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Centuria Office REIT: Leasing & valuations underpin FY22 results

Strong employment growth and returning office workers provide positive tailwinds

  • $115m statutory net profit (+50% FY21); $37.9m valuation increase1; 41,200sqm+ leased2 (13.6% NLA)
  • 18.2cpu FFO, 16.6cpu distribution, consistent with FY22 guidance
  • Portfolio provides 23 high quality assets worth $2.4bn3; 90% are A-Grade buildings, av. 16 years old
  • 94.7% occupancy4, 4.2 year WALE5; $313.7m6 of acquisitions; $20.9m divestment

Australia’s largest ASX-listed pure-play office fund, Centuria Office REIT (ASX: COF), has provided positive year end 2022 Financial Year (FY22) results having navigated through COVID impacts, rising inflation and subsequent interest rates increases.

Its statutory net profit jumped 50% to $115 million, while Funds from Operations (FFO) improved 2.7% to $104.9 million.

The REIT delivered 18.2 cents per unit (cpu) FFO and 16.6cpu distributions, consistent with FY22 guidance.

COF’s strong leasing activity supported healthy like-for-like valuation gains of $37.9 million1. During the period, COF secured 48 leases across 41,283sqm2, equating to 13.6% of its portfolio net lettable area (NLA). More than half of these leases related to new tenants (17,605 sqm), illustrating strong tenant demand for modern metropolitan office accommodation.

Grant Nichols, COF Fund Manager and Centuria Head of Office said, “Most pleasing about COF’s FY22 results is the significant amount of leasing executed. In fact, since the outbreak of COVID-19, COF has leased 120,000sqm, equivalent to c.40% of its NLA.

“While our leasing activity contributed to a healthy valuation uplift, valuation gains were supported by recent sales transactions across metropolitan and near city office markets. In fact, across the Australian office sales market, 71% of the office buildings transacted during the second half of FY22 were outside core CBD office markets. Metrics from these sales strongly reinforce the property valuations which make up COF’s Net Tangible Assets (NTA) of $2.50 per unit7</>sup.

“We continued to witness a shift in tenant preferences towards better quality accommodation that is close to key transport nodes, providing better commutability and subsequently improved work-life flexibility. COF’s young office portfolio lends itself to these leasing preferences, with its modern and sustainable office buildings providing better access to wellbeing amenity, retail and hospitality while offering affordable rents.”

COF benefits from a geographically diversified office portfolio without a single market concentration. In total, the REIT comprises 23 high quality metropolitan office buildings worth $2.4 billion3. Approximately 90% of its buildings are A-Grade assets.

Its portfolio provides a strong 94.7% occupancy4 and a 4.2 year weighted average lease expiry5 (WALE). In addition, COF has an average building age of 16 years and an average NABERS energy rating of 4.8 stars.

Despite the impact of COVID-19, COF provided a strong average rent collection of 98%.

During the period, COF acquired three strategic assets worth $313.7 million6 and divested one building for $20.9 million, providing a 10% premium above its prior book value.

Mr Nichols, concluded, “Throughout FY22, we saw the impact of COVID retreating as more workers returned to the office and employment rates strengthened. Looking ahead, we expect COF to have like-for-like net operating income growth through FY23.

“We recognise that a rising interest rate environment creates some future uncertainty, but we remain optimistic for Australian office markets. Tenant enquiry levels, backed by strong employment growth, continue to improve and some of the strongest demand is within metropolitan office markets. This bodes well for medium term rent growth.

“In making FY23 guidance, we have adopted an interest rate forecast with suitable buffers to manage potential further interest rate volatility8. We believe our guidance provides an attractive, compelling yield within the current economic climate.”

COF provides FY23 FFO guidance of 15.8cpu9 and distribution guidance of 14.1cpu9 (distribution yield of 7.7%10), which are expected to be paid in equal quarterly instalments.

1. All COF assets were independently valued during FY22, with 12 of the 23 properties being externally valued as at 30 June 2022, resulting in a $37.9 million like-for-like increase across FY22. Past performance is not a reliable indicator of future performance.
2. Includes Heads of Agreement (HOA)
3. Includes the right of use asset
4. Occupancy by gross income
5. Weighted Average Lease Expiry (WALE) by gross income
6. Values include the Wyatt Street development’s as on completion value
7. NTA per unit is calculated as net tangible assets divided by closing units on issue
8. Assumed floating rate is based off an average forecast cash rate of 3.0% over FY23
9. Guidance remains subject to unforeseen circumstances and material changes in operating conditions
10. Based on COF closing unit price of $1.84 on Thursday 28 July 2022​