Australian Unity Office Fund grows earnings 2.7% and pursues merger talks

26 August 2021

The Australian Unity Office Fund released their results for FY21 with earnings growth of 2.7% and reaffirms a commitment to potential merger with the Australian Unity Diversified Property Fund.

The Australian Unity Office Fund consists of 8 office worth $638m. The assets spread across markets in Parramatta, Macquarie Park, Brisbane, Adelaide, Melbourne and Canberra with an average occupancy of 95%.

The Fund delivered earnings growth per security of 2.7% which within guidance but impacted by COVID rental waivers and higher incentives, but assisted by lower operating costs.

Approximately 16% of the Fund’s tenants have requested proportionate rent relief under the National Code. AOF has provided rent waivers totalling $558,000 during the year ended 30 June 2021 and agreed to defer $298,000 of tenants’ rental payments.

Nikki Panagopoulos, AOF Fund Manager said “The AOF portfolio has demonstrated resilience and has continued to perform well in the current challenging environment. Pleasingly, we delivered on both FY21 FFO and distribution guidance, with FFO of 18.7 cents per unit being at the top end of the FY21 guidance range.

“With occupancy at 95.7%, following strong leasing outcomes, and our approach to active management with the disposal of 241 Adelaide Street and the recent acquisition of 96 York Street Beenleigh, we believe AOF is well-positioned for FY22.

“As businesses reassess their cost bases and employees seek to work closer to home, reducing travel times on public transport, we expect the markets that AOF is invested in will outperform given their affordability when compared to the larger CBDs of Sydney and Melbourne”.

“The AOF portfolio remains well- positioned across the metropolitan office markets and smaller CBDs. These markets offer affordable rents which are a fraction of Sydney CBD and Melbourne CBD rents, while typically still providing great accessibility and amenity. In the current cost-conscious environment, we believe these markets are likely to outperform.

Ms Panagopoulos said, “The strategic assessment has been completed and strategic priorities for the fund have been identified with the benefit of unitholder engagement.”

The push for a strategic review began following the take over proposals in 2018 from Starwood (priced at $2.95), then outbid by Charter Hall and Abacus (priced at $3.04). Both offers were at a significant premium to the NTA and Unit price of the Fund at the time, suggesting that more value should be able to be extracted from the portfolio than what Australian Unity was delivering.

At the time the Board advises that “In concluding the strategic assessment, the Board has determined to maintain AOF’s office focus in metropolitan and CBD markets, to be complemented by a targeted and diversified portfolio of Australian real estate assets. The Fund will continue to focus on delivering sustainable and growing income returns through active asset management and value-add initiatives.”

It is therefore possible that an alternative Fund Manager with a targeted and diversified portfolio could generate a take over proposal that the Board will now find hard to defend on strategic grounds.

Ms Panagopoulos said, “AOF management remains focussed on driving an active management strategy to deliver leasing outcomes and execution of asset refurbishment initiatives and delivering on portfolio repositioning priorities, including exploring the divestment of 32 Phillip Street, Parramatta. In addition, management will continue to implement the refined strategy to realise value for unitholders, including by continuing the ongoing investigation of the DPF merger opportunity.

“AOF provides FY22 FFO guidance of 18.0 cpu – 18.5 cpu and distribution guidance of 15.2 cpu, subject to no material change in current market conditions and no unforeseen events. This distribution guidance equates to a distribution yield of approximately 6.1% on the 20 August 2021 closing price of $2.49”.

The Australian Unity Office Fund is not on our Top Picks List.

The REIT commenced the year with a security price of $2.09 against a NAV of $2.72 (-23% discount to NAV) and closed the year at $2.61 against an NAV of $2.71 (-4% discount to NAV). The REIT provided a 15c distribution for FY21, equating to a 7.2% yield on its opening price, which together with a 25% lift in unit price would provide investors with a total return of 32%.

Key financial and operational highlights for the period are:

Financial highlights:

  • Funds from Operations (FFO) of $30.6 million, or 18.7 cents per unit (cpu), at the top end of the guidance range
  • Distributions of $24.6 million, or 15.0 cpu
  • Portfolio value of $638.85 million, down $30.8 million from 30 June 2020, reflecting the sale of 241 Adelaide Street Brisbane for $31.5 million offset by valuation uplift
  • Net tangible assets (NTA) of $2.71 per unit, a decrease of 1 cent per unit, from $2.72 per unit at 30 June 2020
  • Balance sheet remains strong with gearing of 28.4% with no debt expiring until October 2022
  • Rental collections of 98% of FY21 rental income
  • Disposal of 241 Adelaide Street occurred during FY21 with the asset having been identified as non-core
  • Strategic assessment completed

Operating highlights:

  • Portfolio weighted average lease expiry (WALE) of 2.4 years
  • $638 million property portfolio as at 30 June 2020
  • Portfolio cap rate firmed 30bps from 6.1% as at 30th June 2020 to 5.8%


Approximately 16,449 sqm of leasing was completed in the FY21 financial year across 30 separate transactions. This represented approximately 15.3% of the portfolio area, prior to the sale of 241 Adelaide Street, Brisbane. The strong leasing activity drove a 2.0% increase in occupancy to 95.7%.


Management is focused on driving capital growth over the longer term for the portfolio.

At 2 Valentine Avenue, Buildcorp are well advanced on early works to de-risk the delivery program.

To further enhance the flexibility of the Valentine Avenue development opportunity, management is working on a design to link both 2 and 10 Valentine Avenue together to create a combined building offering. This offering is designed to provide a direct link through 10 Valentine Avenue to 2 Valentine Avenue, providing an enhanced arrival experience for both buildings and greater flexibility in security configurations. A development application to create a combined building was lodged with Parramatta Council in June 2021. Management is also actively marketing the properties at 2 and 10 Valentine Avenue to secure a tenant pre- commitment.


All properties were independently revalued as at 30 June 2021, with the portfolio valued at $638.35 million.

Portfolio valuations increased by $5.95 million during the year, driven by valuation growth from the two Macquarie Park assets and 2-10 Valentine Avenue, Parramatta. The valuation of 30 Pirie Street, Adelaide was reduced due to an increase in capital expenditure refurbishment allowances. The average value of the portfolio is ~$6,500 per square metre.

Strategic Assessment

On 7 July 2021 AOF announced the results of its strategic assessment conducted to examine options to maximise returns and value for unitholders.

In concluding the strategic assessment, it was determined to maintain AOF’s focus on owning Australian office properties in metropolitan and CBD markets, complemented by a targeted and diversified portfolio of Australian real estate assets. AOF will continue to focus on delivering sustainable income returns and the potential for capital growth over the long-term through active asset management and value-add initiatives.

After exploring the various options, AUIREL identified a potential merger of AOF and the Australian Unity Diversified Property Fund (DPF) as a key initiative to deliver on the refined strategy. AOF and DPF continue to explore a potential merger and a further update will be provided to the market in due course.

Balance Sheet

During the financial year, gearing reduced to 28.4%, well within the target gearing range of below 40%. AOF had $190.8 million drawn against total debt facilities of $250.0 million as of 30 June 2021.

The interest coverage ratio is 5.2 times providing significant headroom to the 2.0 times covenant.

The average cost of debt at 30 June 2020 was 3.4%, reducing to 2.9% as at 24 August 2021.

AOF’s capital structure aligns with its capital management objective of maintaining a robust capital structure that enables growth over the long term through significant undrawn debt, ample coverage to its covenants and a diversified debt structure with no debt maturing until October 2022.

FY22 Guidance

AOF provides FY22 FFO guidance of 18.0 cpu – 18.5 cpu and distribution guidance of 15.2 cpu subject to no material change in market conditions and no unforeseen events.

The distribution guidance of 15.2 cpu equates to a yield of approximately 6.1% based on the 20 August 2021 closing price; attractive in the current low interest rate environment.

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