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Centuria Office REIT occupancy bolstered by significant leasing

Metro offices demand contrary to anecdotal WFH rhetoric

  • COF leased 30,420sqm1 across 35 deals in HY23, increasing occupancy to 96.4%,
  • 150,000sqm+ leased since COVID-19 outbreak, over 50% of portfolio NLA
  • Reaffirmed FY23 FFO guidance of 15.8 cpu2, distribution guidance of 14.1 cpu2 (8.8%3 distribution yield).

Australia’s largest listed pure-play office fund, Centuria Office REIT (ASX:COF), has leased c.30,000sqm across its Australia-wide portfolio during HY23, which materially increased its occupancy to a healthy 96.4%.

More specifically, COF executed 35 transactions throughout the half, representing (10% of portfolio NLA)4,5, including 24,285sqm across new leases and 6,135sqm in renewals. These transactions continue the REIT’s leasing momentum since the beginning of COVID, with more than 150,000sqm leased, accounting for c.51% of COF’s portfolio Net Leasing Area (NLA).

Grant Nichols, COF Fund Manager and Centuria Head of Office said, “COF’s leasing activity substantiates the increasing demand for metropolitan and near-city office markets that lends themselves to affordable office accommodation, an increasing consideration from occupiers in the current economic environment.

“COF’s encouraging leasing activity runs contrary to anecdotal speculation concerning the impact flexible work may have on demand for office space. With tenants increasingly recognising the benefit offices provide to collaboration and culture, and labour demand remaining strong, we are confident that COF’s quality office portfolio will continue to attract and retain tenants.

“Moreover, research shows workspaces providing lifestyle amenities incentivise workers to return to the office and facilitates recruiting personnel6. Offices with lifestyle amenities are indicative of COF’s portfolio.”

Further to COF’s significant leasing activity, many Australian office markets demonstrated positive net absorption, or an increase in leased space over the past 12 months. Much of this positive net absorption occurred in metropolitan or near city office markets, with the Melbourne Fringe demonstrating the strongest 12-month net absorption of any Australian office market. Negative net absorption was concentrated in the Sydney and Melbourne CBD, markets COF has limited or no exposure to.

During HY23, COF delivered Funds From Operations (FFO) of $48.6 million or 8.1cpu, in line with guidance. Distributions of 7.05cpu were in line with FY23 guidance and were paid to unitholders in equal quarterly instalments. The resilience of COF’s high-quality portfolio is reflected by its high-calibre tenants, delivering a strong 97% average rent collection during HY23.

COF maintains substantial undrawn debt of $101.5 million7 and c.$19.4 million cash on hand, complemented by a 3.4 year weighted average debt expiry with no debt expiry until FY25. Gearing as at 31 December 2022 was 35.6%, with 58.1% of the debt hedged.

COF maintained a 4.2 year Weighted Average Lease Expiry (WALE) across its portfolio of 23 high quality assets worth $2.3 billion. Additionally, 90% of COF’s portfolio comprises A-Grade assets with a young, average building age of 17 years.

Mr Nichols continued, “During the period, there has been a noticeable reduction in capital transaction volumes due to rising interest rates impacting asset and debt pricing. Of the assets that transacted, there is evidence of bifurcation based on quality and leasing risk. Well tenanted, high quality buildings continue to trade on competitive sales metrics. It is expected that transaction volumes will increase once interest rates stabilise and investor conviction improves.”

Like-for-like portfolio revaluations as at 31 December 2022 declined by only 2% from COF’s prior portfolio value, with NTA reduced to $2.40 per unit8 as at 31 December 2022. COF’s weighted average capitalisation rate (WACR) expanded 17bps during the half to 5.75%.

Mr Nichols concluded, “With positive industry data revealing an increasing number of workers returning to the office across all capital cities9 and tenants generally seeking to accommodate peak office occupancy rather than average occupancy, we are optimistic tenant demand will continue in the near term.”

COF reaffirms FY23 FFO guidance of 15.8cpu2 and distribution guidance of 14.1cpu2 (distribution yield of 8.8%4), which are expected to be paid in equal quarterly instalments.

1. Total leasing activity extends to 15,084 sqm of executed leases and 15,336 sqm of signed Heads of Agreement
2. Guidance remains subject to unforeseen circumstances and material changes in operating conditions
3. Based on COF closing unit price of $1.60 on Tuesday, 31 January 2023
4. Includes Heads of Agreement and executed leases
5. Existing tenant, Clough, is currently in voluntary administration with an outcome still to be determined
6. Workplace Report released by MRI Software, respondents across US, UK and Australia
7. $101.50m of undrawn debt includes a $1.5m bank guarantee
8. NTA per unit is calculated as net tangible assets divided by closing units on issue.
9. Property Council of Australia’s Office Occupancy Survey (7 December 2022)