Centuria’s Strategic Divestment Highlights Risks Amid Office Market Recovery

Strong Financial Performance Amid Market Recovery

Centuria Office REIT (ASX, COF), Australia's largest pure-play office REIT, has reported robust financial results for the half-year ended 31 December 2025. The REIT posted Funds From Operations (FFO) of $33.4 million, translating to 5.6 cents per unit, alongside a distribution of 5.1 cents per unit, consistent with its full-year guidance. This steady income stream underscores COF’s resilience as the office market begins to recover from previous cyclical lows.

The portfolio’s net tangible assets (NTA) per unit rose to $1.72, reflecting a $42.8 million uplift in property valuations. This marks the second consecutive period of valuation gains, supported by a 4% year-on-year increase in market rental rates. The REIT’s weighted average capitalisation rate (WACR) remained stable at 6.92%, indicating sustained investor confidence in its asset quality.

Leasing Activity and Portfolio Metrics

Leasing momentum was a highlight, with COF achieving its second-largest ever leasing volume of 29,354 square metres across 26 transactions, representing 10.7% of the portfolio’s net lettable area. Occupancy levels held firm at 91%, supported by a weighted average lease expiry (WALE) of 4.1 years, which provides income stability and visibility. Notably, 10 of the 19 assets in the portfolio achieved full office occupancy, including a 100% occupancy milestone at 8 Central Avenue, Eveleigh.

The REIT also successfully mitigated over 71% of its FY26 lease expiry risk during the period, a testament to proactive asset management. These leasing outcomes are particularly encouraging given the fragmented and challenging conditions still present in some metropolitan office markets.

Strategic Capital Recycling and Balance Sheet Strength

In line with its strategy to optimise portfolio composition and strengthen financial flexibility, COF exchanged contracts to divest the B-grade office asset at 9 Help Street, Chatswood, for $90 million. This sale price represents a 12.5% premium to book value and delivers a 12.3% internal rate of return (IRR) and a 109% capital uplift since acquisition. Settlement is expected in June 2026, with proceeds earmarked for debt reduction.

The REIT’s balance sheet remains robust, with proforma gearing at 42.5% and $107.5 million in liquidity. Debt metrics are comfortably within covenant limits, including a 2.1 times interest coverage ratio against a 1.75 times covenant and a loan-to-value ratio well below the 60% threshold. Approximately 78.5% of debt is hedged, providing protection against interest rate volatility.

Market Outlook and Sustainability Focus

Centuria’s management team expressed optimism about the outlook for metropolitan office markets, citing constrained future supply due to high replacement costs and the repurposing of office spaces for alternative uses such as residential and data centres. This supply constraint, combined with improving rental growth and occupancy trends, bodes well for COF’s portfolio of high-quality assets.

On the sustainability front, COF improved its GRESB rating to 4 stars with a score of 87, reflecting ongoing commitment to environmental, social, and governance (ESG) principles. This aligns with Centuria Capital Group’s broader sustainability framework and enhances the appeal of COF’s assets to environmentally conscious tenants and investors.

Overall, COF’s HY26 results demonstrate a well-executed strategy of active portfolio management, capital recycling, and prudent financial stewardship, positioning the REIT to capitalise on the anticipated recovery in Australia’s office property sector.