The Australian Unity Office Fund portfolio recovery has stabilised with tenant enquiry pointing to improving conditions ahead.
James Freeman, AOF’s Fund Manager said “AOF’s portfolio continues to perform well. Pleasingly occupancy has been maintained at over 95% and rent collections remained high. We are continuing to see tenant enquiry and we remain in active dialogue with the Fund’s major tenants around future space and accommodation requirements.
“From a portfolio construction perspective, we were pleased to enter a conditional contract for the sale of 241 Adelaide Street, Brisbane for $31.5 million during the quarter. The purchaser continues to work through the conditions precedent with a target settlement prior to 30 June 2021.”
During the 3rd Quarter of FY21, the Group entered into Leases and Heads of Agreement for eight tenancies, equating to approximately 3,280 sqm (representing approximately 3.0% of portfolio Net Lettable Area (NLA)). Total leasing for FY21 now equates to approximately 14,300 sqm (representing 13.2% of portfolio NLA), with approximately 12,000 sqm of leases executed and 2,300 sqm of Heads of Agreement.
AOF reported that occupancy remained stable at 95.2%, (ie space subject to a lease) but have not provide information about the number of people actual using their assets. The Property Council’s March data showed that across the market, the return to the office in March showed signs of improvement, but was well short of capacity with Melbourne at 35% usage, Sydney 50%, and Brisbane 63%. AOF has a number of metropolitan and secondary CBD assets which are reported to be less affected.
James Freeman said, that “Employers generally remain focused on affordability, and employees are seeking to work closer to home, while still enjoying excellent amenity and accessibility.”
Notwithstanding the possibility of unused space, AOF collected 97% of the billed rents in the quarter in addition to rental arrears related to previous periods.
AOF reaffirmed their FY21 FFO guidance of 18.3 – 18.7 cpu and FY21 distribution guidance of 15.0 cpu.
The responsible entity for AOF (which is a joint venture of between Australian Unity Limited and Singapore-based Keppel Capital Limited) are under pressure to explain the trading gap to NTA, which is currently sitting at a -14% discount. The Group appointed Highbury Partnership to assist with the strategic assessment which, back in February, was to have produced outcomes over “the coming months”, but is now deferred to late June.
James Freeman said “The board currently expects to be able to communicate further progress on the Strategic Assessment during, or shortly after, the fourth quarter of FY21.”
Our Views
Clearly the market is expecting office rents and cap rates to soften further as vacancies and incentives rise. These expectations lead to a lower forecast NTA which is difficult for AOF to overcome.
We feel that if AOF were able to demonstrate that occupiers of its assets were returning to their offices at rates higher than the benchmarks reported by the PCA, it is possible the REIT could be re-rated and the discount to NTA closed.
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