Company Interview / Centuria Office REIT meets distribution targets

Key points:

Belinda Cheung highlights the importance of leasing in strengthening Centuria Office REIT's portfolio.Rise in office space demand due to predicted population and white-collar worker growth outpacing the decrease in office supply.Brisbane is touted as a market to watch due to its quick recovery and the infrastructural developments, according to Belinda.

In her conversation, Belinda Cheung from Centuria Office REIT (ASX: COF) shares that they have significantly enhanced their portfolio across the board over the past five years. Belinda attests that leasing provides notable support for their bottom line, with over 200,000m² leased since the onset of Covid, including 42,000m² in the last year alone. One of their key accomplishments she cites is renewing their largest tenant, the Commonwealth government in Western Australia, to a ten-year term.

Addressing the office space demand versus supply dynamic, Belinda states that the portfolio value of existing properties will significantly increase due to rising construction, financing, and leasing costs leading to decreased new office supply in the near to medium term. She is optimistic about the medium-term outlook of the office, attributing this to predicted population growth. She also expects that the increased demand for office spaces, with the rise of white-collar workers, will outpace lease availability.

On the topic of legacy of Covid and the work from home phenomenon, Belinda asserts that they are witnessing an increase in the return to office movement and are optimistic about the continued momentum. She also addresses how they are handling potential vacancies and providing reliable income streams through their robust in-house asset management team. Belinda concludes by alluding to the enhancements they're making to their portfolio, including reducing their portfolio asset age and naming Brisbane as a promising growth area.

Full unedited transcript below:

0:00

I think it goes beyond the past 12 months. Over the last five years since Covid, we've actually done so much across the board to really strengthen the portfolio as a whole. Um, the most important thing for us is probably leasing. That's really supports the bottom line. We've done over 200,000m² of leasing in the last well since Covid, and even this last year alone, we've done 42,000m², which represents about 15% of our total portfolio. I think it's really important to draw out the fact that we renewed our largest tenant, uh, Commonwealth government in WA, and that's over 13,000m². They've retained their entire footprint, which for me says quite a lot about how tenants are thinking about space, like they've retained their footprint. They truly believe they still need that space. And then it's they've committed to a ten year term. So to me, that speaks a lot to the medium term outlook for

0:59

office. It's definitely a lot more positive than it was maybe this time last year even before uh, tenants uh, Gravitating towards high quality assets which we have in the metro areas, and we're very positive about the medium term. We've got predictions for population growth. I think Australia is the second country that's meant to be expecting the most population growth in the next ten years. That's 15% increase in population. And we know for a fact that about 27% of workers are white collar workers. And that means that there will be increase in office space demand. Um, another thing that I wanted to mention is there's going to be very there's going to be less office supply in that medium term because of rising costs. It's the rising cost of living. But the same also applies to construction financing costs, leasing costs. These all add up

1:59

and it becomes very expensive to build. And so there is incredible value in all the existing stock that we have right now. So let me pick you up on those lasting legacy of Covid if you like. And obviously the work from home phenomenon. We have seen some similarly state governments try to encourage workers back to the cities. Yes, but we're still some way behind where we were pre-COVID. So are you expecting that that work from home phenomenon is going to continue and perhaps likely to impact your business? You mentioned there obviously the government being a key tenant of yours. What are the about the private sector though? The private sector, we have a very large portfolio of private sector tenants. Also their blue chip work, ASX listed multinational corporations as well. We're finding that there is an increase in the return to office movement. A lot more corporates and state government, as you mentioned, have mandated their staff to come back to the

2:59

office. And we're seeing that there's just a lot more momentum in recent times. And so it's a very positive outlook for office. You've mentioned here your focus on addressing vacancies as well as near-term expiries to provide that reliable income stream. So how are you actually doing that at the moment? Well, on the ground, we actually have a very strong in-house asset management team. So from facilities property to asset management, they're very focused on leasing, building out amenity and making these buildings really attractive to potential tenants and and existing tenants. I think an example of us trying to find value in our buildings is 818 Bourke Street in Docklands. We recently signed a ten year lease with Reset Data there, a new generation data centre service provider, um, using liquid immersion cooling technology. But what it means is it's a very efficient

3:59

way to run a data centre, and it takes a very small footprint. So for us, they've taken a very small part of the office, but we're hoping to be able to generate 1.5MW of capacity for them. So your portfolio occupancy at 92.5%. Um, what's the ideal target for you there? Are you expecting that to to alter over the next financial year, over the next financial year? We're hoping to really chip away. I do a lot more leasing, but we've had a proven track record to show that we can do leasing with over 2000m² leased in the last five years. We've had a lot of renewals as well, especially within the last year. About 75% of our leasing deals were existing renewals, so we're confident that the team will go out there and continue leasing as strongly as we have in the past. You're also obviously look to strengthen your balance sheet. You have made a number of divestments. How have you made those choices in in choosing what you you divest from?

4:59

So across the portfolio we're very focused on improving the quality. And by that I mean we're trying to reduce the portfolio asset age. At the moment it's about 17 years, which is probably one of the youngest portfolios on the listed market at the moment. We are well, the four divestments we made last year were all done at really close to book value So an average discount of about 2%. Um, so the assets that we sold were still really high quality, but they were more or less be great assets, older style assets, and it was time to let them go to improve the portfolio as a whole. And you've said, Belinda, that you're expecting office supply to continue to diminish. So where are you seeing those growth areas? Obviously as you you talk about the population growth for Australia, which regions are perhaps you going to concentrate on? I think at this point in time, Brisbane is a really wonderful market to watch. It's recovering a lot quicker than a lot of the other markets.

5:58

So Brisbane, Perth, they're super strong. But we're also seeing some tailwinds in the city market with the Sydney Metro opening this week. And actually we've got exposure in the North Shore. And I truly believe that once the Metro opens, it opens up the workspace to just the wider Sydney population. Commute times will be cut in half from the west and from the south. And that's not the only piece of transport infrastructure that's being brought in in Brisbane. You've got the Brisbane Cross City River rail that will also improve commute time to places like Fortitude Valley and South Brisbane, where we have our assets to.