Centuria open to selling offices amid write-downs, rising rates
Centuria Office REIT has flagged asset sales to bolster its balance sheet as debt costs rise and write-downs stripped 4.2 per cent off the value from its portfolio of mostly suburban office blocks.
The ASX-listed office trust said the $98 million write-down and rising interest rates culminated in a statutory net loss of $91 million during the 2023 financial year. The swing to a net loss is in stark contrast to the $115 million statutory net profit recorded in the year prior.
Its funds from operations, the standard earnings measure in the property sector which factors out valuations swings, dropped 11.3 per cent to $93 million for the 2023 financial year.
Distributions for FY23 were also lower, dropping by 15 per cent to 14.1¢, over the full-year, which was in line with guidance. The fund expects its FY24 distributions to be even lower – 12¢, due to the higher cost of debt.
“For FY24, in terms of interest rates, we’ve assumed a rate of 4.6 per cent as the floating rate,” Centuria Office REIT fund manager Grant Nichols said. “Now that is not what we expect to happen, but we are providing a buffer there in case it does happen.”
The higher debt meant the Centuria-run office fund was considering further asset disposals throughout the 2024 financial year, after selling two assets for $63 million during the 2023 financial year, Mr Nichols said.
Mr Nichols said the fund was aiming to lower its gearing, currently at 36.7 per cent after those two sales, which was still above its target range.
Occupancy questions ahead
But Mr Nichols said the fund’s primary focus would be on maintaining its occupancy rates rather than selling assets. Centuria Office REIT increased its occupancy rate by 240 basis points to 97.1 per cent during the 2023 financial year.
The fund has about 14,200 sq m that is set to expire in FY24. Leasing for that amount of space equates to 6.4 per cent of the fund’s income.
Among those leases set to expire are Ericsson leaving its 7000 sq m office in 818 Bourke St, in Docklands, Melbourne, and IQVIA not renewing its 3000 sqm lease at 201 Pacific Highway, in Sydney’s St Leonards. The fund has assumed no income will be generated from those office spaces once they are vacated for the remainder of FY24.
In addition to those upcoming leases expiring, the fund has about 12,000 sq m vacant primarily across the harder hit Sydney and Melbourne office markets.
Mr Nichols conceded it would be difficult to secure leases for those upcoming expirations quickly, noting the difficult environment in Docklands and St Leonards. “I completely acknowledge that it’s still a grind and it will probably continue to be over the short to medium term,” he told analysts.
“There’s no doubt Docklands has been tough. A lot of Australian office markets have been performing quite well, but Sydney generally and Melbourne CBD have been struggling.”
Mr Nichols remained confident in Australia’s other office markets, however. He said the fund’s occupancy rates increased due to momentum in Perth and Brisbane.
As the office sector battles headwinds, the Centuria fund’s net tangible assets fell to $2.20, down from $2.40 only six months ago, which means the discount at which its stock is trading has risen from 27 per cent to about 35 per cent.
