Australia’s largest listed pure-play office fund, Centuria Office REIT (ASX:  COF), has reported significant leasing activity and capital management initiatives throughout FY24 to deliver on  Funds From Operations (FFO)2 and distribution guidance, while identifying an innovative opportunity to extract value  from a next generation edge data centre customer tenant. 

During the period, COF leased 42,722sqm equating to c.15% of portfolio NLA1 while the divestment of four non-core assets provided $139million in proceeds used to reduce debt. Additionally, more than $862million of existing loans  were refinanced and debt covenant terms improved, indicative of strong lender support for COF and underlining  confidence in the quality of portfolio assets.  

COF delivered FFO2(earnings) of 13.8 cents per unit (cpu) and distributions of 12cpu. 

While COF provides a robust portfolio occupancy of c.93%3 and a stable 4.3-year WALE4, Centuria’s inhouse management team continued to address vacancies and near-term expiries, exploring a leasing opportunity with a  next-generation edge data provider. 

Recently, COF secured a 10-year lease to ResetData at 818 Bourke Street, VIC for an edge data centre of up to 1.5  megawatts using proprietary Liquid Immersion Cooling (LIC) technology5. Further assets within COF’s portfolio are being evaluated for these data centres. 

Belinda Cheung, COF Fund Manager, said, “During FY24, Centuria has executed on COF’s priorities by achieving  strong leasing activity, non-core divestments and debt refinancing. This was achieved against a backdrop of  challenging macroeconomic headwinds including a high inflationary and interest rate environment coupled with slow  GDP growth. Significantly, non-core assets were divested at an average discount of c.2% to prevailing book values, underpinning the quality of COF’s portfolio.  

“Across the nation, increased construction costs, financing costs and softer capitalisation rates have impaired office  development feasibilities, which is likely to dramatically reduce new office supply over the medium term. COF estimates that the economic rents required to support new developments have increased c.60% since 2020, and the  COF portfolio is valued at less than half the increased replacement cost. 

“In light of these tailwinds, we maintain an optimistic outlook on the medium term as we expect future office supply to diminish based on challenging development feasibilities, which are likely to accelerate economic rents materially above the current rents in most Australian markets, particularly in the metropolitan regions where COF’s portfolio is positioned.” 

Jesse Curtis, Head of Funds Management, added, “We are seeing signs of improving office sector tailwinds with  return to office mandates coinciding with limited new office developments and population growth leading to a larger  white-collar workforce. Investment in transport infrastructure, such as the Sydney Metro and Brisbane Cross River  Rail, will also improve commutability, especially to metropolitan and near city office markets. These tailwinds are  expected to positively impact COF’s portfolio over the medium term.” 

COF’s refinancing resulted in no debt expiring before FY28 with renegotiated debt covenants having no change to  debt margins. 

Approximately three-quarters of COF’s leases (c.72%) expire at or after FY27. Since 2020, COF has leased 77% of  its portfolio by NLA, totalling 210,000sqm. The strong leasing activity is reflective of modern sustainable office assets  located within Australia’s metropolitan markets. 

COF’s modern office portfolio encompasses 19 high-quality assets worth $1.9billion, with an average building age of  17 years and 93% of the portfolio comprising A-Grade assets.

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