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Centuria Office REIT (ASX:COF) delivered a solid performance throughout the first half of the 2021 Financial Year (HY21) with significant leasing activity and high rent collection enabling the Trust to reinstate FY21 FFO guidance with a range of 19.4 – 19.9cpu.
COF, which is diversified across many Australian office markets, benefited from its exposure to the nation’s better performing office markets. COF has no exposure to Sydney’s CBD, which displays the weakest domestic tenant demand.
During the HY21, COF secured 31 leasing transactions across 28,306 sqm2, equating to 9.3% of its portfolio NLA. More than 10,790 sqm related to new tenants across 17 separate deals.
Despite the COVID-19 affected trading period, COF secured a 96.7% average rental collection1, which it credits to the high-quality tenant covenants that underpin the portfolio and Centuria’s active, in-house asset management team.
COF reinstated a FY21 FFO guidance range of 19.4-19.9cpu and reiterates FY21 distribution guidance of 16.5cpu, paid in equal quarterly instalments and reflecting a current yield of 8.5%4 based on market closing price on Wednesday 3 February 2021.
Grant Nichols, COF Fund Manager, said, “I am pleased to report solid half year results. While working from home is still topical, we understand many workers want to be back in an office environment but not endure time consuming daily commutes, which compromise their work-life balance. Equally, many businesses, especially those affected by the pandemic, are conscious of cashflow and are actively seeking more affordable rents.
“These complementing themes highlight the desirability of decentralised office markets and support COF’s robust half year performance, evidenced by its significant leasing activity and continuously strong rent collection.”
COF also highlights its young office portfolio as another attractive tenant consideration, with the portfolio’s average building age being 16.4 years. It also continued to enhance its energy and water efficiencies across the portfolio with the portfolio averaging a 4.8-Stars NABERS energy rating.
Nichols continued, “Younger assets enable better adaptability to the current pandemic work environment, such as social distancing considerations. Younger stock also limits overall capital expenditure and maintenance requirements, while lending itself to greener infrastructure.”
The Trust’s Weighted Average Lease Expiry (WALE)2,5 as at 31 December 2020 was 4.5 years, providing a staggered expiry profile with 57% of leases expiring at or beyond FY25. More than 80% of COF’s portfolio income is derived from government, listed and multinational tenants. In particular, c.27% is underpinned by Australian state and federal government tenants.
Despite the significant exposure to large corporations and government tenants, the COF portfolio remains very diversified, with no single tenancy representing more than 7% of portfolio income.
COF has strengthened its balance sheet, with gearing reducing to 33.2%6 and undrawn debt capacity increasing to $175.7 million7. The reduction in gearing further increased COF’s significant covenant headroom.
Nichols concluded, “Throughout the first half of FY21, there was a significant number of comparable office transactions that showed yields have held at pre-pandemic levels or in some instances, contracted. This illustrates strong investor demand for the types of assets COF owns, but also a disconnect between direct market transactions and where listed markets are pricing office REITs, especially for those Trusts whose assets are outside of CBDs.
“In the past quarter, as we have witnessed the pandemic’s effects starting to unwind, we have also experienced tenants becoming more engaged, resulting in increased leasing enquiry across our portfolio”
COF confirms it has a truly geographically diversified portfolio, with no state allocation greater than 26%.
1 Included within the outstanding rent is agreed and pending rent relief claims related to the National Code of Conduct on Commercial Leases As COVID-19 impacts and the National Code of Conduct on Commercial Leases remains active, it is possible further rent relief claims could be received for the April 2020 to June 2020 period
2 Includes Heads of Agreement (HOA)
3 Guidance remains subject to unforeseen circumstances and material changes in operating conditions
4 Based on COF closing price of $1.95 per unit on 3 February 2021
5 WALE by gross income
6 Adjusted to include the proceeds from the sale of 465 Victoria Avenue, Chatswood NSW. Gearing is defined as total borrowings less cash divided by total assets less cash and goodwill
7 NTA per unit is calculated as net assets less goodwill divided by closing units on issue