Updated Views On DXC

I've recently done more of a deep dive into DXC off the back of the recent presentation and thought I would share my updated views for anyone that's interested. Bell Potter also recently published a very in depth analysis on the REIT sector featuring DXC with a buy rating so I got some interesting information from that report too:

The Positives

There have been 65 transactions in AUS over the past 12 months at an average cap rate of 6.1% (also the current WACR of the portfolio). This firms up my central view on what makes the stock good value and that's the NTA being a lot more firm than the majority of other REITS (more on that later)

Gearing post recent sales is down to 31.8%

The WALE of the portfolio is 9.7 years with 12% of rental income now coming from fast food tenants

I'm not sure whether to call this a positive but there was talk in the presentation about "high quality acquisition opportunities emerging in the next 12 months..... I agree their working into a good financial position but considering the huge NTA discount I think the best value investment would be a share buy back

Negatives

After reading through the most recent annual report I was pretty disappointed to find that three of the 6 directors own no shares at all and the remaining 3 have quite small stakes. Dexus itself has a 9 percent ownership but hasn't topped up to show some faith while the share price is at an all time low and neither have any of the directors. I don't believe they have enough skin in the game.

General Observations

More broadly it was interesting to see the implied cap rate of the portfolio figure which is 8.36% (the cap rate would have to blow out that far to reduce the underlying NTA to the actual share price). Personally I'm expecting another valuation decrease but think 6.75% is a nice conservative figure whereas Bell Potter are working on the basis of 7.25% and even then have them at a buy with a target price of $2.85. It's important to keep in mind that Waypoint are still using a much lower WACR of 5.4% and CQR seem to have their petrol stations around that same level too.

Something that really highlighted how badly the smaller REITS have suffered is that the non ASX 200 listed REITS are down 17.5% for the year while those inside the index (XPJ) are slightly up at 0.3% so scale has become an issue (this was something the DXC management pointed out to me when I spoke with them earlier in the year.

The buy thesis for me is still quite simple which is that DXC has been unfairly lumped in with other REITS despite operating in a more resilient area of the property market with vastly more liquidity and relatively resilient cash flows.

I would say a 10 percent NTA discount for DXC is approximately fair value so if the NTA dropped to $3.50 in February (I think it will come in a little higher than this) then my fair value would come in higher than Bell Direct at $3.15.

Even if it gets to $3 from here it's a 20% capital gain plus an 8 percent dividend yield in the first year (I expect this to come back a little bit considering the sold assets and higher interest bill).

I should mention I expect to see the SP in the doldrums for a while yet and just plan on collecting dividends until there is inevitably a bit more certainty around interest rates and more retail investors start to consider REITS again. It's a counter cyclical pick so patience is required.

I hope this is helpful and would love to hear some different perspectives.