Centuria Office REIT

Company Overview: Centuria Office REIT (ASX: COF) is Australia’s leading pure play office REIT (A-REIT) with a geographically diversified portfolio of 23 high-quality assets. The company’s portfolio is mainly exposed to metropolitan and near city office markets. It offers a range of investment opportunities, including listed and unlisted real estate funds as well as tax-effective investment bonds. The company’s strategic vision is to become Australia’s leading pure play office REIT. The company is overseen by an active management team with deep real estate expertise.

COF Details

Top-line Growth Supported by Decent Occupancy Level: Centuria Office REIT (ASX: COF) is Australia’s leading domestic ASX-listed pure play office REIT that provides quality, highly connected and affordable office space. COF has a portfolio of quality Australian office assets diversified by geography, tenants and lease expiry. Despite the impact of COVID-19 pandemic on business performance, the company was able to maintain its portfolio occupancy rate of 98.1% with decent top line growth of 34.1% in FY20 on Y-o-Y basis. The company also witnessed decent tenant covenants with around 80% of portfolio income derived from government, listed or multinational corporations. Over the last five years, the company’s total revenue (continuing operations and other Income) has increased at a CAGR of 38.66%.

5-Year Financial Performance, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Having completed FY20 with decent occupancy levels to high-quality tenants, the company is well placed to deliver attractive income returns to unitholders. Looking ahead, COF is focused on prudently managing its balance sheet to position for further growth. In FY21, COF is focused on generating predictable and quality income streams while building on its position as Australia’s pure-play office REIT. With a portfolio underpinned by high-quality tenants, and assets in decentralised and near city locations, the company is well-positioned to navigate through COVID-19 pandemic.

Decent Growth in H1FY21 Gross Property Income: For H1FY21, the company reported gross property income of $94.5 million, up by $27 million on pcp, mainly driven by the growth in portfolio value and Foxtel surrender payment. Total expenses for the period stood at $36.8 million. Funds from operations stood at $57.7 million, up by $18.7 million on pcp. COF’s portfolio income is underpinned by diverse, quality tenants. In H1FY21, 80% of the company portfolio income was derived from federal and state government, ASX listed and multinational tenants. Statutory net profit for H1FY21 stood at $21.54 million, down from $24.69 million in H1FY20, mainly due to the loss on the fair value of investment properties of $30.19 million. As at 31 December 2020, the company had ample debt headroom of $175.7 million.

H1FY21 Results Highlights (Source: Company Reports)

Maintained High Occupancy in FY20: For FY20, the company has reported a total gross property income of $149.2 million, up by $41.4 million on FY19, predominantly driven by growth in portfolio value. Total Funds from Operations (FFO) stood at $85.4 million in FY20, up by $24.2 million on FY19. Over the years, the company established five new tranches, including a new 7-year facility with Crédit Agricole. Statutory net profit for FY20 stood at $23.1 million, with Funds from Operations of $85.4 million or 18.6 cents per unit (cpu). Despite the challenges caused by the COVID-19 pandemic, COF’s portfolio maintained high occupancy of 98.1% with a weighted average lease expiry (WALE) of 4.7 years. As at 30 June 2020, COF’s portfolio totalled 23 assets valued at $2.1 billion.

FY20 Financial Snapshot (Source: Company Reports)

Key Margins: During FY20, the company reported reduced EBITDA margin and a net margin of 66.9% and 15.7%, respectively, as compared to FY19, impacted by COVID-19 pandemic due to rent relief claims related to the NCCL and other provisions. Current ratio for FY20 stood at 0.74x. Debt to Equity for FY20 stood at 0.61x.

Growth and Profitability Profile, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 57.71% of the total shareholding while the top four constitutes the maximum holding. Centuria Capital Group and Vanguard Investments Australia Ltd. are holding a maximum stake in the company at 19.93% and 7.44%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Track Record of Distribution: COF has a track record of paying decent distributions to its shareholders. For FY20, the company paid a total distribution of 17.8 cents per unit, up from 17.6 cents per unit paid in FY19. For Q1FY21, the company had paid a distribution of 4.125 cents per unit, in line with FY21 distribution guidance of 16.5 cents per unit. For Q2FY21, the company had paid a distribution 4.125 cents per unit. This is also in line with FY21 distribution guidance. Total H1FY20 distribution represents payout ratio (% of FFO) of 73.6%. At CMP of $2.03, the company’s annual dividend yield stood at ~8.49%, higher than past 5-year average dividend yield (2016 to 2020) of ~7.46%.

Five-Year DPU Trend (Source: Company Reports)

COF External Revaluations: Centuria Property Funds Limited (CPFL), as Responsible Entity of COF, conducted external valuations on 13 of its 23 investment properties. The completed valuations indicated a slight reduction of approximately $17 million or 0.8% as at 31 December 2020. Notably, the revaluations reflect decent ongoing investment demand for quality office property.

Settlement of 25% interest in 465 Victoria Avenue: On 1 February 2021, the company announced the settlement of sale of its 25% interest in 465 Victoria Avenue, Chatswood, NSW for $44.7 million. The proceeds from the sale will enhance the company’s liquidity and improve COF’s robust balance sheet, which has ample headroom against the loan to value and interest coverage covenants.

Change of Director’s Interest: Recently, one of the company’s Directors, Peter Done, acquired 50,000 ordinary securities of the company at $1.995 per ordinary security, via on-market purchase. He now holds around 202,044 ordinary securities of the company.

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. The company’s results can be impacted by the changes in the valuations of its assets. COF is also exposed to the risk of vacancy and low occupancy.

Outlook: With over 80% of portfolio income derived from government, listed and multinational tenants, the company continues to generate decent income streams. Looking ahead, the company is focused on generating predictable and quality income streams while building on its position as Australia’s pure-play office REIT. For FY21, the company expects its FFO per unit to be in the range of 19.4-19.9 cents. Dividend guidance for FY21 is set at 16.5 cents per unit, with DPU yield expected to be around 8.5%.

FY21 Guidance (Source: Company Reports)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of COF has corrected by 10.61% in the last three months. The stock is currently trading below the average 52-week price level band of $1.375 and $3.240, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of $1.834 and resistance of $2.26. We have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company might trade at some discount to its peer average P/E (NTM Trading multiple), considering the continued impact from COVID-19 scenario, decline in net profit, lower current ratio. We have taken peers like Aventus Group (ASX: AVN), Charter Hall Retail REIT (ASX: CQR), Mirvac Group (ASX: MGR), etc. Considering the company’s track record of paying a decent distribution to its shareholders, decent performance in H1FY21, modest long-term outlook, current trading levels and valuation, we give a “Buy” rating on the stock at the current market price of $2.03, up by 0.495% as on 25 February 2021.

COF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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