COF defies COVID-induced office market volatility

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ASX-listed pure-play office fund Centuria Office REIT (ASX: COF) managed to pull in positive FY22 results, despite the ongoing impacts of COVID-19, the inflationary landscape and resulting interest rate hikes.

COF’s statutory net profit was up 50% from FY21 at $155 million for the financial year ending 30 June 2022, while FFO was up a more marginal 2.7% to $104.9 million.

COF delivered 18.2 cents per unit FFO and 16.6 cents per unit distributions, falling in line with the REITs FY22 guidance.

“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,” said Grant Nichols, fund manager of COF and head of office at Centuria.

Over the FY22 period the REIT saw healthy leasing activity underpinning like-for-like valuation gains of $37.9 million, with 48 leases secured across 41,283sqm, representing 13.6% of portfolio 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,” added Nichols.

“Metrics from these sales strongly reinforce the property valuations which make up COF’s Net Tangible Assets (NTA) of $2.50 per unit.”

Of the leases secured over the year, more than 50% were also represented by new tenants, spanning 17,605sqm.

“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,” said Nichols.

The REITs total portfolio is comprised of 23 high-quality office buildings worth a combined $2.3 billion, with 90% of the portfolio comprised of A-Grade assets.

The portfolio also provides a 94.7% occupancy, with a WALE of 4.2-years, and average building age of 16 years and an average NABERS energy rating of 4.8-stars.

“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,” added Nichols.

Average rent collection across the portfolio was at 98%, strong despite COVID-19 impacts.

FY22 saw COF acquire $313.7 million of assets across three strategic property transactions, while also divesting a single building for $20.9 million at a 10% premium.

“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,” said Nichols.

COF provided a FY23 FFO guidance of 15.8 cents per unit and a distribution guidance of 14.1 cents per unit, with a distribution yield of 7.7%.

“In making FY23 guidance, we have adopted an interest rate forecast with suitable buffers to manage potential further interest rate volatility8 . We believe our guidance provides an attractive, compelling yield within the current economic climate,” concluded Nichols.

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