Centuria Office Copes with COVID but Vacancies Rise

4 February 2021

Centuria Office continues to trade at a -20% discount to NTA despite as markets continue to price in risk in the office sector.

Centuria released their 6 monthly results for COF to 31st December revealing positive outcomes for vacancy and rental collection during COVID enabling the group to maintain guidance on distributions.

The Trust is however facing a tough time with some assets following the Infosys departure at 818 Bourke Street, Melbourne and Foxtel surrendering its lease at 35 Robina Town Centre Drive, Robina. These departures drove COF’s vacancy to 8.5%, still well short of the national average of 13.4% for Non CBD office markets.

COF will also face challenges to its tenancy schedule in the next 18 months with 10% of income facing a lease expiry. Notwithstanding this, COF continue to maintain its guidance with FY21 distributions reflecting a yield of 8.5% on the current price of $1.95.

HY21 Financial Highlights

  • Funds from operations (FFO) of $57.7 million, with FFO per unit of 11.2 cents per unit (cpu)
  • FY21 FFO guidance provided of between 19.4 – 19.9 cpu
  • Net Tangible Assets (NTA) of $2.45 per unit
  • Pro-forma gearing of 33.2%, with undrawn debt capacity increased to $175.7 million
  • Rent collections for the period July – December 2020 averaged 96.7%
  • HY21 distributions per unit (DPU) of 8.3 cpu, in line with guidance
  • FY21 DPU guidance reiterated at 16.5 cpu, reflecting a distribution yield of 8.5%

HY21 Portfolio Highlights

  • Leases agreed for 31 lease transactions, totalling more than 28,306 sqm (9.3% of portfolio NLA)
  • 465 Victoria Avenue, Chatswood sold for $44.7 million (25% interest), $2.8 million above prior book value
  • Over 80% of total portfolio income is derived from government, listed and multinational tenants
  • Staggered lease expiry, with 57% of the portfolio’s leases to expire at or beyond FY25
  • ▪ Portfolio occupancy9 of 91.5%; WALE10 of 4.5 years

Grant Nichols, COF Fund Manager, commented, “COF delivered a robust performance in HY21, completing a significant amount of leasing across the portfolio while maintaining high rent collections. COF also reduced gearing through the COVID-19 affected period. Resilient operating performance has enabled COF to provide forecast FY21 FFO guidance range of 19.4 – 19.9 cents per unit. COF also re-affirmed its FY21 distribution guidance of 16.5 cents per unit, which equates to a strong distribution yield of 8.5%”

Statutory net profit for HY21 was $21.5 million, with Funds from Operations of $57.7 million or 11.2 cpu, and distributions of 8.3 cpu, in line with FY21 guidance.

COF’s portfolio rent collection averaged more than 96% from July 2020 to December 2020. Provided rent relief, both waivers and deferrals, totalled c.$2.6 million for HY21, an annualised reduction of c.50% from the rent relief provided in relation to Q4 FY20 ($2.5m).

COF strengthened its balance sheet during HY21, with gearing reducing to 33.2%4,5 and undrawn debt capacity increasing to $175.7 million. The reduction in gearing further increased COF’s significant covenant headroom with an interest coverage ratio of 7.6x (covenant 2.0x) and loan to value ratio of 36.8% (covenant 50%). COF maintains a staggered debt maturity profile with five high quality financiers, a weighted average debt maturity of 2.8 years and a competitive all in debt cost of approximately 2.3%.

Occupancy at 31 December 2020 was 91.5%, a decrease of -6.6% compared to 30 June 2020 due to the Infosys expiry at 818 Bourke Street, Melbourne and Foxtel surrendering its lease at 35 Robina Town Centre Drive, Robina, QLD – as previously announced. Under this agreement, COF received a surrender payment equivalent to the rent payable for the remainder of Foxtel’s lease term, discounted to June 2020. This surrender provides an opportunity to utilise Centuria’s strong leasing capabilities to reposition the asset, maximising the benefit of the surrender payment received. Pleasingly, and due to leasing completed, occupancy at 35 Robina Town Centre, Robina increased to 36.1% during HY21.

As at 31 December 2020, 13 of the 23 assets, representing 59% by value, were independently revalued resulting in a marginal, decreased portfolio value of approximately $17m or -0.8%, compared to the preceding book value. The decrease in value was primarily the result of valuers adopting lower growth rates, with increased downtime and incentives. The weighted average capitalisation across the portfolio was broadly unchanged at 5.90%.

Like for like portfolio revaluations throughout HY21 reduced $17.0 million, contributing to an NTA of $2.45 per unit.

Grant Nichols, COF Fund Manager, said, “The portfolio performed well throughout HY21, generating solid leasing activity, strong cash receipts and maintaining WALE. This performance can be credited to the portfolio being underpinned by high quality tenants and assets offering affordable rents in locations that resonate well with tenants at a time when operating costs are scrutinised and workforces’ preferences show a trend towards working closer to home. Additionally, COF benefits from a relatively young asset portfolio with the average building being 16.4 years. Younger generation
stock will assist with attracting and retaining tenants while providing limited overall capital expenditure and maintenance requirements.

COF provides FY21 FFO guidance of 19.4-19.9 cents per unit and reiterates FY21 distribution guidance of 16.5 cents per unit paid in equal quarterly instalments and reflecting a current yield of 8.5%.

Our Views

COF are trading at -20% discount to NTA as the market anticipate a further softening of values and a reduction in income into the FY22 and beyond.

The 10% exposure to lease expiries over the next 18 months is concerning and could lead to a some pain in the short term.

Whilst the current yield is 8.5%, a -12% reduction in values across the board based on a -5% reduction in income and a 50Bps softening of cap rates would quickly take NTA to $2.12 and the yield to 7.5%.

We have asked Grant Nicols to comment on whether there are any mitigating factors for those near term lease expiries (ie are their passing rents higher or lower than market or has there been any early discussions on renewals). Grant advised that the lease expiries “are diversified across the portfolio, and there is not one lease expiry that represents material risk”.

We have also asked Grant whether COF will look to close the NTA gap through any re-purchase of scheme.

Grant advised that “it may be something we contemplate going forward. Unfortunately most office REITS are trading at significant discounts at the moment, as the market doesn’t appear to differentiate between them. We think that COF represents very good value, and due to the type of assets within the portfolio, COF could very well outperform the broader market.”

On the basis of the yield, and the low short term risks, COF is on our preferred REIT list.