Centuria Office REIT reported solid HY25 results, delivering $34.7 million in Funds From Operations and maintaining strong portfolio occupancy. The REIT is actively transforming office space into data infrastructure, positioning itself for future growth amid a challenging office market.
- HY25 Funds From Operations of $34.7 million, FFO per unit at 5.8 cents
- Portfolio occupancy steady at 92.2% with 12,611 sqm leased across 23 transactions
- Strategic conversion of office space to a 1.1MW data centre at 818 Bourke Street underway
- Robust balance sheet with $65.5 million debt headroom and no debt maturing until FY28
- FY25 FFO and distribution guidance reaffirmed, targeting 11.8 cpu and 10.1 cpu respectively
Financial Performance and Guidance
Centuria Office REIT (ASX: COF), Australia's largest pure-play office REIT, has released its half-year results for the period ending 31 December 2024, reporting Funds From Operations (FFO) of $34.7 million, equating to 5.8 cents per unit. This performance aligns with management's expectations and supports a distribution of 5.05 cents per unit, consistent with prior guidance. The REIT reaffirmed its full-year FY25 FFO guidance of 11.8 cents per unit and distribution guidance of 10.1 cents per unit, reflecting confidence in its operational resilience despite ongoing market headwinds.
Portfolio Stability and Leasing Activity
The portfolio remains robust with a 92.2% occupancy rate and a weighted average lease expiry (WALE) of 4.2 years, underscoring the stability of income streams. During HY25, Centuria Office REIT completed 23 leasing transactions covering 12,611 square metres, representing 4.6% of the portfolio’s net lettable area. Notably, leasing activity at key assets such as 818 Bourke Street in Docklands and 201 Pacific Highway in St Leonards contributed to maintaining occupancy levels amid a challenging office market environment.
Strategic Pivot: Office to Data Infrastructure
In a forward-looking move, Centuria is converting underutilised office space at 818 Bourke Street into a 1.1-megawatt edge data centre leased to ResetData on a 10-year term. This initiative not only diversifies income sources but also enhances asset value, with the conversion already delivering a 10% uplift in the property’s valuation. This strategic pivot reflects Centuria’s proactive approach to evolving tenant demands and the growing importance of data infrastructure in commercial real estate.
Balance Sheet Strength and Capital Management
Centuria Office REIT has fortified its balance sheet by refinancing $862 million of debt, extending its weighted average debt expiry to 3.6 years with no maturities until FY28. The REIT enjoys $65.5 million in undrawn debt facilities and maintains a conservative gearing ratio of 42.9%, with 98% of debt hedged. Importantly, renegotiated debt covenants have been relaxed, increasing the loan-to-value ratio (LVR) threshold to 60% and lowering the interest coverage ratio (ICR) requirement to 1.75x, providing additional financial flexibility without impacting margins.
Market Outlook and ESG Commitments
Management remains cautiously optimistic about the medium-term outlook for the Australian office market, citing supportive factors such as reduced future office supply, population growth, and strengthening occupier sentiment, particularly from government and large corporate tenants. However, elevated vacancy rates persist in the near term, tempering expectations for immediate rental growth. On the sustainability front, Centuria continues to advance its ESG agenda, targeting zero scope 2 emissions by 2028 and eliminating gas and diesel use by 2035 where practicable. The portfolio boasts a 5.0-star NABERS Energy Sustainable Portfolio Index rating and a strong GRESB score of 80/100, reflecting ongoing commitment to environmental performance.
Conclusion
Centuria Office REIT’s HY25 results demonstrate a resilient and strategically managed office portfolio navigating a complex market landscape. The combination of steady leasing, innovative asset repurposing, and prudent capital management positions COF to capture emerging opportunities as market sentiment improves.
Bottom Line?
Centuria’s strategic agility and solid balance sheet set the stage for navigating office market challenges and capturing future growth.
Questions in the middle?
- How will the conversion to data centre space impact long-term income stability and valuation?
- What are the risks if office vacancy rates remain elevated longer than anticipated?
- How might evolving tenant preferences influence Centuria’s asset management and leasing strategies?