Centuria Office re-rated on the return of ‘normal business conditions’

Having concluded that Centuria Office REIT (ASX: COF) exceeded expectations in the first half, Credit Suisse has upgraded the owner of Australia’s largest office landlords predicts to Outperform from Neutral and lowered the target price to $2.42 from $2.48.

The broker was largely undeterred by the -13% funds from operations (FFO) - the sector’s preferred earnings measure - decline, especially given that it accounts for a large surrender payment received in the previous half.

While the REIT bounced lower following yesterday’s result, the stock was up 1.81% in early morning trade but has since retreated.

Larger tenants to return

What the broker particularly liked about the REIT’s first half result was the expectation of second half vacancies offsetting the $2m drop in lease surrender payments.

While leasing activity across the REIT’s national portfolio of 23 assets has been driven by smaller tenants over the past year, management expects leasing activity from larger tenants to improve through 2022 as business conditions return to [covid] normal.

Other notables within the REIT’s first half year result were a 1.2% rise in network occupancy to 94.3% over the year prior, while rent collections remained strong at 97.8%.

Management also reaffirmed full-year distribution guidance of 16.6 cents per unit.

Acquisitions

Management believes the $273m spent on new acquisitions during the half including – 100% of 101 Moray Street, South Melbourne and the remainder of 203 Pacific Highway, St Leonards, Sydney - deliver clear benefits to the portfolio.

These benefits include, high occupancy, improved weighted average lease expiry, and modern accommodation with affordable lease profiles.

Grant Nichols, manager of the REIT noted an increased demand to be located in areas that provide short commutes to improve employee satisfaction and attract the best talent.

Nichols believes the $28.5m increase for like-for-like portfolio revaluations at December 31 reflects ongoing investor demand for assets.

He also noted that the REIT could potentially further expand its portfolio if the right property opportunities presented themselves.

“I think through the course of this year you may see more office assets come to market, particularly with the opening of borders,” said Nichols.

Centuria Office underperforms the sector over the last three months

What other brokers think

Based on the four brokers covering the REIT (as reported by FN Arena), there’s a 9% upside to the target of $2.44, however, one of these brokers hasn’t updated on the REIT since September 2021.

• Having concluded that the FFO fall was an anomaly, Morgan Stanley today left its FY22 FFO forecast unchanged at 18.4c. The broker also retains an overweight rating, while the target falls to $2.60 from $2.70.

• Morgans retains its Hold rating and raises its target price to $2.50 from $2.48 (15/12/21).