Centuria Office REIT (ASX:COF) Fund Manager Grant Nichols talks full year 2020 results, portfolio metrics and guidance.Katrina Bullock:
Katrina Bullock: Hello. Katrina Bullock for the Finance News Network. And joining me today from Australia's largest pure-play office REIT, Centuria Office REIT (ASX:COF), is Fund Manager Grant Nichols. Grant, welcome to FNN.
Grant Nichols: Thanks for having me.
Now, before we jump into the full year 2020 results, could you start by telling us a little bit about how the REIT is positioned in the market?Grant Nichols:
COF seeks to position itself as providing quality, well-connected, and affordable office space. We do this by owning a geographically diversified portfolio of 23 assets that is mainly invested into metropolitan, near city, and secondary CBDs, like Canberra. The benefit of investing into markets like this is that we can attract large quality tenants, with around 80 per cent of the income that we derive from COF coming from either government, ASX-listed, or multinational corporations.
Another key component of the COF portfolio is the average age of building being around 16 years, which is very young for an office portfolio. The benefit of having a young office portfolio is that you have lower operating costs, greater efficiency, and it's generally more attractive to tenants.Katrina Bullock:
Now moving on to the fund's 2020 full year results, could you talk us through the performance highlights?Grant Nichols:
Funds from operations, or FFO, for the full year was 18.6 cents per unit. We also distributed 17.8 cents per unit, which was in line with guidance for FY20. During the year we also did a lot of work to strengthen our balance sheet, with gearing at 34 per cent and undrawn debt facilities of about 130 million as at 30 June 2020. On the portfolio side, it was another good year in terms of leasing, with over 10 per cent of the portfolio leased during the course of the year. This maintained occupancy at over 98 per cent, with a WALE of 4.7 years.Katrina Bullock:
So what impact did Covid-19 have on today's results?Grant Nichols:
The COF portfolio was very resilient during the Covid-affected period. In terms of valuations, the NTA at 30 June was $2.49, which was the same NTA that we had a year earlier at 30 June 2019. So, the reason why valuations didn't materially change is that there remains robust demand for quality real estate that produces ongoing sustainable income returns. Now looking through at income itself, during the course of the Covid-affected period, being April to June 2020, we maintained rent collections well over 90 per cent, which is a testament to the quality of the tenants within the COF portfolio.Katrina Bullock:
So throughout the Covid-19 period, there has been a spotlight on office REITs as an asset class, given that there are more workers naturally working from home. So, given this, what do you think the impact of Covid-19 is going to be on office properties?Grant Nichols:
I think there are ongoing question marks in regards to working from home, particularly into productivity and maintaining a strong corporate culture. In regards to maintaining a strong corporate culture, it's a very difficult thing to do when there is no unstructured interactions, and when a large proportion of your employee base are working from home and are isolated from the other employees.
In regards to productivity, working from home can be very inequitable. It can work okay if you have a home office environment, but particularly for younger staff that may be living in a share house, it's very difficult to maintain productivity when you could be working on the edge of a bed with a laptop.
We also think that Covid-19, from an immediate perspective, will turn tenants' focus towards affordability and the health of their office accommodation. From this perspective, we again think that COF is well-placed, given that COF provides quality affordable office accommodation, but also because we have younger, newer-generation stock, as new buildings generally provide greater ability to provide social distancing, particularly in regards to lift usage.Katrina Bullock:
And finally, what can Centuria Office REIT investors expect of the 2021 financial year?Grant Nichols:
COF starts FY21 in a really strong position, with occupancy of over 98 per cent, a weighted average lease expiry of 4.7 years, and around 80 per cent of the income derived from those high-quality tenants, being government, multinational or listed corporations. These high-quality tenants will underpin the FY21 distribution guidance of 16.5 cents per unit, which equates to a very attractive distribution yield of over 8 per cent.Katrina Bullock:
Grant Nichols, thanks for the update.Grant Nichols: