Centuria Office REIT (ASX: COF) reports 50% increase in profit

• COF profits increase 50% to $115 million
• Portfolio occupancy 94.7%
• WALE is 4.2 years

Centuria Office REIT (ASX: COF) released its full-year financial results this morning, with the pure-play office REIT announcing increased profits and FFO.

The positive results come despite the ongoing pandemic and, more recently, the interest rate hikes:

“COF has generated solid results in FY22, delivering an increased net profit while providing FFO and distributions consistent with guidance despite the impacts of rising interest rates,” said COF fund manager Grant Nichols.

Mr Nichols also noted that “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 circa 40% of its NLA.”

Centuria Office REIT’s profit moved up 50% to $115 million, with funds from operation increasing by 2.7% to $104.9 million.

In other financial highlights, COF’s total assets increased from $2,068.9 million to $2,410.8 million, NTA per unit increased from $2.48 to $2.50, and gearing has moved from 33.5% to 33.8%.

COF refinanced $257.5 million of debt and added an additional $50 million of headroom taking its total debt facilities to $962.5 million, across a diversified pool of six lenders. The debt refinancing increased the REIT’s weighted average debt maturity from 3.3 years to 3.7 years with no debt tranche expiring until FY25.

Despite the increased tenure, there has been no material change to the weighted average debt margin. Debt covenants of a 50% loan to value ratio and 2.0x interest cover ratio apply to the new and extended debt facilities, in line with existing covenants. As at 30 June 2022, COF’s loan to value ratio was 35.8% and the interest cover ratio was 6.3x.

COF’s portfolio comprises 23 assets worth $2.3 billion, with the company making three acquisitions worth $313.7 million and one divestment worth $20.9 million.

The three acquisitions included 101 Moray Street in South Melbourne for $205.1 million, 203 Pacific Highway in St Leonards, NSW (the remaining 50% interest) for $68 million, and 57 Wyatt Street in Adelaide, a development acquired for $40.2 million.

COF divested 131 Grenfell Street in Adelaide for $20.9 million, 10% above book value.

Mr Nichols said: “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 computability 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’s strong leasing activity supported healthy like-for-like valuation gains of $37.9 million. 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.

Among other metrics, occupancy was recorded at 94.7%, WALE 4.2 years, with an average building age of 16 years, an average NABERS energy rating of 4.8 stars, and average rent collection of 98%.

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.”

Centuria Ofice REIT’s FY23 FFO guidance is 15.8 CPU and distribution guidance is 14.1 cpu.