2019 Annual General Meeting

Chair’s address

Good afternoon everyone and welcome to Dexus’s 2019 Annual General Meeting. I would also like to welcome those joining us on the live webcast.

I’m Richard Sheppard, the Chair of the Board of Directors of Dexus Funds Management Limited, and I’ll table my appointment as Chair of today’s meeting and open the meeting.

Welcome to Dexus Place, which is our flexible space offering that we provide to our customers for& meetings, training and events just like this. Earlier this month we opened Dexus Place in Perth, which now enables us to offer these facilities in five locations across the four core Australian property markets we invest in - connecting the east coast to the west.

I will commence the meeting with my address which will provide you with a high-level overview of what we achieved in the 2019 financial year and then I’ll hand over to our CEO, Darren Steinberg, who will cover some of our recent achievements. 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 in late-September.

I’ll start my presentation by looking at what Dexus is today.

We manage an Australian property portfolio valued at $31.8 billion, with Dexus directly owning $15.6 billion of this, consisting mainly of office as well as industrial properties. We manage a further $16.2 billion in the office, industrial, retail and healthcare property sectors on behalf of our third party capital partners.

We are the largest owner and manager of office buildings in the country with $13.2 billion invested in our directly owned Dexus portfolio and our market capitalisation is circa $13 billion.

I want to reflect on how we run this business for the long term and how real estate is a long-term asset class. Our actions since FY12 have transformed the business while delivering improvements to all key metrics. Importantly this Management team, led by Darren, has demonstrated a successful track record of executing on strategy and completing highly complex transactions and developments.

Our customer focus is being reflected in our strong customer net promoter score which has continued to increase even further this year. Our funds management business has grown strongly and continues to attract interest from offshore capital partners.

We have a highly engaged and diverse workforce and we continue to invest in our properties to improve the efficiency of our portfolio and minimise our environmental footprint while enhancing our resilience to climate risk.

We entered the financial year with a clear strategy, ready to respond to market opportunities and challenges. This focus has delivered great returns over the long-term and for the past 12 months has seen us achieve a strong financial result. We’ve also been involved in a number of transactions that have positioned the group for the next 5 to 10 years, which I will touch on shortly.

Our full year distribution of 50.2 cents per security was in line with our guidance, up 5.0% on FY18 and resulting in a compound annual growth rate of 6.6% since FY12.

Growth in Adjusted Funds from Operations (or AFFO) per security and Return on Contributed Equity are key measures that drive long-term value creation for security holders. For the year, we delivered AFFO per security growth of 5.5% and a Return on Contributed Equity of 10.1%.

We had a significant year of transaction activity, reinforcing our active approach to portfolio management and addressing the Board’s focus on increasing the group’s exposure in the Melbourne CBD. Overall, we transacted $3.9 billion of properties, which included $3.1 billion of acquisitions and $800 million of non-core asset sales.

We increased our office exposure in our core markets while enhancing our embedded pipeline of office development projects in the CBDs of Melbourne and Sydney.

This included:

• Firstly, acquiring the remaining 50% interest of the MLC Centre, Sydney alongside Dexus Wholesale Property Fund (DWPF), giving us control of one of Sydney’s landmark assets that will directly benefit from significant capital investment in the Martin Place precinct. This property currently has a retail redevelopment project underway.
• And second we secured properties located at the tightly held Paris end of Collins Street in Melbourne. This included 60 and 52 Collins Street, which we will consolidate into a premium office development, and the 80 Collins Street precinct, again acquired with DWPF and which represents a rare opportunity to invest in a whole block precinct.

Our transactions over the year have enhanced portfolio quality and diversification.

They also provide us with the opportunity to develop landmark office towers that will generate significant value for the group over the long term.

Like Sydney, Melbourne continues to benefit from record infrastructure investment and is underpinned by strong population growth.

We have some key office development opportunities which will see Dexus play a key role in the evolution of Australia’s major cities.

At 60 and 52 Collins Street, we have lodged a development application and at 180 Flinders Street, opposite Federation Square, we are now more than 80% leased.

In Sydney, we were very pleased to be able to finalise the amalgamation of a key future development site around our existing asset at 56 Pitt Street which, under proposed changes to the Sydney planning laws will allow for a tower of up to 310 metres. This is an exciting opportunity for the group and has taken more than four years to consolidate.

Also, in Sydney, we continue to make good progress with our unsolicited proposal for a development at Central Station, and we expect a conclusion to the process early next year.

In Brisbane, following feedback from key stakeholders, we have amended our scheme at the Waterfront Precinct and expect to enter into conditional agreements with the State Government before the year end.

We will ensure that these developments are funded in a measured and conservative manner – with most of these projects expected to be undertaken alongside our third party capital partners.

From a capital management perspective, we continued to improve the diversity of our funding sources and maintained the strength of our balance sheet in an active year of acquisitions.

We achieved this through issuing $425 million of Exchangeable Notes to fund the MLC Centre acquisition – and completing an equity raising that included a $900 million institutional placement and a Security Purchase Plan to partly fund 80 Collins Street. The Board upscaled the Security Purchase Plan from the original $50 million cap to $64 million and accepted all valid applications in order to meet the strong demand from eligible Security holders.

Both of these issuances are up for ratification today by Security holders as part of Resolution 4.

These activities, as well as the divestment of properties during the year, have resulted in our gearing level remaining well below our target range of 30-40%.

This provides us with the funding needed for committed projects in our development pipeline and also for future opportunities where we see an efficient use of our capital, including buying back Dexus securities on market should the opportunity present itself.

New investors have enabled us to strengthen the position of our Funds Management business – demonstrated through the launch of a new fund and the activation of industrial development projects.

We welcomed GIC as a foundation investor in the newly created Dexus Australian Logistics Trust, a $2 billion portfolio made up of assets from our Dexus industrial portfolio.

We also introduced M&G Real Estate to the Dexus Industrial Partnership and extended the Partnership’s investment period to accommodate a new growth mandate.In the healthcare property space, Employees Provident Fund Malaysia became an investor of the Healthcare Wholesale Property Fund, enabling the Fund to acquire the North Shore Health Hub last month.Last month also marked the completion of the Calvary Adelaide Hospital development, with the Fund’s portfolio now valued at over $450 million.

Moving onto some recent achievements from an Environmental, Social and Governance or ESG perspective, which is an integral part of our business operations. Our focus on ESG is not only important for our investors but is also important for our customers who want to occupy sustainable buildings.

ESG continues to contribute to long-term value, and this year we were recognised by the Dow Jones Sustainability Indices as the Global industry leader across all real estate companies. Global Real Estate Sustainability Benchmark (GRESB) also recognised us as having Australia’s most sustainable listed office portfolio, and we’ve achieved strong results in this year’s assessment from the Principles of Responsible Investment.

We progressed our long-term goal to achieve net zero carbon emissions by 2030 across our portfolio by securing one of Australia’s first supply-linked Energy Supply Agreements which will see half of the base building power of our NSW properties being sourced from wind and solar projects from 1 January 2020.

As a Board we recognise that good corporate governance is the foundation for the long-term success of the group, and our best practice corporate governance continues to attract third party capital partners. We have always placed a high importance on governance, including ethical behaviour, treating our customers and investors well and complying with our legal obligations. To maintain this focus, this year we conducted a detailed review of our corporate governance framework and established a dedicated Governance team.pan>

Recognising the increasing relevance of ESG factors we also established a new Board ESG Committee.

The safety of our employees, contractors and people visiting our properties is of paramount importance to us as a Board and we continue to include safety metrics in the Group Scorecard to ensure that it remains front of mind. And finally, we defined our organisational purpose, which reinforces our reason for being in business. To support the right culture, we articulate our core values of openness and trust, empowerment and integrity, and recognise the Board’s oversight role in ensuring that management instils these values.

CEO’s address

Good afternoon everyone.

Looking closely at our $15.6 billion property portfolio and our latest results for the September quarter released last Wednesday show that the office market cycle is certainly not over.

Our office portfolio is effectively full, and the Sydney and Melbourne office market vacancy rates are at very low levels. In this environment we remain confident of being able to continue to drive rental growth in our quality office properties, particularly in those leases coming up for expiry over the next few years.

Across both our office and industrial portfolios, the weighted average lease expiry has increased or been maintained with the completion of developments like 100 Mount Street and 240 St Georges Terrace, and we’ve seen average incentives remain low.

Investment demand for quality office and industrial properties combined with a lower for longer interest rate environment continues to flow through to our capital values – and we expect this to continue.

Total portfolio valuations were up nearly 6% on prior book values, but lower than the revaluation uplifts achieved in the prior year. In office, rental growth drove more than 60% of the portfolio’s valuation uplift.

And our weighted average cap rates are now at 5.15% for office and 5.92% for industrial.

Over the next 12 months we see the potential for circa 25 basis points of cap rate firming for quality office property and at least 25 basis points firming for industrial, supported by the spread to bonds and investor sentiment.

From a development perspective we reached key milestones across the group’s development and concept pipeline, including completion of the premium office development at 100 Mount Street in North Sydney owned by Dexus and DWPF.

100 Mount is a new generation building which adopts the latest in smart building technology and sets a new benchmark for office on Sydney’s north shore.

We achieved an unlevered project IRR of 39.6% and a yield on cost of 7.8%. We exceeded our acquisition assumptions on both rents and downtime, with the project now nearly 100% leased.

Turning to our funds management business, we now manage $16.2 billion of funds across seven vehicles on behalf of 79 third party clients and partners.

In addition to the new Industrial, logistics and healthcare partners mentioned by Richard, DWPF also attracted nine new investors over the year and continues to outperform benchmark over all time periods.

The $3.2 billion funds management development pipeline also ensures we continue to deliver on our third party capital partners’ investment objectives and provides a source of organic growth.

We had another good year in the trading business, which is where we invest and develop for profit.

We reached agreement to sell 201 Elizabeth Street in Sydney across two tranches, delivering circa $34 million of pre-tax profits to be realised in FY20 and a further circa $34 million in FY21 in the event of the exercise of a put and call option for the second tranche.

Last month we also completed the sale of the North Shore Health Hub to our Healthcare property fund on a fund-through basis which will deliver trading profits across FY20 and FY21.

To conclude, it’s been a great year. We are on track and achieving results. We entered the year with a clear strategy and I’m proud of how the team has performed over the past 12 months.

Importantly, we are well positioned for continued success despite increased economic uncertainty. We have high portfolio occupancy with fixed rental increases, limited supply in our core markets and the Australian office yield spread to bonds remains attractive from a global perspective. We also have our trading profits significantly de-risked over the next two years.

Taking all of this into account, we are confident of delivering on our market guidance¹ for the 12 months ending 30 June 2020 of distribution per security growth of circa 5%.

1. Barring unforeseen circumstances, guidance is supported by the following assumptions: Impacts of announced divestments and acquisitions; FFO per security growth of circa 3%, underlying FFO per security growth of circa 3%, underpinned by Dexus office portfolio like-for-like income growth of 4.5-5.5%, Dexus industrial portfolio like-for-like income growth (excluding one-offs) of 3-4%, management operations FFO of $55-60 million, cost of debt of mid-3%; trading profits of $35-40 million net of tax; maintenance capex, cash incentives, leasing costs and rent free incentives of $170-185 million; and excluding any further transactions.