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COF’s leasing and capital management supports healthy FY24 results

REIT explores next gen edge data centres

  • 42,722 sqm total leasing activity across 51 transactions, (15% of portfolio NLA)1 executed during FY24
  • $862 million refinanced, no debt expiring before FY28; $139 million in divestments used to reduce debt
  • One of Australia’s first AI inferencing and ultra high-density LIC data centres expected in Docklands Vic asset
  • Medium-term leasing tailwinds anticipated: reduced new office supply, population growth, transport infrastructure
  • Delivered on FY24 guidance: 13.8cpu FFO2, 12cpu Distributions

Australia’s largest listed pure-play office fund, Centuria Office REIT (ASX:COF), has reported significant leasing activity and capital management initiatives throughout FY24 to deliver on Funds From Operations (FFO)2 and distribution guidance, while identifying an innovative opportunity to extract value from a next generation edge data centre customer tenant.

During the period, COF leased 42,722 sqm equating to c.15% of portfolio NLA1 while the divestment of four non-core assets provided $139 million in proceeds used to reduce debt. Additionally, more than $862 million of existing loans were refinanced and debt covenant terms improved, indicative of strong lender support for COF and underlining confidence in the quality of portfolio assets.

COF delivered FFO2 (earnings) of 13.8 cents per unit (cpu) and distributions of 12cpu.

While COF provides a robust portfolio occupancy of c.93%3 and a stable 4.3-year WALE4, Centuria’s inhouse management team continued to address vacancies and near-term expiries, exploring a leasing opportunity with a next-generation edge data provider.

Recently, COF secured a 10-year lease to ResetData at 818 Bourke Street, Vic for an edge data centre of up to 1.5 megawatts using proprietary Liquid Immersion Cooling (LIC) technology5. Further assets within COF’s portfolio are being evaluated for these data centres.

Belinda Cheung, COF Fund Manager, said, “During FY24, Centuria has executed on COF’s priorities by achieving strong leasing activity, non-core divestments and debt refinancing. This was achieved against a backdrop of challenging macroeconomic headwinds including a high inflationary and interest rate environment coupled with slow GDP growth. Significantly, non-core assets were divested at an average discount of c.2% to prevailing book values, underpinning the quality of COF’s portfolio.

“Across the nation, increased construction costs, financing costs and softer capitalisation rates have impaired office development feasibilities, which is likely to dramatically reduce new office supply over the medium term. COF estimates that the economic rents required to support new developments have increased c.60% since 2020, and the COF portfolio is valued at less than half the increased replacement cost.

“In light of these tailwinds, we maintain an optimistic outlook on the medium term as we expect future office supply to diminish based on challenging development feasibilities, which are likely to accelerate economic rents materially above the current rents in most Australian markets, particularly in the metropolitan regions where COF’s portfolio is positioned.”

Jesse Curtis, Head of Funds Management, added, “We are seeing signs of improving office sector tailwinds with return to office mandates coinciding with limited new office developments and population growth leading to a larger white-collar workforce. Investment in transport infrastructure, such as the Sydney Metro and Brisbane Cross River Rail, will also improve commutability, especially to metropolitan and near city office markets. These tailwinds are expected to positively impact COF’s portfolio over the medium term.”

COF’s refinancing resulted in no debt expiring before FY28 with renegotiated debt covenants having no change to debt margins.

Approximately three quarters of COF’s leases (c.72%) expire at or after FY27. Since 2020, COF has leased 77% of its portfolio by NLA, totalling 210,000sqm. The strong leasing activity is reflective of modern sustainable office assets located within Australia’s metropolitan markets.

COF’s modern office portfolio encompasses 19 high quality assets worth $1.9 billion, with an average building age of 17 years and 93% of the portfolio comprising A-grade assets.

  1. Includes Heads of Agreement and executed leases
  2. Funds From Operations (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
  3. By gross income
  4. Weighted Average Lease Expiry (WALE) by gross income
  5. Subject to electricity provider’s finalisation of gross power availability to the building and conditional on local planning approval.