Dexus Property Group. Infra driving industrial demand A$9.94 AUSTRALIA. Event. Impact. Earnings and target price revision.

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1 AUSTRALIA DXS AU Price (at 06:10, 06 Apr 2017 GMT) Neutral A$9.94 Valuation - NAV A$ month target A$ month TSR % +1.0 Volatility Index Low GICS sector Real Estate Market cap A$m 9, day avg turnover A$m 24.9 Number shares on issue m Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m EBIT m Reported profit m 1, Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x EPS adj EPS adj growth % PER adj x Total DPS Total DPS growth % Total div yield % FFO yield % AFFO yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x DXS AU vs ASX 200 Prop, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April 2017 (all figures in AUD unless noted) 6 April 2017 Macquarie Securities (Australia) Limited Infra driving industrial demand Event We attended the DXS Industrial Tour in Sydney. Impact No change to FY17 guidance. Consistent with our expectations, DXS retained its recently upgraded FY17 FFO guidance of ~1% growth vs FY16. (i.e., 63.7cps, MRE: 63.1cps). Key driver of FY17 earnings growth is strong LFL income growth anticipated across the office and industrial portfolios, offset by lower expected trading profits. FY17 Group DPS guidance of % growth was unchanged (i.e., cps). Industrial market update Sydney solid. DXS noted industrial leasing conditions remain solid in Sydney across most markets and highlighted strength in the South Sydney market, particularly for office use. The group referenced a number of factors that are supporting the market: i) strength of metro office markets is driving relative affordability in industrial locations; ii) local infrastructure projects driving demand for materials storage (four major projects identified); and, iii) the residential construction cycle. Industrial remains a strategic holding. The group indicated it will retain its industrial exposure although highlighted it does not have the same scale as its peers. As an example, the group currently has ~46,300sqm of GLA at Quarrywest but has a medium-term target to develop up to ~120,000sqm with a number of pre-commitments already secured. Another source of value creation for the group is from the change in use of existing sites. Indeed, the group highlighted a number of assets Regents Park Industrial Estate (NSW), Flemington (NSW), and Kings Park Industrial Estate (NSW) that are located in close proximity to passenger rail infrastructure and would be suitable for mixed use. On the ground The group views Moorebank positively with increasing demand for industrial space from tenants seeking proximity to the intermodal terminal. There was no additional commentary provided around the leasing requirements of Amazon. Our recent analysis on the potential industrial/ logistics requirements of Amazon are detailed here: Listed property sector - Welcome to the jungle. Earnings and target price revision No change. Price catalyst 12-month price target: A$9.57 based on a NAV methodology. Catalyst: Identification of further properties to deliver trading profits in 2017 Action and recommendation We remain attracted to DXS s exposure to a strengthening Sydney market which will underpin an above-sector underlying income growth profile. With limited opportunities for positive surprises to the earnings profile (ex-trading profits) and a relatively demanding equity valuation, we retain our Neutral recommendation. Please refer to page 7 for important disclosures and analyst certification, or on our website

2 Feedback from asset tour DXS hosted a tour in Sydney across two industrial estates and a recently acquired corporate park. We have summarised the properties below. Fig 1 Summary of toured assets Asset Ownership Acquired Book Cap Initial WALE Occupancy Lettable area value rate yield % $m % % Years % 000 sqm 1 Foundation Place 100 Feb-03 1 Basalt Road 50 Dec Basalt Road 50 Dec Basalt Road 50 Dec Basalt Road 50 Dec Basalt Road 50 Dec Bellevue Circuit 50 Dec Bellevue Circuit 50 Dec Bellevue Circuit 100 Dec Bellevue Circuit 50 Dec Bellevue Circuit 50 Dec Turnbull Close 50 Dec Turnbull Close 50 Dec Turnbull Close 50 Dec Litton Close 100 Dec Prospect Highway 50 Jun A Basalt Road & 1 Charley Close 50 Jun Dolerite Way 50 Jun Quarry Industrial Estate Lakes Business Park, Botany 100 Jan The Mill, Alexandria 100 Jan Quarrywest 50 Jun Notes: 1. Stats as at 31 December Book value represents DXS holding value. 3. Lettable area represents 100%. 4. The Mill cap rate represents purchase price. Source: Company data, Macquarie Research, April 2017 While there are clearly a large number of assets that we drove past as indicated in the table above, feedback from specific assets are indicated in the table below. 6 April

3 Fig 2 Commentary from specific assets 2A Basalt Road / Quarry Industrial Estate This building is the national distribution centre for Toshiba Australia. DXS understands the tenant may consolidate its head office (currently in North Ryde) to this facility in the medium term. The Toshiba tenancy represents ~12,500 sqm which comprises ~10,000 sqm of industrial and ~2,500 sqm of office space. The passing rent for the combined tenancy is ~$ /sqm. This would imply ~$1.7m of net rent p.a. The landlord also contributed to the fitout which was estimated to cost $2.9m, including the spare parts automation facility ($1.6m). This would imply an incentive <20%. The lease commenced in 2016 for a 10-year initial term with two 5-year options attached. We understand the construction cost was $850/sqm over a 9-month build time. We understand the office component (~2,500 sqm) represents ~11% of the total building (~36,200sqm). DXS is targeting ~20,000sqm of office space in the estate more broadly. Lakes Business Park, Botany There are 40 individual tenancies at Lakes Business Park North which is held 100% on DXS s balance sheet. Lakes Business Park South is held on DXS s balance sheet as a trading asset. Lakes Business Park North s GLA is ~76% exposed to office, 23% industrial and 1% café. DXS is looking to introduce a childcare operator through its existing tenant relationship with Guardian Early Learning Group for its tenants in the Business Park. A similar service is also being considered for Quarry Industrial Estate. Consistent with broader industry feedback, office rents in the South Sydney market has become increasingly tight with solid tenant demand supplemented by withdrawal of stock for alternate use. The Mill, Alexandria The site was acquired with the view to extract upside to the existing rental profile, supplemented by returns from redevelopment. While only one deal has been completed since acquisition (January 2017 settlement), we understand the rental upside was ~12%. The current rents of the asset are ~$345/sqm net face with $55-60/sqm for outgoings. Car parking is an issue at this asset with 1 carpark spot for every ~161sqm of GLA. For comparison, Lakes Business Park in Botany has 1 carpark spot per ~41 sqm and the area average is 1 carpark/~50sqm. Redevelopment opportunities are focused around adding additional levels on existing tenancies and adding carparking using the existing carpark space. The existing carpark facility is suitable for a further ~6,000 sqm of GLA. We understand the buildings are heritage protected. Source: Company reports, Macquarie Research, April 2017 Photos from the tour are shown below. Fig 3 Toshiba distribution centre Fig 4 racking part of fit-out (DXS-funded) Source: Macquarie Research, April 2017 Source: Macquarie Research, April April

4 Fig 5 DXS has contributed to the fit-out Fig 6 and the automation equipment Source: Macquarie Research, April 2017 Source: Macquarie Research, April 2017 Fig 7 Retail at The Mill carpark in background Fig 8 One of the tenants Source: Macquarie Research, April 2017 Source: Macquarie Research, April April

5 Fig 9 DXS Financial Summary DXS FY16 FY17F FY18F FY19F FY20F Income Net rental income A$m Funds mgmt income A$m Development profits A$m Property revaluations & FV adjustments A$m Other income A$m (70) Total income A$m 1,488 1, Expenses Interest expense A$m Trust & other expenses A$m Total expenses A$m Profit before tax A$m 1,303 1, Tax expense A$m Reported net profit after tax A$m 1, Less adjustments to derive dist. Income A$m (649) (370) Reported distributable income (FFO) A$m Per share data EPS A cps EPS growth % 5.4% (0.1%) (1.2%) (0.3%) (2.0%) FFO A cps FFO growth % 6.0% 0.9% (1.1%) (0.3%) (1.5%) DPS A cps DPS growth % 6.0% 4.6% 2.3% 0.4% (2.2%) Cashflow statement Cash flow from operations EBITDA A$m Net interest A$m (137) (142) (126) (124) (127) Change in working capital A$m (20) Tax paid A$m (8) (30) (24) (23) (18) Other A$m Net operating cash flow A$m Cash flow from investing A$m Asset sales A$m Asset purchases A$m (715) (115) (50) (7) - Capex- Maintenance A$m (197) (166) (156) (155) (157) Capex - development A$m Other A$m (17) (3) Net investing cash flow A$m (922) (162) (157) Cash flow from financing Issue of equity A$m (25) Debt movement A$m 719 (382) (239) 7 - Distributions paid A$m (431) (436) (451) (452) (443) Other A$m Net financing cash flow A$m 263 (818) (690) (446) (443) Net cash flow A$m Balance sheet Total current assets A$m Total noncurrent assets A$m 10,908 11,475 11,392 11,554 11,711 TOTAL ASSETS A$m 11,783 11,975 11,900 12,071 12,239 Total current liabilities A$m Total noncurrent liabilities A$m 3,488 3,086 2,847 2,853 2,853 TOTAL LIABILITIES A$m 4,187 3,961 3,722 3,728 3,728 TOTAL EQUITY A$m 7,596 8,014 8,178 8,343 8,511 Source: Company data, Macquarie Research, April April

6 Macquarie Quant View The quant model currently holds a marginally positive view on Dexus Property Group. The strongest style exposure is Earnings Momentum, indicating this stock has received earnings upgrades and is well liked by sell side analysts. The weakest style exposure is Growth, indicating this stock has weak historic and/or forecast growth. Growth metrics focus on both top and bottom line items. 270/1033 Global rank in Real Estate % of BUY recommendations 18% (2/11) Number of Price Target downgrades 0 Number of Price Target upgrades 1 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Real Estate) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.4 Mirvac Group 0.1 Mirvac Group GPT Group 0.1 GPT Group % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. 0.3 Mirvac Group 0.4 Mirvac Group GPT Group 0.1 GPT Group % -30% -20% -10% 0% 10% 20% 30% 40% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Earnings FY1 Price to Earnings NTM Price to Cash FY1 Dividend Yield LTM Operating Leverage NTM Momentum 6 Month Momentum 3 Month Momentum 12 Month Negatives Positives -16% -22% -23% -13% 36% 34% 32% 41% -60% -40% -20% 0% 20% 40% 60% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/1033) Percentile relative to market(/421) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 6 April

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) DXS AU vs ASX 200 Prop, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April month target price methodology DXS AU: A$9.57 based on a NAV methodology Company-specific disclosures: DXS AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of 's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 15-Feb-2017 DXS AU Neutral A$ Jan-2017 DXS AU Neutral A$ Aug-2016 DXS AU Neutral A$ Jul-2016 DXS AU Outperform A$ Aug-2015 DXS AU Outperform A$ Jul-2015 DXS AU Outperform A$ Apr-2015 DXS AU Neutral A$ Feb-2015 DXS AU Neutral A$ Jan-2015 DXS AU Neutral A$ Dec-2014 DXS AU Neutral A$ Nov-2014 DXS AU Outperform A$ Oct-2014 DXS AU Outperform A$ Aug-2014 DXS AU Neutral A$ Jul-2014 DXS AU Outperform A$6.96 Target price risk disclosures: DXS AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: 6 April

8 This publication was disseminated on 06 April 2017 at 13:53 UTC. Macquarie Wealth Management We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 6 April