The Centuria Office REIT results showed the fund delivering well in FY20, but is forecasting a -7% drop in distributions in 2021 in light of the challenging operating conditions resulting from COVID-19.
Grant Nichols, COF Fund Manager highlights the 2020 performance was due to a high proportion of Australian state and federal government tenants, a high occupancy rate and a long WALE, but is clearly more pessimistic about how these factors will assist in 2021.
Whilst the forecast distribution would equate to a distribution yield of c.9.0%, based on the current unit price, the market continues to believe the assets are overvalued with the stock trading at a -25% discount to NTA.
Statutory net profit for FY20 was $23.1 million, with Funds from Operations of $85.4 million or 18.6 cpu, and distributions of 17.8 cpu. Distributions were in line with FY20 guidance provided. Funds from Operations were adversely however impacted by COVID-19 due to rent relief claims related to the National Code of Conduct on Commercial Leases and other provisions. Combined, these items reduced Funds from Operations from 19.3 cpu to 18.6 cpu, noting FY20 guidance was 19.0 cpu.
Like for like portfolio revaluations throughout FY20 of $23.3 million contributed to NTA of $2.49 per unit. During FY20, the flattening swap curve adversely impacted the value of COF’s interest rate swaps, reducing NTA by 2.0 cpu.
COF further diversified its debt book during FY20 with five additional tranches established including a new seven-year facility with Crédit Agricole. COF now has five high quality financiers. The weighted average debt maturity remained broadly unchanged at 3.3 years with a competitive all in debt cost of approximately 2.2%11 . COF continues to operate with significant undrawn debt5 of $131.0m and significant covenant headroom with an interest coverage ratio of 6.3x (covenant 2.0x) and loan to value ratio of 36.4% (covenant 50%).
COF continues to enhance and actively manage its portfolio with a focus on further improving the portfolio’s lease expiry profile to quality tenants. During FY20, COF completed 41 lease transactions, with leases agreed for 32,378 sqm, representing 10.6% of portfolio NLA. Included within this leasing is a new 10-year lease to the WA Government at 144 Stirling Street, Perth, across the entire building (excluding the café). As a result of the new lease, the WA Government is now the second largest tenant (by income) across the COF portfolio.
High occupancy of 98.1% was maintained and the WALE8 was extended from 3.9 to 4.7 years with 58% of leases expiring at or beyond FY24. Notably, COF’s portfolio income is strongly underpinned by government tenants. Over 25% of income derived from government tenants with the Federal Government representing almost 14% of the portfolio income.
In June, Foxtel signed a deed of agreement to surrender its lease at 35 Robina Town Centre Drive, Robina, QLD. Under this agreement COF will receive a surrender payment during FY21 equivalent to the rent payable under the remaining Foxtel lease term discounted to present day. Existing sub tenants, representing 23.3% of building’s NLA, will convert to direct leases. The lease surrender provides another opportunity to utilise Centuria’s strong leasing capabilities to reposition the asset and minimise potential downtime.
COF seeks to provide quality, highly connected and affordable office space that meets changing tenant demands, and COF’s asset quality is emphasised by an average building age of 15.9 years (by value) and average NABERS energy rating of 4.8 Stars (by value). COF is focused on further enhancing building efficiency with 856 solar panels installed across five portfolio assets during FY20. The installation is estimated to reduce annual CO2 emissions by approximately 300 tonnes, the equivalent of removing approximately 170 cars from the road.
All assets within the portfolio were independently revalued during FY20. As at 30 June 2020, 13 of the 23 assets, representing 55.7% by value, were independently revalued resulting in a decreased portfolio value of $21.9m or 1.1%, 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 5.93%. Where relevant, valuers incorporated ongoing rent relief claims related to the National Code of Conduct on Commercial Leases.
Grant Nichols commented, “COF benefits from Centuria being a hands-on, proactive manager with in-house property and facilities management and deep leasing capability. The results achieved throughout FY20 including an increase in WALE, an increase in the average NABERS energy rating while maintaining high occupancy is a testament to this. The management team is currently focused on preparedness and a rapid response to challenges arising from COVID-19 and generating greater tenant engagement through this period of uncertainty."
During 1H20, $636.5 million of transactions were executed, with interests in the three high-quality, Prime Grade office assets acquired, at an average yield of 5.6%, with 100% occupancy and average WALE8 of 8.0 years.
Grant Nichols commented, “COF selectively identified acquisition opportunities that enhance the overall quality of the portfolio and improve its diversification across major Australian office markets. These acquisitions introduce additional quality tenant covenants, which further improve and diversify the portfolio’s income streams.”
Grant Nichols, COF Fund Manager, said, “The COF portfolio delivered solid results throughout FY20, which included the challenging COVID-19 affected trading period. Its performance can be credited to assets underpinned by high quality tenants and positioned in metropolitan and near-city locations that provide excellent connectivity – easy commutes for workers – while delivering affordable rent levels. The assets’ location and affordability resonate well with tenants at a time when operating costs are scrutinised and workforces’ preferences show a trend towards working closer to home. For these reasons, we believe the COF portfolio will continue to provide attractive options for tenants into the future.
“Additionally, COF benefits from a relatively young asset portfolio with the average building being 15.9 years. Younger generation stock will help attract and retain tenants while providing limited capital expenditure and maintenance requirements.
“While there is continued immediate uncertainty resulting from COVID-19, the medium to long-term outlook for highquality office assets remains positive, driven by continued investor demand for income producing investments in this low interest rate environment.”
COF provides FY21 distribution guidance of 16.5 cents per unit, which equates a current yield of c.9.0% . Distributions will be paid in equal quarterly instalments. Due to uncertainty arising from COVID-19 and the potential impact on operating conditions, COF will not be providing FFO guidance at this point.
FY20 Financial Highlights
- Funds from operations (FFO) of $85.4 million
- FFO per unit of 18.6 cents per unit (cpu)
- Distributions per unit of 17.8 cpu, in line with FY20 guidance
- Statutory net profit of $23.1 million
- Net Tangible Assets (NTA) of $2.49 per unit
- Rent collections for the period April-June 2020 averaged 92%
- Strengthened balance sheet, 34.5% gearing and undrawn debt capacity increased to $131.0 million
FY20 Portfolio Highlights
- Australia’s largest pure play ASX listed office A-REIT with 23 quality assets diversified across major Australian office markets with no single geographical market concentration
- 79% of total portfolio income is derived from government, listed and multinational tenants of c.25% of total portfolio income underpinned by state and federal government tenants
- Staggered lease expiry, with 58% of the portfolio’s leases to expire at or beyond FY24
- Leases agreed for 41 lease transactions, totalling over 32,378 sqm (10.6% of portfolio NLA)
- High portfolio occupancy maintained at 98.1%; WALE extended to 4.7 years
- Average building age of 15.9 years (by value)
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