Economic

Financial sustainability

At DEXUS, we take a holistic approach to CR&S and consider all aspects of our business operations – environmental, social, governance and economic. In terms of economic sustainability, our approach is based on two principles:

1. Sustained financial performance

We are committed to delivering consistently strong financial performance by creating stable future income streams that enable our business to grow, enhancing returns to our investors and invest in initiatives that deliver improved sustainability performance.

2. Sustainability adds value

We recognise the value that operating sustainably adds to our business and the enhanced performance and long-term contribution to the bottom-line that can be achieved through appropriate investment in sustainability.

Financial highlights

In the year ending 30 June 2009, the economic downturn continued to impact the property sector and we saw declines in both property values and tenant demand worldwide, which were reflected in the Group’s overall performance.

Despite these challenging conditions, the quality of the DEXUS portfolio, together with the underlying stability of operating earnings and our proactive and prudent approach to managing our balance sheet, continued to deliver strong results.

In the listed business – DEXUS Property Group – operating earnings were up 5.7% on the prior year to $526.3 million. The Australian portfolio delivered a strong result with like for like growth of 4.5% in office and 4.1% in industrial. The international portfolio in North America and Europe declined 4.9% in line with the weak economic conditions.

The impact of the economic downturn on DEXUS’s financial results was largely felt in declining property values. In 2008/09, property devaluations totalled $1.6 billion and contributed to the Group’s net loss of $1.46 billion (see over page for further information).

The Group’s third party property funds under management stood at $5.6 billion at 30 June 2009, a decline of $800 million which was principally due to declining property values. However, DEXUS maintained its position as one of the largest third party property funds management businesses in Australia.

While the investment performance of the third party funds has been impacted by the current economic environment, the portfolio quality and active management has seen it continue to deliver strong performance with a combined total return over five years of 9.3% per annum.

Property Valuation Fluctuations

Implementing our capital management strategy

DEXUS continued to apply an active and prudent approach to capital management during the year and undertook a number of key initiatives:

• Refinanced and secured new debt facilities totalling $860 million. At 30 June 2009, the Group’s undrawn debt facilities exceeded $1.4 billion.
• Revised our distribution policy to adopt a payout ratio of 70% of Funds From Operations (FFO), with the balance retained to fund operational and leasing capex.
• Successfully completed two equity raisings totalling over $1 billion in December 2008 and April 2009, each receiving good investor support.
• Commenced a $600 million selected property sale program, the proceeds of which will be used to repay debt, improve liquidity, reduce gearing and further strengthen the balance sheet.

Together these initiatives have enabled DEXUS to maintain a prudent gearing level of 31.2%, well within our target of below 40%. We continue to maintain a strong credit rating from Standard & Poor’s (S&P) of BBB+ with a stable outlook.

Prudent development approach

Despite the tougher market conditions, we continued our commitment to delivering the next generation of sustainable office buildings with our developments on track and on budget at 1 Bligh Street, Sydney and 123 Albert Street, Brisbane.

The progress of these developments is relatively unique in the current market, where many development projects have been put on hold. At DEXUS we have always taken a prudent approach to our developments and both our office projects maintain strong feasibility with significant pre-commitment from major anchor tenants Rio Tinto at 123 Albert Street and Clayton Utz at 1 Bligh Street.

We have upheld our commitment to obtain a 6 star Green Star design rating and a 5 star NABERS Energy rating for both projects. We also continue to work with our anchor tenants to tailor the workspace design to their needs and to our common vision of delivering the next generation of sustainable office space.

During the year, we took further steps to manage our investments prudently by creating a joint venture partnership at 1 Bligh Street with Cbus, the construction industry’s superannuation fund, who acquired a one third interest in the development. This has not only reduced our development costs by $200 million, but has introduced a new investment partnership with a leading Australian company who shares our vision for sustainable development. This project has also provided direct economic benefit to the community through the creation of approximately 3,000 jobs over the life of the development.

Further information on DEXUS Property Group’s financial performance can be found in the 2009 Security Holder Review and Annual Report at www.dexus.com or calling DXS Investor Relations on 02 9017 1330. Information on third party funds can be obtained by investors via www.dexus.com or calling Investor Relations on 02 9017 1121.

Property valuation fluctuations

In the property sector, the frequency and the number of properties revalued within a particular period and the change in fair market value of properties from period to period, can result in significant fluctuations in reported net profit/loss.

For example, in the year ended 30 June 2007, the sector experienced positive economic and market conditions. At DEXUS we saw strong demand and increased market rental rates across our portfolio and property valuations increased by $864 million, which contributed to a net profit of $1.2 billion. These positive conditions continued in Australia through the first half of the year ending 30 June 2008 but began to deteriorate in the United States and Europe. As a result, changes in property revaluations of $185 million, contributed to a reduced net profit of $438 million.

In the 2009 financial year, global economic conditions deteriorated further due to the global financial crisis. These adverse market conditions were reflected in a softening of capitalisation rates and weaker underlying property fundamentals, causing a decline in property valuations worldwide. As a consequence, the DEXUS property portfolio was devalued by $1.6 billion, which contributed to a net loss of $1.46 billion to 30 June 2009.

Overall since the valuation peak in December 2007, we have seen a decline in book value of 19%. However, looking ahead we expect that property devaluations and impairments are nearing the bottom of the cycle and will begin to recover in 2009/10.

Data note: DEXUS figures refer to DXS.