ASX property stocks have been on the nose with asset write downs and dividend cuts forced on the sector from the COVID-19 meltdown.
But there’s one that’s promising a 9% yield for the current financial year. This is the Centuria Office REIT (ASX: COF) share price.
The office trust reported its FY20 full year results this morning and went to great pains to point out its relatively more defensive properties compared to its peers.
Big jump in earnings and revenue
Centuria reported a 38% surge in total revenue to $149.3 million as funds from operations (FFO) jumped $85.4 million in the latest financial year compared to FY19.
The trust even recorded an upward revision in the value of its office properties, although I think some of this could be unwound this year.
Work-from-home restrictions during the coronavirus pandemic is expected to lead to a drop in demand for office space even after the crisis passes.
Risk of write-downs
We have already seen a number of listed property stocks cut the value of their portfolios. This includes Mirvac Group (ASX: MGR) and GPT Group (ASX: GPT), although it relates mainly to their retail properties. I suspect their office portfolios will be next.
However, Centuria’s office properties may not be as badly impacted as these are outside of CBD areas.
It’s high-end central offices charging premium rents that are facing the most pressure. Centuria’s offices are instead in Fortitude Valley in Queensland and Chatswood in New South Wales.
Centuria rents are typically 47% to 77% below what equivalent offices in Sydney CBD charge. Government agencies make up around a quarter of its tenant base.
But Centuria isn’t immune. In fact, it took a $3.2 million hit before June 30 this year from credit losses and rent waivers.
WALE splash or crash?
The trust reported a weighted-average lease expiry (WALE) of 4.7 years and occupancy stands at around 98%.
However, I would take these numbers with a slight pinch of salt in this volatile environment. There are reports that some tenants still in contract are aggressively pushing to cut their rents or renegotiate terms.
Further, 15.2% of rents (based on WALE) expires in 2021 and another 6.8% matures in 2022. These are reasonably small numbers but if most of these tenants do not renew, it can have a big impact on Centuria’s FFO.
Should you be tempted by yield?
However, management will be hoping investors will be tempted by its forecast dividend yield. While the trust is guiding for a lower distribution in FY21 at 16.5 cents a unit (a 7.3% cut from FY20), this still works out to a 9% yield based on yesterday’s close of $1.83.
But in a sign that things remain in a state of flux, management isn’t providing guidance on its FY21 FFO at this point. This makes me wonder how much confidence we can have in the 16.5 cents forecast distribution.
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