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COF’s HY24 results: Optimistic outlook for metro office demand

Metro market positive net absorption outperforms Sydney/Melbourne CBDs

  • 28,659sqm leased across 23 deals, (9.7% of portfolio)1; c.67% of portfolio leased since COVID hit
  • Maintained high 96.2%2 occupancy, 4.4-year WALE3; 92% portfolio weighted to metropolitan/fringe
  • Reduced future metro office supply, coupled with forecast population growth, provides mid-term tailwinds
  • Reaffirmed FY24 FFO guidance4 of 13.8cpu, distribution guidance of 12.0cpu4

Australia’s largest listed pure-play office fund, Centuria Office REIT (ASX:COF), has delivered solid interim results for the 2024 financial year, with strong leasing transactions demonstrating the continued resilience of metropolitan markets over Sydney and Melbourne CBDs.

Approximately 92% of COF’s portfolio is exposed to metropolitan, fringe and near-city office markets, that is, markets outside the Sydney and Melbourne CBDs. COF’s portfolio consists of 22 modern office buildings worth $2.1 billion5.

During HY24, COF leased 28,659sqm across 23 transactions, representing (9.7% of portfolio NLA)1. Significantly, since 2020 when the COVID pandemic impacted the office sector, COF has leased more than c.67% of its portfolio, totalling more than 197,000sqm.

Grant Nichols, COF Fund Manager and Centuria Head of Office said, “Four years on from the start of COVID’s impact and, despite flexible working arrangements having become somewhat ubiquitous, many Australian office markets experienced positive net absorption throughout 2023. This suggests many tenants have already right-sized and tenant demand may be finding an equilibrium.

“Many tenants have not decreased their footprint and the office leasing distress predicted by some market speculators has not materialised, particularly in the markets COF is exposed to6. In fact, metropolitan office demand continues to materially outstrip the Sydney and Melbourne CBDs. In particular, the Brisbane fringe market incurred the strongest net absorption in 2023 and has limited pending supply. COF has substantial exposure to this market with a 20% portfolio weighting.”

During the half, COF maintained high occupancy exceeding 96%2 and its portfolio WALE increased to 4.4 years3.

COF delivered Funds From Operation (FFO) of $41.8 million or 7.0 cents per unit (cpu)7 and distributions of 6.0cpu, both in line with FY24 guidance4. The latter provides a distribution yield of 9.6%8.

Ross Lees, Centuria Head of Funds Management, added, “COF is providing unitholders with a well-priced investment, considering its high distribution yield. COF’s portfolio construction, comprised of modern, high-quality assets within metropolitan markets, is differentiated by amenity, affordability and connectivity. These unique attributes capitalise on the continued bifurcation between Prime grade stock and secondary assets.”

Mr Nichols concluded, “Looking forward, we expect future office supply to materially reduce over the medium term. Development feasibilities have been impaired due to rising construction costs, increased finance costs and softening capital market transactions, pushing economic rents significantly above prevailing rents in the majority of Australian office markets. This is likely to provide strong future tailwinds for the markets COF is exposed to, especially in light of forecast population and white collar employment growth.”

During the period, COF continued to maintain liquidity with $88.2 million pro forma debt facility headroom9, a 2.7-year weighted average debt expiry and has no debt expiring until FY26. As at 31 December 2023, 76% of debt is hedged.

Selective divestment of two non-core assets during the period improved overall portfolio quality, positioning COF to take advantage of the recovering conditions within decentralised office markets.

COF also addressed its most significant FY25 lease expiry, relating to its largest tenant (c.5% portfolio NLA). The Commonwealth Government committed to a further 10-year term at 235 William Street, Northbridge, WA.

COF reaffirmed its FY24 FFO guidance of 13.8 cpu4 and distribution guidance of 12.0 cpu4 (distribution yield of 9.6%9), which are expected to be paid in equal quarterly instalments.

COF HY24 results highlights

Centuria Office REIT Fund Manager, Grant Nichols discusses the Fund’s HY24 highlights.

  1. By Net Lettable Area (NLA), including Heads of Agreement and executed leases
  2. Occupancy by gross income as at 31 December 2023
  3. Weighted Average Lease Expiry (WALE) by gross income as at 31 December 2023
  4. Guidance remains subject to unforeseen circumstances and material changes in operating conditions
  5. Excludes the right of use asset
  6. JJL research 2023
  7. 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
  8. Based on COF closing unit price of $1.25 on 14 February 2024
  9. Headroom reflects undrawn debt (including a $1.5m bank guarantee held as security over the 46 Colin Street, West Perth WA ground lease)