The REAL Deal

Darren Steinberg and Ross Du Vernet
Launch date: 28 March 2024

Disclaimer: The information contained in this podcast is general information only and opinions of participants are their own and not the views of their organisations. Any advice is general advice only. Past performance should not be relied on as indicative of future performance.

Intro: Welcome to The REAL Deal, a podcast about what’s happening across the real estate and infrastructure sectors.

Episode grab (Ross): I think the fact that there isn't a lot of distress, and nor is there likely to be a lot of distress here in Australia, is meaning

that right now we're not seeing a lot of that kind of marginal capital flow. But I think as a long-term investor, I would actually take a lot of comfort in that. You think that the US is like highly leveraged capital structures, but cycles for us here are less boom bust, they're more general business cycles. And I think that's different when you're investing in real assets for the long term.

Intro (cont.): That was Ross Du Vernet, Dexus’s incoming Chief Executive Officer and Managing Director, who is in conversation with current Dexus CEO Darren Steinberg for Darren's final episode on The REAL Deal podcast. They discuss insights from their recent trip to the Citi Global Property CEO conference in Miami and touch on infrastructure and their outlook for the remainder of 2024.

Darren Steinberg: [00:01:32] Welcome everyone to The REAL Deal podcast. Today we are joined by incoming Dexus CEO Ross Du Vernet. We'll be discussing the feedback we've heard from our investors on our recent trip to the US, the Dexus infrastructure platform, and we'll finish with our thoughts on the outlook for the year ahead. So welcome, Ross, and thanks for joining us. It's great to have the opportunity to introduce you to our listeners as you transition to Dexus CEO. Now we've known each other and worked together for over 17 years now – so you're obviously a very patient man. We've done a lot together over this time both at Dexus and before that. So why don't we start off by telling 
our investors a little bit more about your background?

Ross Du Vernet: [00:02:08] Thanks Darren. Well, I grew up and I always liked finance and was really attracted to the tangible nature of real estate. I spent a decade at Colonial First State Global Asset Management in a really wide range of roles across asset management, funds, transactions and strategy. In many respects, CFS GAM was ahead of its time. Back then, they had property, infrastructure and private equity were actually all pulled together in a single business unit, which was real assets, which is where our strategy is sitting today. I joined Dexus back in 2012, shortly after you joined, it's been a fantastic ride. I really joined in a capacity of helping to reboot the strategy and then as you kind of say, strategies, one thing, executions, everything. So really rolled up my sleeves and have been focused on building capabilities and executing on the strategy. So transactions and development have probably been the key areas of my focus over the past few years.

Darren Steinberg: [00:03:00] Yeah, we see plenty of companies that have great strategies and never go anywhere because they just can't execute. And I think when I look back over our time together, hopefully more often than not we've executed on the right things. But execution has been one of the strengths of the teams at which we've operated in. So Ross, we've just come back from an overseas investor meetings. There was a big conference every year that we normally attend in the US. It has about 700 odd companies and around 1000 investors. So we've attended that conference on and off for 20 odd years. It's a great way to get a snapshot about what's happening across the globe. So why don't you just give us a bit of feedback that you picked up from that group of meetings that we had?

Ross Du Vernet: [00:03:40] Yeah the Citigroup conference, it's held in Miami of all places, so a long way for Australians to travel, but it really does get a very wide universe of companies presenting, but also a lot of the US and global investors. So I think for me, and I haven't been to that conference for a couple of years, but certainly sentiment was a lot less negative than it was last time I was in the US, which was quite pleasing. I think what is certainly, for companies like ours, is a growing appreciation that if we focus on office for a second and rightly or wrongly, a lot of the US investors still think of us as being an office company in many respects. I think there's a growing appreciation that office is not the same 
everywhere in the world, and I think that's pleasing for us because of all the work we've been doing on the portfolio and trying to tell the story around why it's different down here. I guess one of my other takeaways, I think from the couple of days in the US, was this idea that there's going to be an immediate snap back in markets. I think we need to be playing for the long term. I think sentiment will improve slowly, but it's really going to be asset management strategies that drive performance. And I think investors are increasingly looking for management teams that can sweat the assets harder, if you can excuse that expression.

Darren Steinberg: [00:04:52] Yeah, it was interesting though. Some of the investors, and the investment universe is flat, with some of the investors that we spoke with, the ability to go and invest into markets that have been more severely impacted post the COVID era, like the US and various parts of Europe versus Australia, which is seen as very attractive still we've got 27 million, I think we've got the highest population growth in the western world, but our markets haven't been impacted as much as some of the offshore markets.

Ross Du Vernet: [00:05:23] You would think that would make us, the lack of volatility there, the lack of the distress, I think for the long term investors should mean Australia screens very, very well. But you're right, I think the fact that there isn't a lot of distress and nor is there likely to be a lot of distress here in Australia, is meaning that right now we're not seeing a lot of that kind of marginal capital flow. But I think as a long-term investor, I would actually take a lot of comfort in that. You think that the US is like highly leveraged capital structures, different foreclosure laws that creates volatility and distress in the system, which the private equity groups have made a lot of money out over a long period of time playing those cycles. But cycles for us here are less boom bust. They're more general business cycles. And I think it's different when you're investing in kind of real assets for the long term.

Darren Steinberg: [00:06:10] Yeah, totally concur with that. Now talking of boom bust, I had the opportunity on the way back from Miami to drop into San Francisco. There's been a lot of publicity about what's happened to that city. And to be fair, it was a real eye opener. I must admit, I'm still a little shocked from what I saw there, because I think what I saw was a city that's in its like death throes, because I hadn't been there for about a decade, or definitely not since the COVID era. You walk into one of the flagship assets at the time, last time I went there was to look at what was the Westfield San Francisco centre, walked into a shopping centre that was virtually boarded up. It probably had five tenancies opened. As we were driving to the hotel from the airport, there was people that were literally stepping in front of cars. It was like I was in the middle of a zombie movie and I spoke to a lady on the plane as I was going into San Francisco, and she works in an office there. They go into the office 1 or 2 days a week, but she said all the good restaurants, etc. it started to move out to the suburbs. So it was really like witnessing the end of an era for that particular city. It will obviously reinvent itself over time, as cities tend to do, but it was a real eye opener just to how different Australia is to the US market. And that leads me back to the investor experience. So do you want to just touch on some of the differences there?

Ross Du Vernet: [00:07:30] Well, when I think about the US markets, I think I go back to grass roots level that people are much less transient in Australia, what 40% of our population lives literally in our two largest cities and people don't move, right? Whereas in the US you pretty much finished school, you leave, you go to college interstate, and you're accepting that your career will take you all around the states and you'll move cities for jobs. There's not that many people, even in Dexus, if you kind of said, actually, we have a job in Melbourne, we've tried that with some executives over the time getting people to move is very, very difficult. And so I think the more transient nature of careers in the US and the lower friction costs, and then we haven't even really started talking about taxes as well. State taxes are a huge driver of mobility. And we've kind of seen that with in the US, where a lot of people during Covid, if you kind of work from home, why are you working in a place where your state taxes might be 15 to 20%? If you can work in Texas or Florida, where taxes are close to zero, right. That's a that's a big pay rise and the cost of living and the cost of real estate may be a lot lower as well in some of those states. So I think that's not to say that I think to your point, San Francisco is going to reinvent itself, but it was a city that benefited from a very rapid period of growth in terms of the tech sector. Yeah, huge. And that creates whenever you see periods of rapid growth, the risk of kind of bubbles forming and distortion and asset pricing. And I think we've kind of seen that in the extreme example in San Francisco, that's not what we have here in Australia for all the obvious reasons.

Darren Steinberg: [00:09:03] Totally agree. I think the other interesting point to me from that meeting was just, once again, the lack of understanding from the US and some of the global investors on the banking market here. So Dexus, we have unsecured debt across our portfolio. In America, for those of you that aren't aware, some of the large office groups had actually been handing back the keys on some of their office buildings.

Ross Du Vernet: [00:09:25] Even retail as well.

Darren Steinberg: [00:09:26] Yes, and so just explaining to some of those investors that, hey, if Dexus ever defaulted on its debt, which has never happened before and unlikely to happen again because we have quite low leverage, we would not get another loan in this market. But in the US, the investors, they were coming to grips with the fact that we are financed.

Ross Du Vernet: [00:09:44] Well, I think it's so obviously there's technical legal differences. So people use chapter 11 in a way to reorganise business affairs and businesses do come out the other side. So I think their bankruptcy laws are designed in a way to give businesses a second life. 

Darren Steinberg: [00:10:00] They are encouraged to take a risk, Ross.

Ross Du Vernet: [00:10:02] But I think the other thing is, and then there's a cultural element, at least in the Australian context, it's not a badge of honour to sort of say you blew up a company or you went bust. Whereas I think in the US, for many tech investors in particular they won't give you money unless you can kind of demonstrate that you've had a couple of failures already. And so I think there's a cultural element let's call it US to Australia. But I think the relationship one you point to is very valid. The Australian market is heavily banked by essentially four banks, and you can sort of have laws on one side and cultural on the other. But the reality is, if you weren't performing under a loan, whether or 
not they have the security or not, it's going to affect your availability of credit as an organisation for the long run, as both an individual and as a company. And that does temper the behaviour. And it means that, yeah, I think people generally take less risk in a more probably prudent in how they're managing those financing relationships.

Darren Steinberg: [00:10:54] Now let's just turn our attention to infrastructure. It’s new to the group, we acquired a $10 billion infrastructure platform as part of the recent AMP Capital transaction. So, Ross, you're no stranger to infrastructure, you've been involved in some quite large transactions in your time at Colonial.

Ross Du Vernet: [00:11:12] Been to some airports.

Darren Steinberg: [00:11:13] Been to quite a few airports. And as CIO, you've obviously been overseeing the infrastructure platform for us here at Dexus. Maybe you can just elaborate a little bit on what infrastructure does for our group and more broadly, why should investors be looking at this as an investment asset class?

Ross Du Vernet: [00:11:27] Well, maybe I'll just touch on what we think it does for clients and investors first. It does provide an important role in the diversification of client portfolios. It also has, and this is kind of in the traditional sense of infrastructure, and there's stuff we can talk about there. But traditional infrastructure has had very, very stable cash flows, often with good CPI protection in it and this has been very attractive to pension funds who are looking to sort of asset and liability match. I think the interesting thing, having kind of been away from infrastructure for a long time, is just how much it's kind of changed over the last 15 years for me. It was all about toll roads, airports, ports, and you kind of come back and it looks more like private equity. It looks more like sort of businesses doing roll ups and businesses that might have the prospect of stable, recurring cash flows in time, but may not be there today. And so I think the definition of infrastructure is very, very broad at the moment.

Darren Steinberg: [00:12:25] So bingo rubbish collection, for example, is held in some infrastructure funds. 

Ross Du Vernet: [00:12:29] Yes, bingo. You have coin laundry businesses in student accommodation facilities. I actually don't mind that, I can see the case. I think where we’re more cautious is where there's genuine business risk that is being taken on and is that risk being priced? I think it's okay if it's being priced and investors are getting a commensurate return. But what I've kind of seen over the last year or two is there's some, I won't say sponsors, but some people are seeing lower cost capital from infrastructure providers basically being the sharpest cost of capital to take business risk. And is that risk fully understood when those infrastructure investors are making that deployment decision? It's probably a bit of a question mark, I would say. I think in terms of why is infrastructure interesting for our platform? There’s probably a couple of elements there. First is I think we do really have some interesting expertise that can add value into the underlying assets, whether it be airports, whether it be a lot of infrastructure has elements of real estate, airports for example, 30 odd per cent of the revenue for a lot of the major airports here in 
Australia is actually real estate related.

Darren Steinberg: [00:13:34] You and I have been investing in and around those airports for a long time. So if we go back to the Colonial days when we bought the DFO, the discount factory outlet portfolio, a lot of those or several of those were on airport land. If you think about the Jandakot acquisition, where we're developing out a very large industrial estate over in Perth, in what is Perth's secondary airport there, and even look at Melbourne Airport, which has the potential to be Melbourne's best industrial estate, best located. You've got a massive car park business there, you've got a surf park. I know Ross, you're a keen surfer in your part time. Have you partaken of the surf park yet down in Melbourne?

Ross Du Vernet: [00:14:13] No, it's not heated.

Darren Steinberg: [00:14:16] But these are huge real estate plays. And I suppose, yes, the aviation services are a driver of, what did you say 70% of the income?

Ross Du Vernet: [00:14:25] Yes, aviation 70%.

Darren Steinberg: [00:14:25] 70%, but 30% is a big difference if you can sort of push that ahead and it can really make a difference for the returns to our investor base.

Ross Du Vernet: [00:14:32] Yes and I think whether it's an airport or other infrastructure assets, what are the core skill sets in businesses like ours that is built in our DNA. It really is about driving performance, whether it be through managing OpEx, managing CapEx, developments as a way to activate value. And our business is very much in the weeds and in the detail on how we sweat assets and drive performance and infrastructure maybe traditionally hasn't had that level of intensity, perhaps in some of the operating companies, but a lot of the investors in that space have been financial sponsors and investors who are looking for simple cash flows. And I think the world of multiple rerates and asset prices just rising, that's not where we are right now. And I think those skills and expertise to actually drive the performance out of the assets is going to be more and more valuable.

Darren Steinberg: [00:15:18] Totally agree, it's back to the basics. Drive the income, drive the income, drive the income, and that will in turn drive investment performance. 

Ross Du Vernet: [00:15:27] The other thing is just on the funds management side, a lot of clients are organising themselves now to allocate capital out of real assets teams. They see the opportunity and there will be risk and opportunity that is mispriced, that kind of sits between the cracks of is it infrastructure, is it real estate, and they're going to be the sorts of things I think we can really lean into.

Darren Steinberg: [00:15:44] To be fair, that's evolved since you and I first saw this in 2016/2017 when we launched our health fund and we said, does that sit in the real estate team? Does it sit in the infrastructure team? And that's what helped us form the view of bringing together and focusing on real assets rather than real estate and/or infrastructure.

Ross Du Vernet: [00:16:05] Yes, that’s an interesting point. And it also enables us with some of those strategies to really provide the full suite of solutions to customers. So if you're a government and you want to build into a health precinct, we have a PPP type solution, we have a straight equity solution, we'll have a development partnership type solution. And so I think it's the full financing and the operational type packages that we can bring that's going to, I think, be quite interesting and hopefully a differentiator.

Darren Steinberg: [00:16:33] And for those of you in Sydney, or know the Sydney market, the best example of that is over in the lower North Shore, where Dexus through a PPP relationship with the state government in one of our infrastructure funds, owns a large portion of the public hospital over there. And in the same time, Dexus in its health fund and through the balance sheet developed an industrial state that was a directly adjoining into a private hospital. And we were able to put a bridge into the public hospital. So it's stuff like that where we're able to bring our development expertise and different ranges of capital to satisfy a requirement for the government and for the various customers in that area. So it's a very good example about what the group can now do with its various different pools of capital. So, Ross, now that you're about to become CEO, you're going to get asked this question a lot. What are your predictions for the remainder of 2024 from a market perspective?

Ross Du Vernet: [00:17:26] I'm hopeful that investment markets will stabilise, and I think I took a lot of encouragement from some of the investor feedback we had when we were overseas. So I'd like to think investment markets are stabilised, we'll see a few more transactions, that's what the listed investors are looking for in Dexus, they're looking to see some price support in the transaction market. My fear if I'm honest, my fear is, the second half of the year is going to be a circus with the US election. And I think that is just going to give people a lot of reasons to continue to defer decisions, major decisions, whether that be transactions, capital deployment or major tenancy decisions. My hope is that we see a return to normalised markets, my fear is that we get a deferral of decisions because of what happens in the US.

Darren Steinberg: [00:18:07] Well, I think based on what you and I saw in the US a couple of weeks ago, it looks like Donald Trump is well and truly on his way to becoming president again. I don't know whether that's a good or bad thing, maybe we need a whole new podcast on that. So my predictions are not too dissimilar to yours Ross and I can be a bit more [free] with my prediction now, because I'll be sitting on a beach somewhere. So I think I've said for a while, interest rates look like they're normalising, inflation around the globe looks like it's peaked, I believe that the low point for [valuations] should be in around the June valuations so they'll come through in July and August. And as a result of that, we'll see more transactions and a more normalised market in the back end of 2024, and that the buyers will come back. So at the moment, it's very hard to find buyers for some of these core assets as you and I know only too well. 

Ross Du Vernet: [00:18:56] What about the predictions for the Swans?

Darren Steinberg: [00:18:58] It's only early days, Ross. Only early days, but things are looking on the up like the markets. So thank you Ross for joining us today, that now brings us to the end of the episode, and this will be my final episode for the podcast unless I'm invited back as a guest later on. So I'd like to thank all of our listeners for tuning in over the past six months, we've had some great conversations, which are all still available on the Dexus website or wherever you listen to podcasts. So thanks again Ross, and all the best for your new role. 

Ross Du Vernet: Thanks Darren.

Outro: You’ve been listening to The REAL Deal, a podcast for Dexus. Listen to The REAL Deal as dexus.com/theREALdeal and follow free on Apple podcasts, Google podcast, Spotify or wherever you listen to podcasts. This podcast is recorded on the lands of the Gadigal People of the Eora Nation. 

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