Strong employment growth and returning office workers provide positive tailwinds for Centuria Office REIT

Centuria Office REIT has provided positive year end 2022 results having navigated through COVID impacts, rising inflation and subsequent interest rates increases.

The Funds statutory net profit jumped 50% to $115million, while Funds from Operations (FFO) improved 2.7% to $104.9 million.

The REIT delivered 18.2 cents per unit (cpu) FFO and 16.6cpu distributions, consistent with FY22 guidance.

COF’s strong leasing activity supported healthy like-for-like valuation gains of $37.9million. During the period, COF secured 48 leases across 41,283sqm, equating to 13.6% of its portfolio net lettable area (NLA). More than half of these leases related to new tenants (17,605 sqm), illustrating strong tenant demand for modern metropolitan office accommodation.

Grant Nichols, COF Fund Manager and Centuria Head of Office said, “Most pleasing about COF’s FY22 results is the significant amount of leasing executed. In fact, since the outbreak of COVID-19, COF has leased 120,000sqm, equivalent to c.40% of its NLA.

“While our leasing activity contributed to a healthy valuation uplift, valuation gains were supported by recent sales transactions across metropolitan and near city office markets. In fact, across the Australian office sales market, 71% of the office buildings transacted during the second half of FY22 were outside core CBD office markets. Metrics from these sales strongly reinforce the property valuations which make up COF’s Net Tangible Assets (NTA) of $2.50 per unit.

“We continued to witness a shift in tenant preferences towards better quality accommodation that is close to key transport nodes, providing better commutability and subsequently improved work-life flexibility. COF’s young office portfolio lends itself to these leasing preferences, with its modern and sustainable office buildings providing better access to wellbeing amenity, retail and hospitality while offering affordable rents.”

COF benefits from a geographically diversified office portfolio without a single market concentration. In total, the REIT comprises 23 high-quality predominantly metropolitan office buildings worth $2.3billion. Approximately 90% of its buildings are A-Grade assets.

Its portfolio provides a strong 94.7% occupancy and a 4.2-year weighted average lease expiry (WALE). In addition, COF has an average building age of 16 years and an average NABERS energy rating of 4.8-stars.

Despite the impact of COVID-19, COF achieved a strong average rent collection of 98%.

During the period, COF acquired three strategic assets worth $313.7million and divested one building for $20.9million, providing a 10% premium above its prior book value.

Mr Nichols, concluded, “Throughout FY22, we saw the impact of COVID retreating as more workers returned to the office and employment rates strengthened. Looking ahead, we expect COF to have like-for-like net operating income growth through FY23.

“We recognise that a rising interest rate environment creates some future uncertainty, but we remain optimistic for Australian office markets. Tenant enquiry levels, backed by strong employment growth, continue to improve and some of the strongest demand is within metropolitan office markets. This bodes well for medium term rent growth.

“In making FY23 guidance, we have adopted an interest rate forecast with suitable buffers to manage potential further interest rate volatility. We believe our guidance provides an attractive, compelling yield within the current economic climate.”

COF provides FY23 FFO guidance of 15.8cpu and distribution guidance of 14.1cpu (distribution yield of 7.7%), which are expected to be paid in equal quarterly instalments.