Centuria Office REIT (COF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CMA Half Year '20 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Grant Nichols, Fund Manager of CMA. Thank you, sir. Please go ahead.

Good morning, everyone, and thank you for dialing in to this conference call relating to the half year FY '20 financial results and fund update for the Centuria Metropolitan REIT. My name is Grant Nichols, and I'm the Fund Manager of CMA. Earlier today, we published various documents on the ASX relating to the half year results, including a results presentation, which we will go through this morning. You can follow the presentation by downloading the ASX announcement from CMA's website or the ASX website. Starting on Slide 4, and I'll provide a quick overview of the manager before getting into CMA proper. Centuria Capital Group is an established specialist investment manager that operates the ASX code, CNI. With $7.3 billion of assets under management, Centuria Capital Group provides its investors with exposure to quality office, industrial and health care commercial real estate investments across Australia and investment bonds through the Centuria Life business. CMA accounts for around 29% of Centuria Capital Group's total assets under management. Centuria Capital Group is a strong supporter of CMA, and remains the trust's largest unitholder, with 19.9% of the register. This strong alignment to CNI provides the trust with various opportunities to utilize a highly experienced and extensive in-house real estate team with opportunities to undertake joint venture initiatives and the potential to access pipeline opportunities for further future transactions. Moving on to Slide 5. In the first half of FY '20 was another busy period for CMA, with the Centuria team executing several significant leasing and capital transactions, which if you -- combine to enhance the REIT's asset quality, tenant covenants, occupancy and WALE. In addition to these transactions, we delivered FFO and distribution guidance and also generated an $0.08 per unit increase in net tangible assets for some valuation uplift across the existing portfolio. These initiatives and results have contributed to CMA delivering a strong 12-month total unitholder return 31 December 2019 of 30.7%. Looking at the results summary in more detail on Slide 6, and the completed transactions that reinforced CMA's position as Australia's largest ASX-listed pure-play office REIT as the portfolio has grown to over $2 billion. With the 23 assets having an average building age of around 15 years, which is very young for an office portfolio, and now nearly 25% of the portfolio income is being derived from either Australian federal or state government tenants. As noted earlier, the Centuria team executed a significant amount of leasing with nearly 29,000 square meters of leasing completed during the half. This has maintained very high occupancy of over 99% and increased the weighted average lease expiry to 5.1 years. We have also maintained a solid capital position with gearing of 33.2% and significant debt covenant headroom and undrawn debt capacity. A strong current position and a 30.7% total unitholder return to 31 December 2019, complements the track record CMA has already established, with CMA having consistently delivered strong distribution growth returns to unitholders. As indicated in the graph, on the left-hand slide -- left-hand side of Slide 7, since listing in 2014, CMA has delivered a nearly 110% total return to unitholders, which is over 30% outperformance of the ASX 300 A-REIT Index over the same time frame. Looking at the strategy for CMA on Page 8. And for the remainder of FY '20, we reiterate our FFO guidance of $0.19 per unit and distribution guidance of $0.178 per unit. To that end, our focus for CMA throughout the remainder of FY '20 and beyond will be continuing to generate predictable and quality income streams by building Australia's largest and leading office REIT, positioning CMA to take advantage of Australia's favorable office market conditions. With the quality portfolio of robust and diversified capital structure and with the support of the wider Centuria business, we believe CMA is well placed to continue delivering its strategic objectives. Moving back to the half year FY '20 financial results on Slide 10. CMA produced $39 million in funds from operations, with $0.089 paid to unitholders as a distribution. This equated to a very attractive annualized distribution yield of around 6%. As noted previously, net tangible assets per unit has increased from $2.49 per unit to $2.57 per unit, an $0.08 per unit increase, which has been predominantly driven by like-for-like valuation growth. Turning to capital management on Slide 11. During the half, CMA raised both debt and equity to fund the acquisition of 3 high-quality office buildings. Around $460 million of equity was raised, which has increased the market cap and further diversified unitholder base. An additional $250 million of debt facilities were put in place to complement the equity raisings, such that as at 31 December 2019, CMA had total debt facilities of $805 million, with approximately $735 million drawn. These additional debt facilities have increased the debt maturity diversification, further diversified lenders and maintained a weighted average debt maturity at 3.8 years. Gearing of 33.2% and hedging of 63.4% are within target levels. The interest coverage ratio of 6x has materially improved and is well above the debt covenant 2x. With sufficient undrawn debt, significant debt covenant headroom and a diversified debt maturity profile for Australia's 4 major lenders, CMA is well placed with a robust capital structure that can withstand cycles and enable growth. Moving on to the portfolio on Slide 13. CMA has a truly diversified portfolio of 23 assets with exposure to most of Australia's major office markets. So for those investors seeking a way of accessing Australian office property, CMA, as Australia's largest ASX-listed pure-play office REIT, provides exposure to a truly diversified high-quality portfolio that is not heavily weighted to any single market and is currently delivering a distribution yield of around 6%. This diversification does not diminish the quality of the underlying tenant covenants with about 75% of the portfolio income derived from either Australian federal or state government departments, listed companies or multinational corporations. As already mentioned, the average building age across the portfolio is around 15 years, which is very young for an Australian office portfolio and further highlights the quality of the CMA portfolio. Newer buildings generally have lower capital expenditure requirements, lower operating costs and are generally more attractive to tenants, offering greater building efficiencies and generally better building amenity. Looking at lease expiry profile on Slide 14, Centuria has continued to achieve strong leasing outcomes for CMA with almost 10% of the portfolio leased during the half, maintaining high total portfolio occupancy of over 99% while extending the WALE to 5.1 years. These results are a testament to the strong capabilities of Centuria's in-house asset management team. With a dedicated leasing team, Centuria has consistently been able to maintain high occupancy across all of its listed and unlisted platform. In addition to this management capability, CMA unitholders benefit from an already diverse tenancy profile with over 60% of leases expiring at or beyond financial year 2024. The quality of tenant covenants has also materially improved during the half, with the Australian federal government, now the largest portfolio tenant, representing over 13% of portfolio income, while the WA state government has increased to the second largest tenant at 4.5% of portfolio income. When all Australian federal and state government departments are combined, they generate almost 25% of CMA's portfolio income, which contributes to the stated CMA objective of generating quality income streams. Highlighting some of the key leasing transactions on Slide 15, 3 of the notable leasing transactions were: 144 Stirling Street in Perth, where a 10-year lease of 10,875 square meters has been agreed with the WA government on behalf of the WA Police, which has expanded its tenancy across the entire building. At 203 Pacific Highway in St. Leonards, Verizon have renewed their 3,528 square meters tenancy for a further 5-year term. And our 555 Coronation Drive in Toowong, Centuria has leased what was the portfolio's largest vacancy as at 30 June 2019. With Data#3 leasing the 1,963 square meters suite for an 8-year term. The lease to Data#3 was complemented by Chandler MacLeod renewing their tenancy for a further 5 years. This building has now been repositioned with building occupancy increasing to 100% from around 60% as at 30 June 2019. Maintaining very high occupancy remains the key management focus. And while the results in the half were pleasing, we are actively seeking outcomes to address the upcoming expiries, particularly at 818 Bourke Street, 1 Richmond Road and 131 Grenfell Street. Touching on an operational update. And during the half, 856 solar panels have been installed across 5 buildings located in Brisbane, Adelaide and Wollongong. Combined, these solar panels reduce carbon emissions by about 300 tonnes, which is equivalent to taking 170 cars off the road. The electricity savings created from the installation also generate about 15% return on cost. During the remainder of FY '20, we will continue to assess opportunities to implement either solar or other energy-saving initiatives across the CMA portfolio. Turning to portfolio evaluations on Slide 17. And within the portfolio value increase to over $2 billion was a $37.9 million like-for-like increase in property value. This valuation increase drove the rise in CMA's NTA to $2.57 as at December 31, 2019. Strong investment demand and rental growth are driving valuation increases across the portfolio. But pleasingly, 2 of the largest valuation increases occurred at 144 Stirling Street, Perth and 555 Coronation Drive, buildings where significant leasings were completed. Looking at the completed transactions on Slide 18. And during the half, 3 high-quality office buildings were acquired for around $636 million. These prime grade assets located in Sydney Fringe, Perth and Canberra, all had 100% occupancy, a combined WALE of 8 years and were underpinned by excellent tenant covenants. The 3 assets acquired were 8 Central Avenue in the Sydney Fringe market of Eveleigh; William Square in the Perth Fringe market of Northbridge; and Nishi NewActon Building in Canberra. We believe that these institutional-grade assets complement and improve the CMA portfolio and assist CMA in delivering its primary objective of providing unitholders with predictable and sustainable income streams by investing in quality well-located office buildings that offer tenants substantial surrounding amenity and access to strong transport links. In addition to improving portfolio metrics, the acquisitions further geographically diversify and re-weight the CMA portfolio so that CMA is not heavily weighted to any single market. The acquisitions and their associated equity raisings have assisted in increasing the market capitalization of CMA to approximately $1.5 billion, as indicated on Slide 20. With the expansion in market capitalization, particularly subsequent to the equity raisings that occurred during the half, some investors have queried where CMA sits in relation to the ASX 200 Index inclusion. In assessing index inclusion, S&P look at 3 measures: investable weight factor, relative liquidity and the free float adjusted market capitalization. At the December rebalance, it may have appeared that CMA met these measures for inclusion in the ASX 200. However, the timing of the equity raisings, being within the rebalance period, may have adversely impacted the calculations undertaken by S&P. The criteria and measure for ASX 200 inclusion is something we will continue to monitor in due course. Reflecting on half year 2020 on Slide 21, CMA has delivered on many of its key objectives, maintaining high occupancy and delivering quality sustainable income returns to its investors. Given the outlook for Australian office markets remain solid, with ongoing investment demand supported by low or falling vacancy rates evident in most major Australian office markets, coupled with a shift to lower interest rates in 2019, increasing the relative attractiveness of commercial office property. When we look at the spread between office cap rates and the risk-free rates, there is a near record spread, which we think will underpin ongoing investment demand. Across our portfolio, we continue to generate pretty good levels of tenant demand, as tenants continue to seek opportunities to be located in quality, affordable office buildings that are generally located within close proximity to retail amenity and transport infrastructure. To that end, our focus for CMA throughout the remainder of FY '20 and beyond will be continuing to generate predictable and quality income streams by building Australia's leading office REIT, positioning CMA to take advantage of Australia's favorable office market conditions. With a quality portfolio, a robust and diversified capital structure and with the support of the wider Centuria business, we believe CMA is well placed to continue delivering its strategic objectives. For the remainder of FY '20, we reiterate our FFO guidance of $0.19 per unit, with full year distribution guidance of $0.178 per unit, payable in equal quarterly installments. This translates to account distribution yield of around 6%. In conclusion, I would like to thank CMA unitholders for their continued support, and we look forward to continuing to deliver value in the coming years. I will now hand you back to the operator, and invite you to ask any questions that you may have.

[Operator Instructions] Your first question today comes from the line of Ronan Barratt from Moelis Australia.

Just unpacking the vacancy and expiries a little further, just with reference to Slide 15 of presentation. Perhaps starting with the only real vacancy which exists at Marcus Clarke Street in Canberra. If you could just give us an update on that space and what's been factored into the guidance?

Sure. So at 60 Marcus Clarke Street, that space became available in April of this year. We have subsequently undertaken a refurbishment of that space, which is completing as we speak, and we'll be putting that back to market. We have got a couple of renters on that space. But at this stage, nothing is being done. And during the course of FY '20, we have factored no income being generated from that suite for the remainder of the financial year.