Part B of Assignment Two comprises of
an analytical assessment, valuation and
investment recommendation for:
Centuria Office REIT (ASX: COF)
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ASSIGNMENT TWO
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COMPANY OVERVIEW
Centuria Capital Group is a diversified property funds management and property development business based in
Melbourne, Australia.
Established some 35 years ago, Centuria now has $9.4 billion of assets under management ($8.6 billion in the
real estate sector) and provides investment options in listed and unlisted (both fixed-term and open ended)
property trusts in the office, industrial and healthcare sectors.
Figure 1 shows the Centuria Capital Group Funds Under Management (FUM) (Centuria Office REIT Annual Report 2020)
Centuria also has a property development arm that focuses on these industry sectors, however, is currently
undertaking property development activities in the affordable housing sector with four projects currently
underway NSW.
FUND OVERVIEW
The Centuria Office REIT (the Fund), which is the subject of this assessment is one of two of Centuria’s listed
REIT’s (the other focusing on industrial investments). According to MorningStar (2020), the Fund was
established in 2005 as an unlisted REIT. However, existing investors voted in favor of resolutions to facilitate
the listing of the Fund on the Australia Stock Exchange (ASX) 24 October 2014.
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Centuria (2020) summarize the Fund in the following way: The Centuria Office REIT (ASX: COF) offers
investors a chance to invest in commercial property via a real estate investment trust (listed property trust). COF
is Australia’s largest pure play office REIT (A-REIT) and is included in the S&P/ASX300 Index. COF has a
geographically diversified portfolio of 23 high quality assets with a value of $2.1 billion (or 22% of assets under
management). The portfolio is predominantly exposed to metropolitan and near city office markets that are well
connected to transport and lend themselves to affordable rents.
The primary objective for COF as a real estate investment trust is to generate sustainable and quality income
streams, by executing initiatives to create value across a portfolio of quality Australian office assets.
COF has a young portfolio with the average age of buildings being approximately 16 years old. It benefits from
a strong tenant profile, with around 80% of income being derived from Government, multinational corporations,
and listed company tenants.
According to MorningStar (2020), COF has the following trading attributes:
CENTURIA OFFICE REIT
(Current 2 December 2020)
Market Capitalized Value
$1,147,000,000
Total Shares Issued
514,500,000
Current Trading Price
$2.23
Real Estate Sector Specialization
Office only
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ASSIGNMENT TWO
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FUND PERFORMANCE
(Centuria Office REIT Annual Report 2020)
COP PROPERTY PORTFOLIO
The key metrics of the COP property portfolio are:
(Centuria Office REIT Annual Report 2020)
(Centuria Office REIT Annual Report 2020)
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The following image is from the COP 2020 Annual Report and provides a snapshot of the distribution of assets
that are owned by the Fund, their weighting in the portfolio, occupancy level and their corresponding WALE by
Australian state.
(Centuria Office REIT Annual Report 2020)
COP PORTFOLIO DIVERSIFICATION
As can be seen above, the COP is heavily diversified geographically, however the fund is also diversified by
tenant:
(Centuria Office REIT Annual Report 2020)
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Where:
•
80% of portfolio income is from government, listed or multinational corporations
•
Of this percentage, over 25% of total income was derived from Australian state and federal government
tenants alone
•
The COF’s portfolio is geographically diversified throughout Australia, predominantly exposed to
metropolitan and near city office markets that are well connected to transport and lend themselves to
affordable rents. For example, COF exposed market rents average a 47-77%1 discount to Sydney CBD.
(Centuria Office REIT Annual Report 2020)
By Income and Tenant Profile:
(Centuria Office REIT Annual Report 2020)
(Centuria Office REIT Annual Report 2020)
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ASSIGNMENT TWO
21
COP RISK MANAGEMENT
PORTFOLIO RISK ITEM
MANAGEMENT STRATEGY / OBSERVATION
COVID-19
Centuria report that the Funds team is meeting daily to ensure the portfolio is
optimized insofar as managing its tenant partners through rental and financial
discussions and ensuring the portfolio is kept in manner that is conducive to
the heightened cleaning and social distancing measures that are being
mandated at a government level. This is a positive step however the Fund
should be going further to implement better monitoring in their buildings and
seeking to lower the number of touch points within their buildings. These
initiatives should be implemented given the young age of the buildings in their
portfolio which should also reduce vacancy downtime and increase their
capital values.
Income Stability
The Fund appears to have implemented a positive strategy to ensure a
stabilized income is achieved through geographic and tenant diversification.
However, 75% of the portfolio comprises of tenants > 2,000sqm. The Fund
leased 32,378sqm in FY20 which represented 41 transactions to achieve an
average deal size of 790sqm. If this trend continues and depending on the
floor plate sizes within the portfolio, it may require some floor plates to be
split to accommodate smaller tenancies which may create additional common
areas and subsequently higher rentals and higher outgoing costs.
Pending Lease Expiry Risk
We note pending vacancy in the Robina asset where Foxtel was the head lease
tenant, which comprises an occupiable area equivalent to 3.1% of the
portfolio. We understand a number of sub-tenants equal to 23% of the building
are prepared to sign head leases, but this leaves 7,557sqm of vacant space for
the leasing team to fill. It is therefore expected this vacancy will take time to
fill, along with costing the fund for outgoings whilst the space is vacant,
leasing fees and lease incentives. It is hoped the lease termination payment
provided by Foxtel will go some way to mitigate this financial exposure.
Further, we note 11,171sqm of space will become vacant in 818 Bourke
Street, Melbourne. The aggregate of these two vacancies is essentially the
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average amount of space that has been leased by the Centuria leasing team
across the portfolio between FY17 – FY19.
In addition, we note a number of other lease expiries are scheduled for FY21
however Centuria do not elaborate on the status of these negotiations /
renewals. Therefore, the leasing team will need to be working at their best to
lease any space, noting the current impacts of COVID-19, where tenants are
observing their cost base for any business expense.
Portfolio Diversification
Well balanced portfolio both geographically and by tenant. The Fund also
focuses on fringe market assets which provide a discounted rental proposition
to what can be found in the traditional CBD’s. This bodes well for several
business who are cost conscious but are also seeking amenity for their tenants.
However, it all comes down to the net effective rentals and lease incentives
are not discussed at a micro-level within the COF 2020 Annual Report.
Portfolio Valuation (NTA)
We note only 55% of the portfolio was valued by third party valuers with the
balance undertaken as Directors valuations. This is despite the Fund acquiring
assets to the value of $636 million, which represents a 49% increase of funds
under management (year-on-year). It will be interesting to see how the
valuation of the Fund tracks in FY21. It appears that the corresponding debt
has been raised to maintain an NTA per share of $2.49 which has been held
stable now for both FY19 and FY20.
Capital Management
The Fund has worked well over FY20 to increase its debt base by some 60%
to $880 million and reduce its all-in debt costs to 2.2% from 3.2% in FY19.
This will allow the Fund to aggressively target new opportunities that suit the
Funds investment focus of acquiring “quality, young office buildings
positioned in highly connected, affordable office markets throughout
Australia”.
Further the fund has been required to raise equity for the FY20 acquisitions
and grown its shareholder units by a further 44%, which has diluted the
overall value of the Fund and impacts the dividend potential of the Fund as
well as the NTA per share.
Liquidity
We note that whilst the Fund has implemented positive capital management
initiatives, the Fund now has a reduced its debt term security to 3.3 years,
down from 4 years in FY19. Whilst this reduction may appear concerning on
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face value, it does allow the Fund to continue to maintain a competitive cost of
debt from the major institutions; however its all in cost of debt of 2.2% is
extremely competitive. The Fund should be seeking to equal or better this in
the coming period, coupled with seeking to increase the portfolio WALE to
ensure it is in the best financial position for its unit holders.
VALUATION METHODS
YIELD BASED VALUATION
Year
Dividend per share
Year-end share price
Dividend Yield
Jun-15
0.0922
$2.06
4.48%
Jun-16
0.17
$2.14
7.94%
Jun-17
0.175
$2.51
6.97%
Jun-18
0.181
$2.48
7.30%
Jun-19
0.176
$2.80
6.29%
Jun-20
0.178
$2.02
8.81%
(MorningStar 2020)
The above yield-based valuation indicates that since listing the Fund, investors have received a relatively
consistent return on their investment. This stability will be favorably looked upon for those investors who are
seeking a stabilized income in their portfolio.
NTA BASED VALUATION
Year
Year-end share price
NTA per share
Premium / Discount
Ratio
Jun-15
$2.06
$1.05
Jun-16
$2.14
$1.18
Jun-17
$2.51
$2.32
Jun-18
$2.48
$2.49
Jun-19
$2.80
$2.49
Jun-20
$2.02
$2.49
1.96
1.81
1.08
1.00
1.12
0.81
(MorningStar 2020)
Currently, the unit price is trading at a 19% discount to its NTA which is the first time since the Funds
registration on the ASX that the stock is traded at its below NTA valuation.
DIVIDEND DISCOUNT MODEL VALUATION
Metric
Beta
Total return index (5 years)
AU Government Bond rate
CAPM
Terminate Rate
200891 - PART B
ASSIGNMENT TWO
Calculation
Bi
Rm
Rf
Value
0.88
7.43%
0.30%
Source
MorningStar
S&P
Bloomberg
6.57%
5.57%
or Discount Rate
less
1%
24
Calculations:
Year
DPU
Date of Valuation
2020
17.8
TOTAL
17.8
Terminal Value
DDM valuation
Current Share Price
Premium / Discount
Ratio
296.00
$3.04
$2.23
2021
16.5
2022
16.5
2023
16.5
16.5
cents per
share
16.5
16.5
2024
16.5*
296.00
312.50
2025
16.5*
0.73
(MorningStar 2020)
* An assumption has been made in respect to the DPU values for 2024 and 2025, due to MorningStar only
proving a three-year forecast.
Based on the Dividend Discount Valuation method, the Funds unit price is trading at a 23% discount.
INVESTMENT RECOMMENDATION
Over the past few years, Centuria has focused this Fund to become an office only based asset fund, which is
now consistent with its recent name change. Centuria have selected their assets based on well-connected fringe
locations with surrounding amenity, rather than competing in traditional CBD environments. This has enabled
the fund to compete for tenants who are wanting to centralize into a fringe location where Centuria can offer a
discount rental proposal to what is generally offered in the CBD’s.
However, being an office-based fund, it exposed to the macro-economic factors that impact the performance of
office assets. None more so than what we have experienced in 2020 with the stay at home mandate from the
state governments in response to the COVID-19 pandemic. Whilst no one knows at this stage how the occupier
market will respond to workplace design into the future, it is widely known that creating a separation between
home and work life is a positive and office based collaboration is much more beneficial to a business, which to
some extent cannot be achieved in a two-dimensional video conferencing environment.
The Centuria Office REIT is well diversified both geographically and by its tenancy covenants. Its WALE is
now 4.7 years and the Fund has worked well in its capital management capacity to raise both equity and debt.
Its all-in debt position of 2.2% is extremely competitive, however its gearing of 34.5% is higher than other AREIT’s I have researched. Refer below for a peer comparison:
200891 - PART B
ASSIGNMENT TWO
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Dexus
GPT
Mirvac
Charter Hall
27.41%
24.29%
26.27%
5.66%
Current Gearing (Debt / Total
Assets)
(MorningStar 2020)
However, based on the analysis the Fund has provided an average dividend yield of 7.46% over the past five
years and the share price is currently trading at a 19% discount to its NTA. Further and as shown in Dividend
Discount Model, the stock is trading at a 23% discount.
Based on this analysis, the Centuria Office REIT is a recommended investment.
REFERENCES:
•
MorningStar, 2020, Company Reports, 2 December 2020, https://datanalysis-morningstar-comau.ezproxy.uws.edu.au/af/company/corpdetails?ASXCode=COF&xtm-licensee=datpremium
•
Centuria, 2020, Centuria Office REIT, 2 December 2020, https://centuria.com.au/
•
Centuria, 2020, Centuria Office REIT Annual Report 2020, Centuria, Sydney
•
S&P Global, 2020, Indices, 2 December 2020, https://www.spglobal.com/spdji/en/indices/equity/spasx-200-a-reit/#overview
•
Bloomberg, 2020, Markets: Australian Rates and Bonds, 2 December 2020,
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia
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