Australian Unity Office Fund (ASX:AOF) 1H18 results & outlook


by Rachael Jones

Australian Unity Office Fund Limited (ASX:AOF) Fund Manager, Grant Nichols talks 1H18 results, portfolio metrics and the outlook for office markets.

Rachael Jones: Hello, I'm Rachael Jones from the Finance News Network. Joining me today from Australian Unity Office Fund (ASX:AOF) is fund manager Grant Nichols. Grant, welcome to FNN.

Grant Nichols: Thank you, Rachael.

Rachael Jones: So first up, could you start with giving us an introduction to your company?

Grant Nichols: Sure Rachael. The Australian Unity Office Fund is a listed real estate investment trust that owns a portfolio of nine assets located across Australia, it's CBD and metropolitan office markets. The fund was listed in June 2016 and has performed admirably since listing with total return of 29.5 per cent in the 18 months to 31 December 2017. The objective of the fund is to provide unit holders with sustainable income returns with the opportunity for capital growth. Based on the current trading price the fund is yielding approximately 7 per cent at the moment.

Rachael Jones: So now to your first half 2018 results. What were the highlights, starting with the financials?

Grant Nichols: The strong financial performance that the fund has incurred since listing continued through the first half of FY '18. The statutory net profit was approximately $16.5 million greater than the PDS forecast for the same period. This increase in net profit contributed to the NTA increasing to $2.31 per unit.

Rachael Jones: And to the fund operations?

Grant Nichols: The half year was also very busy operationally. Most notably with the acquisition of 150 Charlotte Street in Brisbane. This property is a well located Brisbane CBD office building, that is predominantly leased to Boeing Defense Australia on a lease until 2024. The acquisition was underpinned by a $50 million equity raising, which is sought to diversify the unit holder base and increase the market cap of the fund. Beyond the acquisition approximately 6 per cent of the portfolio was either leased or renewed, and a new five-year debt facility was put in place. Increasing the debt turned to maturity and the debt diversification.

Rachael Jones: Thanks Grant, and now to the fund in more detail. Can you tell me about the portfolio composition?

Grant Nichols: So as mentioned the fund has nine assets, providing exposure to ever major Australian capital city other than Perth. Over 40 per cent of the portfolio is based in the Sydney metropolitan markets of North Ryde and Parramatta. This is important because at the moment Sydney and its associated metropolitan markets are demonstrating very strong underlying fundamentals with low vacancy rates and increasing rents.

Rachael Jones: What about the tenant profile of the portfolio?

Grant Nichols: The portfolio has excellent tenant covenants with over 60 per cent of the portfolio leased to either Telstra (ASX:TLS), the State or Federal Government, Boeing, or GE. The quality of these tenant covenants should give investors confidence in AOF's ability to continue providing sustainable income returns into the future.

Rachael Jones: What are your key metrics?

Grant Nichols: The fund currently has a weighted average lease expiry profile of about 4.5 years and 94.4 per cent occupancy. Importantly the fund has no significant single lease expiry until 2022, which again should give investors confidence in AOF's ability to provide those ongoing, sustainable income returns.

Rachael Jones: And Grant, a more general question now. What is the outlook for office markets and what impact could higher interest rates have?

Grant Nichols: The outlook for office markets remains very good with the majority of office markets demonstrating improving tenant demand. Sydney and its associated metropolitan markets, along with Melbourne and its associated metropolitan markets have vacancy rates below the long-term average, and are demonstrating pretty healthy rental growth coming through. In regards to higher interest rates the fund would be fairly insulated from an increase in interest rates, due to the relatively low gearing and that over 70 per cent of the borrowings are hedged to a fixed interest rate. Further, an increase in interest rates would generally be indicative of improving economic conditions, which we generally translate into increased demand for office space.

Rachael Jones: And last question Grant. Why should investors consider adding Australian Unity Office Fund to their portfolio?

Grant Nichols: The Australian Unity Office Fund is a great option for investors seeking sustainable, reliable income returns. With a high quality portfolio underpinned by excellent tenant covenants, and supported by a high quality management team, the fund is well placed to continue with strong performance given the improving nature of tenant demand across Australia's office markets, which should be great news for investors.

Rachael Jones: Grant Nichols, thanks for the update.

Grant Nichols: Thank you.


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