Centuria Office REIT jumps as earnings target hit
A junior property trust, the $600 million Centuria Office REIT, has received an enthusiastic endorsement from investors – it closed 7.4 per cent higher – after reporting interim earnings ahead of expectations and confirming its full-year guidance.
Despite booking in lower earnings and distributions than a year earlier, the fund’s capacity to hit its targets generated a relief rally that sent its stock 12¢ higher to $1.75 by the close.
“We reiterated both our distribution and guidance for FFO [funds from operations], which is important in the context of a rising interest rate environment, so that gives investors some comfort,” fund manager Grant Nichols told The Australian Financial Review.
“The biggest thing about our result, and what has given us the kick today, is the amount of leasing we’ve done.”
The 23 assets in the fund’s $2.3 billion dollar portfolio lie mostly outside CBDs, such as its purchase last year of a new building in city-fringe South Melbourne, giving it a fresh advantage in a post-pandemic market where office commuters prefer to work closer to home, Mr Nichols said.
About 30,000 sq m of space across the portfolio was leased during the first half of 2023, and had an average re-leasing spread of 2 per cent. About 150,000 sq m had been leased since the onset of COVID-19 in 2020. Mr Nichols said that was testament to the quality of the portfolio, and enough to assuage any doubts investors might hold about the resilience of office property.
“That is demonstrating that we continue to generate good levels of tenant demand, and somewhat bucks the trend in terms of the anecdotal speculation about the negative impact flexible work conditions might have on office market demand,” he said.
With a heavy reliance on debt, listed real estate investment trusts have come under intense scrutiny and been traded down heavily over the past year, as investors grow wary about exposure to the interest rate cycle.
The Centuria-run fund’s 2023 interim result was released just hours after US Federal Reserve chairman Jerome Powell ushered in another rate rise. However, he accompanied it with remarks that were less hawkish than expected, and thereby added support to this year’s market rally.
Such was the relief among Centuria Office REIT investors that its stock rallied even as it wrote down its portfolio value by 2 per cent, to reflect a slower market for commercial property assets.
The fund’s net tangible assets has fallen to $2.40, down from $2.50 a year earlier, which means its stock is trading at a discount of about 27 per cent.
Mr Nichols said that NTA discount was an issue that faced many of his peers: “At this stage, the direct market evidence is not supporting where the markets are pricing [REITs].”
The write-down pushed the fund to a bottom line loss of $17.4 million, while earnings, expressed as funds from operations, dropped 11.2 per cent to $48.6 million as finance costs rose. Distributions of 7.05¢ over the half were in line with guidance, and full-year guidance of 14.1¢ reaffirmed.
