Centuria Office REIT profits surge as demand increases despite lockdowns

Despite outbreak of COVID-19 encouraging more office workers to work from home, Centuria Office REIT (ASX: COF) has reported a net profit of $63.6 million for HY22, reflecting a 66 per cent surge compared to the same time last year ($21.5 million).

Although revenue dropped by 4.2 per cent year-on-year ($90.8 million versus $94.8 million), the office fund noted the corresponding period strongly benefited from Foxtel’s surrender payment of 35 Robina Town.

COF had no setbacks in keeping tenants, and occupancy actually increased by 94.3 per cent – a slight jump of 1.2 per year-on-year.

According to the Property Council of Australia’s Office Market Report, tenant demand has lifted an average one per cent across the country’s CBDs, and 0.7 per cent in non-CBD markets.

“COF delivered a strong performance throughout the first half of the 2022 Financial Year providing an upgraded FY22 FFO guidance of 18.3cpu and a reaffirmed FY22 distribution guidance of 16.6cpu, reflecting a 7.4 per cent yield, paid in equal quarterly instalments,” says COF fund manager and Centuria head of office Grant Nichols.

“This pleasing outcome reflects a combination of strong operating metrics and continued leasing momentum across the portfolio. The result has been further illustrated by COF’s strong average rent collection of 97.8 per cent and more than 18,600sqm of leases agreed, representing 6.3 per cent of COF’s portfolio NLA.”

In a breakdown of its assets, COF touched on the geographic distribution of office spaces, with the top three states being NSW (25 per cent), followed by Victoria (24 per cent) and Queensland (21 per cent).

While ASX Listed companies led the tenant mix at 27 per cent, Australian federal and state governments represented approximately 25 per cent of gross income.

An overwhelming majority (72 per cent) of tenants leased out offices more than 2,000sqm in size, hinting towards a large demand for quality metropolitan assets.

“The quality of COF’s portfolio also increased through the strategic acquisition of two high-quality modern office buildings, within key Melbourne and Sydney near-city and metropolitan locations, for a combined value of $273 million.

“The acquisitions deliver clear benefits to the portfolio including high occupancy, an improved portfolio WALE and modern office accommodation, with affordable rent profiles, that are highly connected to transports hubs and retail amenity.”

One particular standout was 101 Moray Street in South Melbourne, which was fully leased during COVID affected periods.

The building was designed to reduce the spread of COVID-19, as it includes thermal imaging which checks visitor temperature upon arrival, sensors which detect if masks are worn upon entering the lobby and card-less swipe access.

Other fully occupied assets include 2 Phillip Law Street in Canberra, 9 Help Street in Chatswood and 131-139 Grenfell Street in Adelaide.

“We see this positive momentum continuing with tenants gravitating towards higher quality accommodation in new-generation buildings that provide COVID-safe work environments, efficient floorplates, improved amenities and competitively-priced accommodation,” says Nichols.

“Furthermore, there is increased demand to be located in areas that provide short commutes to improve employee satisfaction and attract the best talent.”

The average building age for acquired assets is six years, while COF’s overall portfolio average age for assets is 16 years.

Approximately 90 per cent of the company’s portfolio comprises are A-Grade assets.  

“Though COVID-19 continues to impact office markets, Australia has one of the highest vaccination rates in the world, with one of the lowest mortality rates. Backed by the strength of the Australian economy, we expect to see tenant demand for Australian office improving throughout 2022,” says Nichols.

“COF continues to maintain a healthy balance sheet while its portfolio benefits from high-quality modern office buildings leased to strong tenant covenants.

“It remains in a strong position to continue delivering a compelling performance throughout FY22.”

Shares in COF are down 1.79 per cent to $2.20 per share at 3.36pm AEDT.