Centuria Office REIT (ASX:COF) 1H21 results & outlook


by Katrina Bullock

Centuria Office REIT (ASX:COF) Fund Manager Grant Nichols discusses 1H21 highlights, the market conditions for leasing, and the outlook and trends for office markets.

Katrina Bullock:
Thanks for tuning in. I'm Katrina Bullock for the Finance News Network, and joining me today from Century Office REIT (ASX:COF) is its Fund Manager, Grant Nichols. The fund today released its 2021 half-year results, which show strong leasing activity and high rent collection across its diversified portfolio of Australian assets. Grant, welcome back to the network.

Grant Nichols: Thanks for having me.

Katrina Bullock: Absolute pleasure. Now, Grant, could we start with an overview of the company and what it offers to investors?

Grant Nichols: So, COF is a real estate investment trust that owns a portfolio of highly diversified Australian office assets. From these assets, we generate a rental return that we pay to investors as a distribution yield, and the current unit price should be reflective of the underlying capital value of those assets.

The benefit to COF investors is that COF has a high-quality portfolio leased to excellent tenants. Around 80 per cent of the income is derived from either government, listed or multinational corporations. This means that the current distribution yield of around 8.5 per cent is underpinned by excellent tenant covenants.

Katrina Bullock: And, of course, we're here today to talk about the half-year results. Could you talk us through the highlights?

Grant Nichols: So, COF delivered solid performance for the first half of '21, completing a number of leasing deals representing about 9 per cent of the portfolio, maintaining high portfolio rent collections, about 97 per cent, and reducing gearing to about 33.2 per cent. The resilient operating performance has allowed COF to reinstate FY21 FFO guidance of between 19.4 and 19.9 cents per unit, while reiterating FY21 distribution guidance of 16.5 cents per unit, which again represents that distribution yield of around 8.5 per cent.

Katrina Bullock: Now COF managed to generate reasonable leasing activity during the period. What were the market conditions for leasing like?

Grant Nichols: So, there's no doubt that 2020 was a challenging leasing period across Australian office markets, and we saw quite disparate performance across those individual Australian office markets. For example, the Sydney and Melbourne CBD generated pretty significant negative net absorption, whilst many of the markets COF is invested into, such as the Sydney fringe, St Leonards and Canberra, actually generated positive tenant demand through the same period, which is a stark contrast.

Now, within our own portfolio, we've been able to generate a fair amount of leasing activity. So, we're pretty confident that we'll be able to continue to address our short-term lease expiry risk, but also the current vacancies within the COF portfolio.

Katrina Bullock: And what impact do you believe the rollout of the COVID-19 vaccine is going to have on the market for office properties?

Grant Nichols: Look, I think the COVID vaccine is a massive thing for the office markets. Speaking with a number of tenants across the COF portfolio, they're all itching to get back into the office because they recognise the benefits of being in a central workplace to employee productivity, connectivity, and also their corporate culture. Now, obviously, with the ongoing pandemic, they are hamstrung by the potential health risks that COVID-19 continues to present. So, if that can be eradicated, I think it will be a huge boost for office markets across Australia.

Katrina Bullock: And what's the outlook for office markets more generally?

Grant Nichols: So, we have a pretty optimistic view of where the office markets across Australia are going. When you look at the Australian economy, we've seen pretty strong employment growth in recent past, and we continue to see improving economic outlooks. Now, the benefit of the improving economic outlook is that it's underpinned by a substantial amount of fiscal stimulus. And when you look into that fiscal stimulus, a large proportion is directed towards future employment.

Now, where that is important for office markets is that the majority of the Australian employment base is white-collar employment. So, if there's improving employment, there'll be improving white collar employment, and those white-collar employers or the white-collar workers will require more office accommodation.

Katrina Bullock: And Grant, what trends do you see emerging across the office market as we move into 2021?

Grant Nichols: I think, through COVID, we saw a lot of employees working from home. And whilst I think the productivity of working from home is still questionable, most employees recognise that not having to commute to work is providing more efficiency to their work-life balance.

So, we think, moving forward, we'll see employees demonstrate a stronger preference to work closer to home. Now, that's beneficial for a portfolio like COF, which is mainly based in metropolitan and fringe locations.

Katrina Bullock: And finally, Grant, how is COF positioned for the remainder of the 2021 financial year?

Grant Nichols: So, we think that COF is well-placed entering into the remainder of FY21 given its highly-diversified portfolio and exposure to Australia's better-performing office markets. As noted, we have an optimistic outlook for the Australian office markets, and we think the COF portfolio is well-placed to continue delivering solid distribution yields to our investors, moving forward.

Katrina Bullock: Grant Nichols, thanks for the update.

Grant Nichols: Thanks for having me.


Are you a 708 sophisticated investor?

A sophisticated investor is defined under Section 708 of the Corporations Act (net assets of $2.5 million or annual incomes in excess of $250,000).

They are eligible to receive information regarding wholesale investment opportunities that are not available to regular or retail investors.

Please subscribe if you would like to be alerted to these types of opportunities.