportunity for everyone to participate in the meeting through our hybrid meeting format.

Today I’m joined by our independent directors Paula Dwyer, Mark Ford, Peeyush Gupta AM, Rhoda Phillippo, Nicola Roxon, Elana Rubin, and Dexus’s new Group CEO and Executive Director Ross Du Vernet. It is a pleasure to have them here today. 

We will hear from Peeyush on his election, and Mark on his re-election, later in the meeting.

In December last year, we announced Ross as the new Dexus Group CEO.

Since this is our first Annual General Meeting with Ross in this role, I would like to formally congratulate him on his appointment. Ross’ deep property investment expertise, track record of setting and delivering on strategy and his knowledge of the Dexus business has made him the ideal successor.

The Board ran an extensive external and internal recruitment process in 2023 which culminated in the decision to appoint Ross as Group CEO. The Board retains strong conviction that Ross and our highly regarded Executive Leadership team are well placed to lead Dexus through its next stage of growth.

I would also like to welcome our company secretaries and representatives from the Executive Committee, along with a representative from our Auditors at PwC and lawyers at King & Wood Mallesons.

Finally, I would like to welcome our past directors and former CEO Darren Steinberg who are joining us today.

I would like to make two important acknowledgements. First, I would like to acknowledge Penny Bingham-Hall who retired from the Board in March 2024. Penny was an Independent non-executive Director of Dexus for nearly 10 years and made a significant contribution to the Board as well as the People & Remuneration, Nomination & Governance, and Sustainability Committees.

Her passion for sustainability, governance and the property sector helped shape key policies and initiatives during her time on the Board. Penny also drove the Board’s thorough review of the remuneration framework in 2022 which resulted in an increased weighting to long-term incentives. We thank Penny her significant contribution to Dexus.

I would also like to take a moment to acknowledge our former CEO, Darren Steinberg. Darren was instrumental in the growth and evolution of Dexus over the past 12 years. Under his leadership, the platform’s total funds under management increased significantly, while maintaining portfolio quality and diversifying into new sectors including healthcare, alternative investments and infrastructure.

Darren and I had a relationship anchored in mutual trust and respect, with robust discussions that led to a constructive Chair and CEO dynamic. On behalf of the Board, thank you Darren for your strong leadership and your contribution to shaping Dexus as it stands today.

I will now commence the meeting with my address which will provide you with an overview of our positioning and key aspects of our 2024 result. I’ll then hand over to Ross who will discuss our quarterly update, the revised capital allocation framework and Dexus’s medium term priorities. We will then turn to the formal aspects relating to the resolutions which were outlined in the Notice of Meeting and Explanatory Memorandum sent out on 27 September 2024.

On 24 October we announced to the Australian Securities Exchange that we had withdrawn Resolution 2 for the FY25 grant of long-term incentive options to the Chief Executive Officer.

Over the course of the meetings with proxy advisors and investors, it became clear that while many were supportive of an Options based LTI Plan, there were concerns about aspects of the Plan design. Given the concerns raised by investors, Dexus has decided to withdraw the resolution.

We will consider the feedback received and we will determine the best approach going forward.

The withdrawal of Resolution 2 does not affect the validity of proxy or direct votes already submitted in respect of remaining items of business which will be put to Security holders today.

This year we took the opportunity to pressure test the strategy, refining it to align with our strengths and market conditions. Our purpose, ‘Unlock potential. Create tomorrow’, reflects our unique ability to create value for our people, customers, investors and communities over the long term. Our vision is to be globally recognised as Australasia’s leading real asset manager.

We aspire to be known for our deep local sector expertise, our active approach to management, and most importantly as a trusted partner, investing alongside our clients.

Our people, our focus on sustainability and governance, and our culture – that promotes constant evolution and improvement – are central to how we unlock potential in the business. These elements will enable us to deliver superior risk-adjusted returns over the long term.

Dexus today stands out as a unique and diversified real asset platform. We have significant scale and critical mass in each of our sectors, geographically focused in Australia and New Zealand, with access to diverse pools of capital.

Our $14.8 billion balance sheet portfolio is largely invested in high-quality office and industrial real estate alongside third party clients. Additionally, our $39.7 billion third party funds management business has a well-established presence in office, industrial and retail real estate, and an emerging presence in the growth markets of healthcare, infrastructure and alternative investments.

The recent addition of infrastructure to our platform presents a tremendous opportunity for growth underpinned by macro tailwinds. We are actively exploring how we leverage expertise from other sectors to generate more value from infrastructure assets.

The business is well positioned given the current phase of the investment cycle, with future returns expected to be driven through the fundamentals of asset selection, creation and asset management.

This combination of balance sheet scale, multi-sector expertise, tight geographical focus, and access to broad and deep pools of third party capital is what makes Dexus unique.

Despite a challenging environment, we delivered on our guidance and maintained high occupancy across both our office and industrial portfolios, ensuring strong cashflows with AFFO of $516 million. Our distribution of 48.0 cents per security for FY24 was delivered in line with guidance, below the FY23 distribution largely as a result of lower trading profits. We continued our capital recycling strategy, with $1.7 billion of Dexus divestments. Our balance sheet remains strong with gearing remaining at the low end of our range, notwithstanding softer valuations, which drove the statutory loss for the year and are an indirect outcome of the rapid increase in interest rates that began just over two years ago.

In our funds management business, core funds such as DWPF and DSCF outperformed their benchmarks. We raised new equity in growth markets, including more than $300 million for the second fund in our opportunistic series. Additionally, we sold $2.9 billion of fund assets during the year to facilitate redemption requests and manage the capital position of the funds.

We successfully completed the full integration of the AMP Capital business and delivered on the priorities that Ross announced to the market in May this year. This included refining our strategy, implementing a sector-aligned operating model, and refreshing our capital allocation framework. These achievements have positioned Dexus well for the next stage of the investment cycle.

For many years, we have taken an active approach to capital recycling to enhance the quality of the portfolio and strengthen our balance sheet. Despite a subdued transactions market, we have successfully divested assets, selling $7.4 billion from the balance sheet over the past 5 years.

We will continue to recycle capital, with a further $2 billion of assets earmarked for divestment over the next three years. These actions, along with the completion of committed developments, will further enhance the quality of our portfolio while maintaining a prudent level of gearing.

We continue to be globally recognised for our leadership in Sustainability. However, we are increasingly focused on initiatives that make both financial sense and have a positive impact on our customers, the environment and our communities.

The Board and I recently visited our Waterfront Brisbane development, where we saw a prime example of innovation coming to life. This development is underpinned by circular economy principles with the goal of minimising waste. Remarkably, 98% of the materials cleared from the site have been recycled or reused. This has been a significant achievement, and the Board and I are excited to see how the team amplify key learnings across the Dexus platform.

At last year’s AGM, Dexus received a ‘first strike’ against its 2023 Remuneration Report with one proxy advisor recommending a vote ‘against’. Following the strike, the Board has engaged extensively with key investors and proxy advisors to better understand their concerns. We have undertaken benchmarking and again reviewed our framework.

While no substantial remuneration framework changes have taken place in FY24, following substantial changes in FY23, we have been particularly mindful of the feedback received following the 2023 AGM in our disclosures this year and in considering the appropriateness of incentive outcomes.

We set our distribution guidance at the start of each year. Acknowledging that guidance for FY24 was below the previous year, the Board:

• reduced the vesting associated with achieving guidance from 75% (in 2022 and previous years) to 50%, and
• set the level for target vesting materially above guidance, meaning that there was significant challenge to achieve that level. In contrast in FY22, vesting at threshold was 75% and the gap between threshold and target was much smaller.

Against the backdrop of a continued challenging economic environment, with higher interest rates, softening office market valuations and a challenged transaction market, the FY24 outcomes reflected solid achievements (such as delivering on the guidance set at the start of the year, maintaining high portfolio occupancy, divesting $4.6 billion of assets across the platform, raising equity for a new fund, and completing the complex integration of the AMP Capital platform).

FY24 STI outcomes were lower than FY23 and substantially lower than the previous two years. In fact, this was the lowest outcome in more than a decade.

We revised the LTI plan during the year and had proposed to commence a new plan from FY25 to grant ‘Market Priced Options’ instead of performance rights, subject to a TSR performance gateway. While the plan was intended to better align LTI outcomes with the experience of our Security holders, it became clear during our meetings with proxy advisors and investors that while many were supportive of an Options based plan, there were concerns about aspects of the plan design. It was not possible to amend the plan design in the time available.

Given these concerns, the Board will consider the feedback received from investors in determining an appropriate approach for the LTIP moving forward.

In the years since the COVID Pandemic we have experienced growing inflation and interest rates. For real assets, this has resulted in challenging conditions. The market has seen low levels of liquidity and for many borrowers, restricted access to capital. The interest rate outlook today is more certain. Direct investors are gaining greater confidence in deploying new capital.

As part of our strategy refresh, our distribution policy from FY25 has changed to pay out 80–100% of AFFO, which seeks to achieve a balance of providing appropriate distributions to Security holders and investing for growth, and Ross will speak more about this decision and its long-term benefits shortly. Barring unforeseen circumstances, for the 12 months ended 30 June 2025^[1], we expect AFFO of 44.5-45.5 cents per security, and Distributions of 37 cents per security

We have solid foundations with a differentiated funds platform, strong client relationships and a diverse product offering. Our investment portfolio is high quality and positioned to benefit as liquidity returns to the office market.

Before passing to Ross, I would like to thank my fellow Directors and the Dexus team for their commitment and contribution over the past 12 months, and you, our investors, for your continued support.

Group CEO’s address

Thanks Warwick and good afternoon everyone. I feel privileged and excited to be leading Dexus as Group CEO at an important inflection point in its history.

In my time at Dexus, over 12 years, we have continually evolved, and the first six months of my leadership has seen a continuation of that, with some important changes made to the operating model, approach to capital allocation which I will talk to in a moment, and key personnel. On the people front, we recently welcomed two important new hires to our executive committee, Marjan van der Burg and Nik Kemp.

Marjan is our Chief People Officer responsible for building diverse teams to drive leadership and ensuring high quality people experiences, and an equitable and inclusive workplace.

Nik is our Executive General Manager, Growth Markets responsible for supporting sectors in which Dexus is actively building capability and scale. These include Dexus’s $10.9 billion infrastructure business, alternative investments and healthcare sectors. Nik will oversee the strategy, investment decisions and performance of a diverse portfolio of investments across the real asset spectrum.

We are known for our assets, but it is our people that create the value and manage the risks. I am focused on ensuring we have a high calibre team to make the most of the opportunities that we have, and create new ones, and I look forward to providing further updates as we add to the senior leadership team in the coming months.

Despite a challenging operating environment, we continue to see positive momentum across the platform. Our strong balance sheet, continued focus on capital recycling, disciplined approach to capital allocation and our sector aligned operating model set us up to drive investment performance for our Security holders and clients in the next phase of the investment cycle.

On the balance sheet, our office and industrial portfolios have maintained high occupancy levels and rent collections remain strong at 99.5%.

We continue to progress our asset recycling program, including completing on the sale of 130 George Street in Parramatta, providing capacity to recycle capital into our development pipeline and further enhance the quality of our portfolios.

Positive momentum continues across our funds platform with flagship funds Dexus Wholesale Property Fund, Dexus Wholesale Shopping Centre Fund and Dexus Diversified Infrastructure Fund continuing to outperform their benchmarks.

Our opportunity funds have partnered with a local developer to repurpose a B Grade office building in Brisbane’s CBD into a modern, purpose-built student accommodation providing 1,200-beds with an expected on-completion value of circa $500 million.

This transaction demonstrates our ability to leverage the broad set of capabilities across our platform to create value for clients and investors. We have strong capabilities in the areas of special situations investing, office development and refurbishment, along with the infrastructure team’s deep experience within the Australian student accommodation sector.

As a result of this investment, DREP1 is now fully deployed and is on track to deliver its investment objective target return of circa 15% net equity IRR^[2]. The success of DREP1 has enabled us to establish DREP2, already having raised $300 million of commitments and is on track to be a larger fund than DREP1.

In developments, we are progressing construction at our city shaping developments at Waterfront Brisbane and Atlassian Central, Sydney. In our industrial portfolio we continue construction across more than 174,000 square metres, including at our key industrial estates in Ravenhall and Jandakot

In sustainability we continue to be recognised as a Global Leader by the Global Real Estate Sustainability Benchmark (GRESB) with 11 funds and investments across real estate and infrastructure achieving 5 Star GRESB ratings.

Our unlisted fund, Dexus Diversified Infrastructure Trust achieved a high score of 97/100 ranking 7th out of 116 participants globally, and Powerco received 100/100 for the second consecutive year.

We have done a lot of work in the past few years to enhance the office portfolio quality, including divesting lower quality assets and this all plays to the resilience of the portfolio. We see this in key metrics of occupancy, incentives, and downtime. Pleasingly, incentive levels reduced again this quarter to 26.3% reflecting a higher proportion of leasing with smaller customers and at premium assets.

In the quarter to 30 September our office portfolio occupancy remained high at 93.5%, reducing slightly from the prior quarter based on an anticipated expiry at 80 Collins Street in Melbourne, a high-quality asset in the eastern core of the Melbourne’s CBD.

Our industrial portfolio occupancy of 96.2% was supported by leasing success at a Sydney outer west asset.

The industrial sector remains resilient with take-up rates in key markets holding up well and vacancy rates generally below pre-COVID levels albeit rising slowly.

Developments have made a significant contribution to our platform FUM, with large-scale, high-quality precincts accounting for around half of the portfolio.

One of the keys to our success in the industrial development business is the direct relationships we hold with high value customers who have growth aspirations, which creates opportunity for repeat business, as we have done with groups like Hello Fresh, Amazon, and DHL.

Our $40 billion funds management business is diversified across sectors and investor types, and we have a proven track record of delivering performance for our clients which underpins the deep relationships we have with more than 130 institutional investors across Australia and internationally.

We want to be invested alongside our clients and funds. More than 70% of the balance sheet is now
co-invested with our funds or clients, enabling us to align with investors and support growth in the funds management business.

The chart on the right-hand side shows how both the proportion of capital we have invested alongside clients, and the efficiency of that capital, have increased over time. We expect this will continue further as we execute on our strategy.

One of my immediate priority areas when I commenced as CEO was revising our capital allocation strategy, and our target settings and actions.

Our target gearing range remains unchanged, and over time, we expect any single sector to represent less than 50% of the portfolio. This is more a function of the opportunity set than a view on the office market. We continue to invest in office, via the development pipeline, and believe Sydney office vacancy will peak in FY25. I believe we have the best office team in the country, if not the region, and we own the highest quality office portfolio in Australia.

We have earmarked circa $2 billion of divestments over the next three years, which together with the completion of the committed developments, will further enhance the quality of the portfolio while maintaining a prudent level of gearing.

Consistent with our strategy, from FY25 our distribution policy has been updated to pay out 80-100% of AFFO, providing a sustainable source of capital to invest in growth opportunities alongside our clients. The new policy range seeks to achieve a balance of providing appropriate distributions to Security holders and investing for growth.

As we approach the bottom of the cycle, we are seeing attractive investment opportunities and in the near term expect retained earnings to be invested alongside capital partners in high returning strategies in infrastructure, industrial and alternative sectors which continue to benefit from strong tailwinds and provide the opportunity to leverage our capabilities to enhance returns.

Warwick has already spoken to our guidance and outlook, so I would like to share with you some clear medium-term goals that we have set to ensure that we deliver on our strategic priorities:

First is to transition the balance sheet, by:

• increasing co-investments alongside funds clients
• upgrading the office portfolio via divestments and development completions
• continuing capital recycling, with circa $2 billion earmarked over the next 3 years

Second is to maximise the contribution of funds through:

• providing liquidity and delivering performance for our funds clients
• completing the final close for DREP2 and launching new funds and products to match investor demand
• modernising the legacy AMP Capital platform funds

And finally, to unlock our deep sector expertise by:

• embedding our sector-oriented model across the platform
• maintaining high customer satisfaction
• positioning the infrastructure business for growth

To conclude, we are well positioned with a new sector aligned operating model to unlock opportunities across real assets. Despite near-term headwinds, the initiatives I have discussed today are focused on driving sustainable growth for Security holders over the long-term.

Before passing back to Warwick, I would like to thank my fellow Directors and the Dexus team for their continued commitment and support and acknowledge Darren Steinberg, our outgoing CEO, in supporting my transition into the new role.

ENDS

[1]  Based on current expectations relating to asset sales, performance fees and trading profits, and subject to no material deterioration in conditions.

[2]  The Target IRR is not a guarantee, forecast or prediction. There can be no assurance that the Fund will meet the Target IRR. IRR is presented on a “net” basis and reflects Management Fees, Performance Fees, Fund expenses, taxes and duties borne by the Fund (disregarding any rebates).

2018581  30-Oct-2024 CET/CEST