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Australia’s largest ASX-listed pure-play office fund, Centuria Office REIT (ASX:COF), announced its Financial Year 2021 year end results, which revealed a record year of leasing with 61 transactions across 52,077sqm, illustrating strong tenant demand for modern, affordable fringe office accommodation.
COF’s diversified portfolio specialises in quality office accommodation predominantly located in fringe and metropolitan markets that lend themselves to larger floorplates, modern amenities, attractive rents, and better work commutability between home and office via excellent public transport routes and road arterials.
More than 50% of the leases completed were new tenants to the COF portfolio, which demonstrates growing tenant confidence in committing to new office accommodation. Total leasing transactions accounted for 18.1% of portfolio Net Lettable Area (NLA).
Grant Nichols, COF Fund Manager, said, “The pandemic has accelerated a shift towards offices in good, commutable locations, which are modern and provide more lifestyle facilities such as end of trip facilities, flexible workspaces along with cafes, restaurants and other social interaction amenities such as parks and recreational facilities. Access to excellent public transport infrastructure as well as road arterials are increasingly proving to be highly desirable attributes for today’s workforce.
“While Sydney’s CBD experienced negative net absorption of 157,554sqm and Melbourne’s CBD a negative 187,837sqm3 throughout FY21, fringe and metropolitan markets have demonstrated recovering tenant demand. Over the past six months we have seen positive net absorption in the Sydney fringe, Melbourne fringe and Brisbane fringe office markets while each one of their CBD counterparts continue to incur negative net absorption. What this illustrates is a flight to quality accommodation in modern buildings outside of core CBD locations.”
Throughout FY21, COF achieved a 98.3% average rent collection4. More than 80% of the REIT’s income is derived from government, multinational corporations and listed entities, of which, more than a quarter (27%) is generated from Federal and State Government.
COF’s has a resilient leasing profile with more than 63% of portfolio leases expiring at or beyond FY25.
Leasing success translated into a solid trading performance with $102.2 million in Funds From Operations (FFO)5, meeting the top end of the REIT’s guidance of 19.9 cents per unit (cpu) and distribution guidance of 16.5cpu. COF delivered a 21.0% total shareholder return throughout the 12 month period6.
COF’s market confidence is reinforced with a FY22 distribution guidance of 16.6cpu7.
Nichols continued, “At the beginning of FY21, COF was one of the few REITs to provide distribution guidance despite the effects of COVID-19 prevailing at the time. Notwithstanding the recurring impacts of COVID-19 on operating conditions, it is my pleasure to again provide FY22 distribution guidance, which equates to a current yield of 6.7%, with an FFO guidance of 18.0 cpu.”
The high level of leasing activity was complemented by a valuation increase in the second half of FY21, with a $16.3 million gain as at 30 June. The valuation uplift contributed to COF’s Net Tangible Assets (NTA) of $2.48 per unit8 and $76.9 million net statutory profit.
COF’s $2.0 billion portfolio now has a weighted average capitalisation of 5.81%.
Most recently, COF secure a significant $405 million debt refinance, which increases its weighted average debt maturity to 4.2 years (from 2.3 years) and signifies strong support and confidence in the quality of its office portfolio.
Nichols added, “Our recent debt refinancing maintains COF’s competitive c.2.4% all-in cost of debt across a diversified pool of five lenders. This provides the REIT with sufficient undrawn debt and substantial debt covenant headroom, providing a robust capital structure.”
During FY21, COF increased its focus on Environment, Social and Governance (ESG) initiatives with further diversification across its Responsible Entity Board, with the appointment of Matthew Hardy as independent Chair and Nicole Green as Independent Non-Executive Director.
The COF portfolio also achieved a high 4.7 star average NABERS energy rating (by value). Buildings within the portfolio benefit from a relatively young average age of 17 years, lending themselves to sustainable features and low maintenance expenditure.
Nichols concluded, “While there remains uncertainty due the ongoing disruptions caused by COVID-19, we have seen increasing white collar employment growth and greater confidence from tenants in relation to their future office accommodation requirements. Throughout FY22 we expect to see more employees returning to the office and further improving leasing activity.”
Throughout the second half of FY21, the portfolio increased its occupancy to 93.1%9 and maintained a 4.3 year weighted average lease expiry (WALE)10. COF appears well positioned for potential near-term inclusion in the FTSE EPRA Nareit Index.
1 Including Heads of Agreement
2 Original Distribution Guidance 16.5cpu
3 Source: JLL National Office Summary Q2CY21
4 As COVID-19 impacts and the National Code of Conduct on Commercial Leases remain active, it is possible that further rent relief claims could be received for the FY21 period
5 FFO is the Trust’s underlying and recurring earnings from its operations. This is calculated as the statutory net profit adjusted for certain non-cash and other items.
6 Total Securityholder Return (TSR) equals change in unit price during the period, plus distributions declared
7 Guidance remains subject to unforeseen circumstances impacting on material changes to operating conditions.
8 NTA per unit is calculated as net assets less goodwill divided by closing units on issue. NTA adjusted to include the proceeds from the sale of 465 Victoria Avenue, Chatswood NSW.
9 Occupancy by gross income
10 WALE by gross income