Centuria Office REIT (ASX: COF) is an under-pressure ASX stock that could deliver both pleasing passive income and capital growth in 2025, in my view.
The office sector of the real estate investment trust (REIT) industry has been punished as high interest rates hurt rental profits and office property prices. Additionally, the work-from-home trend spurred by COVID-19 has reduced total demand for office space.
However, I think this office REIT is flying under the radar and could be a turnaround opportunity, particularly at its current valuation.
Just by looking at the Centuria Office REIT share price, we can see there has been a lot of pain recently — it has fallen 14% since October. And zooming out, its shares have declined a hefty 56% since September 2021.
A product isn't necessarily good value just because its price has fallen. But this under-the-radar ASX stock could be an appealing investment for a few different reasons. Let's take a look.
Big distribution
With investors valuing the business at such a low price, close to a 52-week low, its distribution yield has been pushed up. That could be compelling for some investors.
While passive income shouldn't necessarily be an investor's only consideration, it can play an important role in returns.
The Centuria Office REIT has guided that it's going to pay a distribution of 10.1 cents per unit in FY25, which translates into a forward distribution yield of 9.1%. That return alone could be enough to beat the return of the S&P/ASX 200 Index (ASX: XJO) in 2025.
The ASX stock has also predicted that it will generate rental profit, or funds from operations (FFO), of 11.8 cents in FY25. That means the business is trading at around 10x FY25's rental profit.
Rate cut(s) incoming?
The high interest rate environment has been a significant headwind for the REIT sector, which is why I think many REITs are trading near 52-week lows.
But, perhaps an eventual rate cut or two from the Reserve Bank of Australia (RBA) will reinvigorate the sector, including the Centuria Office REIT. Time will tell when that actually occurs, but in the RBA's most recent statement for December, it outlined it was seeing progress on inflation in Australia:
…while underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November.
…Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy's supply capacity, that gap continues to close.
While the RBA did say that inflation was currently too high, it added that the board was "gaining some confidence that inflation is moving sustainably towards target".
If at least one interest rate cut occurs in the first quarter of 2025, the ASX property stock could really benefit.
Promising industry dynamics
Despite the challenging environment, the ASX stock continues to sign new office leases, which is helping support its rental earnings. In the first quarter of FY25, it signed leases for 3,531 sqm of space across 11 transactions. It still has an occupancy rate of more than 90%, with a weighted average lease expiry (WALE) of approximately four years.
It's focusing on addressing vacancies and near-term expiries while progressing "value add opportunities". In its quarterly update for the first quarter of FY25, the Centuria Office fund manager said:
Market fundamentals for office continue to improve, demonstrated by increasing positive net absorption across the majority of Australian markets.
The ASX stock continued:
During Q1 FY25, tailwinds across domestic office occupier markets emerged with an increasing number of national and multinational corporations issuing return to office mandates (eg Tabcorp and Amazon), underpinning the relevance and demand for office assets.
Furthermore, survey findings from the KPMG CEO Outlook 2024 Australia revealed that 82% of CEOs expect traditional office roles to return within three years, up from 66% last year.
Australian office markets continue to demonstrate improving leasing momentum, with the majority of markets demonstrating positive net absorption this quarter, including those markets COF has exposure to Canberra, Melbourne Fringe, Adelaide, Chatswood, Brisbane fringe and Perth.
With all of that in mind, I think this ASX stock could deliver both capital growth and a large amount of passive income in 2025. But it's certainly a higher-risk idea.
