Centuria Office REIT, Australia’s largest listed pure-play office REIT, has announced its Full Year financial results for the period ended 30 June 2021 with Funds from Operations up 16% but distribution yield slightly lower than FY20 at 7%.
COF’s diversified portfolio specialises in quality office accommodation predominantly located in fringe and metropolitan markets that lend themselves to larger floorplates, modern amenities, attractive rents, and better work commutability between home and office via excellent public transport routes and road arterials.
More than 50% of the leases completed were new tenants to the COF portfolio, which demonstrates growing tenant confidence in committing to new office accommodation. Total leasing transactions accounted for 18.1% of portfolio Net Lettable Area (NLA).
Grant Nichols, COF Fund Manager, commented, “COF delivered pleasing results throughout FY21. Distributions were in line with guidance of 16.5cpu, which equates to a 6.7% yield, while FFO of 19.9cpu was at the top end of the 19.7-19.9 cpu guidance range. The REIT also benefitted from a $16.3 million valuation uplift on a like for like basis as at 30 June 2021, which reflects the portfolio’s high-quality assets and strong tenant covenants.
COF has benefited from a shift during the pandemic towards offices in good, commutable locations, which are modern and provide more lifestyle facilities such as end of trip facilities, flexible workspaces along with cafes, restaurants and other social interaction amenities such as parks and recreational facilities. Access to excellent public transport infrastructure as well as road arterials are increasingly proving to be highly desirable attributes for today’s workforce.
Grant Nicholas said, “While Sydney’s CBD experienced negative net absorption of 157,554sqm and Melbourne’s CBD a negative 187,837sqm throughout FY21, fringe and metropolitan markets have demonstrated recovering tenant demand. Over the past six months we have seen positive net absorption in the Sydney Fringe, Melbourne Fringe and Brisbane Fringe office markets while each one of their CBD counterparts continue to incur negative net absorption. What this illustrates is a flight to quality accommodation in modern buildings outside of core CBD locations.”
More than 80% of the REIT’s income is derived from government, multinational corporations and listed entities, of which, more than a quarter (27%) is generated from Federal and State Government.
Grant Nicholas said “COF’s performance is also due to its exposure in Australia’s better performing office markets that lend themselves to good workforce commutability and attractive, affordable rents. These markets attract quality tenants, which underpin sustainable income returns and lower volatility. Through 2H21, COF increased occupancy to 93.1%, maintained a weighted average lease expiry of 4.3 years and improved average rent collections to 98.3%.
“At the beginning of FY21, COF was one of the few REITs to provide distribution guidance despite the effects of COVID-19 prevailing at the time. Notwithstanding the recurring impacts of COVID-19 on operating conditions, it is my pleasure to again provide FY22 distribution guidance of 16.6 cpu, equating to a current yield of 6.7%, with a FFO guidance of 18.0 cpu.”
Centuria Office REIT is on our current AREIT Top Picks
Financial Highlights
- $102.2 million Funds From Operations (FFO), up 16% on FY20
- 19.9 cents per unit (cpu) FFO1 per unit, at the top end of the FY21 guidance range
- 16.5 cpu distributions per unit, in line with FY21 guidance (down -1.3% on FY20)
- $76.9 million statutory net profit
- $2.48 per unit Net Tangible Assets (NTA)
- 98.3% average rent collection throughout FY21
- Robust balance sheet, $405million debt refinanced in 2H21, no debt tranche expiring before June 2024
- Well positioned for potential near-term inclusion in the FTSE EPRA Nareit Index
Portfolio Highlights
- 2H21 like for like valuation uplift of $16.3million
- 52,077 sqm leases agreed across 61 deals, (18.1% of portfolio NLA)
- 26,388 sqm of leases agreed relates to new tenants
- Rental income: over 80% derived from government, multinational corporations and listed entities
- 25% derived from Federal and State Government
- Staggered lease expiry, more than 63% of portfolio leases expire at or beyond FY25
- 2H21 portfolio occupancy increased to 93.1%, WALE of 4.3 years
- 4.7 Stars average NABERS energy rating (by value)
Statutory net profit for FY21 was $76.9m, with Funds from Operations of $102.2 million or 19.9 cpu, and distributions of 16.5 cpu. Funds from Operations during FY21 benefited from receipt of a surrender payment from Foxtel, who surrendered their lease over the entire building at 35 Robina Town Centre Drive, Robina, QLD. Under the agreement, COF received a surrender payment equivalent to the rent payable under the remaining Foxtel lease term discounted to June 2020. Pleasingly, since the surrender occurred in July 2020, the building has been largely re-let, with occupancy increasing to 88.6%, which demonstrates COF’s continued success in active leasing management.
Like for like portfolio revaluations at 30 June 2021 of $16.3 million contributed to NTA3 of $2.48 per unit.
COF enhanced its debt profile through the period with $405million of debt refinanced in the second half of FY21, increasing the weighted debt maturity to 4.2 years (from 2.3 years) and providing $106.7 million of undrawn debt. The REIT now has no debt tranche expiring before June 2024 and maintains a competitive all-in debt cost of approximately 2.4%. COF has significant covenant headroom with an interest coverage ratio of 6.6x (covenant 2.0x) and loan to value
ratio of 35.0% (covenant 50%).
COF benefitted from robust leasing activity throughout FY21. Leases were agreed with 61 tenants, across 52,077sqm (18.1% of portfolio NLA). Of the leases agreed, 26,388 sqm related to new tenants, with 15 of the new tenants being in excess of 500sqm. In particular, strong results were achieved at:
- 100 Brookes Street, Fortitude Valley QLD – five new tenants increased occupancy from 80.9% to 100% and extended the WALE from 3.7 to 4.9 years.
- 35 Robina Town Centre Drive, Robina QLD – occupancy has been increased to 88.6% following Foxtel’s full building surrender in July 2020.
- 131 Grenfell Street, Adelaide SA – building occupancy retained at 100% following a three year lease to a new SA Government department.
- 1 Richmond Road, Keswick SA – building occupancy retained at 100% following a new five year lease to ARTC.
Through active tenant relations and effective asset management, over 63% of the portfolio’s leases now expire at or beyond FY25. COF’s portfolio of young, well connected and affordable assets continue to attract quality tenants with 27% of portfolio income derived from Government tenants while a further 55% is derived from multinational corporations and listed entities.
COF externally revalued 14 of its 22 properties as at 30 June 2021, resulting in a like for like increase of $16.3 million due to positive leasing outcomes and some capitalisation rate compression. COF’s $2.0 billion portfolio now has a weighted average capitalisation rate of 5.81%.
COF demonstrated resilience to the continued impact of COVID-19. COF’s portfolio rent collections averaged more than 98.3% for the full year to 30 June 2021. Provided rent relief, both waivers and deferrals, totalled c.$1.4 million for FY21, with limited rent relief provided during Q4FY21. During 1H21, COF divested a 25% interest in 465 Victoria Avenue, Chatswood NSW for $44.7 million, which unwound the REIT’s only minority interest in its portfolio at a price that was $2.8 million above prior book value.
Sustainability
COF is externally managed by Centuria Capital Group (Centuria) and aligns itself to Centuria’s Sustainability approach. Throughout FY21, Centuria and COF implemented various ESG initiatives, including:
- Centuria’s first Sustainability Report to be released later this year and to include responses to the Task Force on Climate Related Financial Disclosure recommendations
- Further diversification of COF’s responsible entity Board (CPFL), appointing Matthew Hardy as independent Chair and Nicole Green as Independent Non-Executive Director
- Establishment of Centuria’s Culture and ESG Board Committee
- Release of Centuria’s first modern slavery statement
- Gender diversity of 38% to 62%, females to males
- 94% of employees enjoy working at Centuria, 91% of tenants recommend Centuria
- Compulsory employee training established for cyber security, financial education, and code of conduct
- Retaining Centuria membership to the Diversity Council of Australia
Specific to environment, over the course of FY21, COF sought to enhance energy and water efficiency under the NABERS rating scheme. A Sustainability Portfolio Index rating of 4.7 for Energy and 3.2 for Water were received for CY2020. Furthermore, COF has disclosed its CY2019 and CY2020 energy and water consumption, GHG emissions (Scope 1 and 2), and their respective intensities in the FY21 results presentation.
Summary & Outlook
Mr Nichols, commented, “Throughout FY21, a number of office transactions have reinforced the strength of the Australian commercial office market and suggest continuing strong investment demand for Australian office assets. This resilient performance continues to attract the interest of domestic of offshore capital, who view Australia’s economic and office market fundamentals favourably.
“Despite the ongoing impacts of COVID-19, the COF portfolio has been able to generate strong leasing activity and achieve high levels of cash receipts. This performance is testament to COF’s diversified portfolio of quality, highly connected assets that offer attractive office spaces in Australia’s better performing office markets.
“While there remains uncertainty due the ongoing disruptions caused by COVID-19, we have seen increasing white collar employment growth and greater confidence from tenants in relation to their future office accommodation requirements. Throughout FY22 we expect to see more employees returning to the office and further improving leasing activity.”
COF provides FY22 distribution guidance of 16.6cpu, which equates a current yield of c 6.7%. Distributions are expected to be paid in equal quarterly instalments. COF provides FY22 FFO guidance of 18.0 cpu.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Related Articles
