The Centuria Office REIT (ASX: COF) has fallen so much over the last two years. It's definitely worth asking the question of whether the real estate investment trust (REIT) is one of the cheapest bargains on the ASX.
For readers who have never heard of this one before, the REIT owns a large portfolio of office buildings around Australia and leases them to tenants.
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About the Centuria Office REIT
In FY23, less than half (49%) of the portfolio is in NSW and Victoria – it has diversification away from those two markets, with other locations making up the majority. For example, Queensland is 21% of the portfolio and the ACT is 14% of the portfolio.
The Federal government is the biggest tenant, with 15.5% of gross income. Other government entities are also sizeable tenants, such as the WA government (4.3%) and NSW government (2.1%).
It has a weighted average lease expiry (WALE) of 4.1 years, so it has a few years of income visibility ahead. The occupancy rate in the first quarter of FY24 was 96.7% – its buildings are almost entirely full.
There has been a lot of commentary on working from home reducing the demand from businesses. But, for Centuria Office REIT, its markets are reportedly not seeing those issues. It recently said:
Contrary to speculation that working from home will have an ongoing adverse impact on tenant demand, these markets have shown strong net absorption during the period. In addition, Adelaide, Brisbane, and the Sydney fringe markets experienced strong rental growth exceeding 5% throughout the past 12 months.
By contrast, the weaker markets with more exposure to tech and financial services, Sydney and Melbourne CBDs, have continued to trend down in leasing activity.
COF's exposure to positively performing markets contributes to COF's robust leasing results, supporting the high portfolio occupancy.
In other words, while Sydney and Melbourne CBDs may be suffering, the places where the Centuria Office REIT is focused are doing better. Management also suggested there will be a material reduction in future supply because of construction costs and return requirements.
It's expecting to make funds from operations (FFO), or rental profit, of 13.8 cents per unit in FY24. That means it's valued at under 10 times FY24's estimated profit. The Centuria Office REIT is expected to pay a distribution of 12 cents per unit, which is a forward yield of 9%.
Buy $1 for 50 cents?
The Centuria Office REIT is down around 50% from September 2021 and it has fallen 60% from February 2020.
Investors are saying the underlying business is worth a lot less than it was a few years ago. But, management would say the business is doing better than what the market is suggesting, as we've just heard about above.
It recently announced the divestment of two assets to repay debt, at prices that were only slightly below its balance sheet values at 31 December 2022.
At 30 June 2023, it had net tangible assets (NTA) of $2.20, compared to the Centuria Office REIT share price of $1.32, a discount of 40%. So, it's not quite a 50% discount, it's more like buying $1 for 60 cents if the stated value is right.
At 30 June 2023, its portfolio saw a 4.4% decline from the December 2022 portfolio value, so it has already accounted for some, or perhaps most, of the decline.
While the assets are probably worth less than they were a few years ago, particularly in a higher interest rate environment, this ASX REIT could keep paying a big yield and it could benefit when interest rates start falling again.
