Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Centuria Office REIT (ASX:COF, Financial) delivered FY24 FFO of $0.138 per unit and distributions of $0.12 per unit, in line with guidance.
- The portfolio is 93% occupied with a 4.3-year weighted average lease expiry as of June 30, 2024.
- COF executed $139 million of divestments at an average 2% discount to book value, improving portfolio quality.
- The REIT has a strong tenant base, with 72% of rental income supported by ASX-listed national and multinational tenants.
- COF's portfolio is young, with an average age of 17 years, and 93% of assets meeting A-grade specifications.
Negative Points
- Leasing challenges persist in specific markets, notably Docklands and St Leonards, with no income assumed for full-floor vacancies in FY25.
- Finance costs have increased to $46 million over FY24 due to sustained rises in interest rates.
- The average all-in cost of debt incurred was 4.9%, with an expected increase to about 5.5% in FY25.
- Gearing is at 41%, and there are no immediate plans to significantly reduce it, despite some concerns from analysts.
- The distribution payout ratio is high, with some analysts calculating it to be 113% of AFFO, raising questions about sustainability.
Q & A Highlights
Q: Given the assumption for full-floor vacancies to remain vacant for the full year, is it fair to say that the portfolio on average for FY25 is slightly more vacant than where it is today?
A: Yes, the 7.5% vacancy number is mainly concentrated in Docklands and St Leonards. We have assumed no income for FY25 across those buildings.
Q: Could you touch on the nuances of 825 Ann Street and how things are going in the Fortitude Valley market?
A: Fortitude Valley is a vibrant precinct. The expiry in question is for Macquarie's space, which occurs in January next year. We have assumed no income for the remaining period in FY25 for their space.
Q: Do you foresee the need to continue with the asset divestment program to manage gearing, and where would you like to see that gearing number?
A: In FY24, we sold four assets to bring down gearing. This year, we refinanced $862 million of debt, renegotiating our debt covenants to provide ample headroom. We are comfortable with gearing in the early 40s.
Q: The distribution this year is essentially 113% of your AFFO. Are there plans to get this down to below AFFO?
A: We are comfortable with our distribution guidance. Over the last few years, we have been reducing our payout ratio to address CapEx and incentives.
Q: What is the path to get gearing down to mid-30s, and are there plans to sell more assets?
A: Our major focus is on debt covenants, which have been renegotiated to provide significant headroom. There are no current plans set in stone to bring gearing down, but we will consider opportunities if they arise.
Q: Can you provide more details on the data center tenancy in Docklands, including space taken up and scalability?
A: The lease is conditional on power availability and local council approval. We have agreed to 608 square meters with a capacity of 1.5 megawatts. The space is the old Ericsson comms room, which already has existing infrastructure.
Q: Does the building have excess capacity for data centers, and can the footprint be increased?
A: 818 Bourke Street is located above a substation, which is crucial for data centers. Scalability is limited to buildings with such access to power, making it a unique opportunity.
Q: Are there any current plans to bring gearing down in the short term?
A: There are no set plans to bring gearing down immediately, but we will consider opportunities as they arise.
Q: Could you clarify the assumptions for full-floor vacancies and their impact on FY25 income?
A: We have assumed no income for full-floor vacancies in Docklands and St Leonards for FY25, reflecting the challenging leasing environment in those markets.
Q: What are the key drivers for the change in FFO guidance for FY25?
A: Key drivers include leasing downtime estimates, reduced income from divestments, and an increase in the overall cost of debt, expected to be around 5.5% in FY25.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
