Centuria Office REIT (ASX:COF) used its half-year FY2026 results call to point to early signs of a recovery in Australian metropolitan office markets and to outline progress on leasing, portfolio valuations, and balance sheet management.
Management sees metropolitan office markets moving beyond the trough
Centuria Head of Funds Management Jesse Curtis said the past year has shown “compelling signs” that many metropolitan office markets are moving beyond the cyclical trough and into a recovery phase. He cited constrained future office supply and the withdrawal of office space for alternative uses such as residential mixed-use, life sciences, and data centers as factors expected to support stronger occupancy and rental growth.
- A near-record period of leasing activity that “effectively” addressed most FY2026 lease expiries, adding income security across almost 11% of portfolio net lettable area.
- Execution of a B-grade office divestment at a “strong premium,” aimed at improving portfolio metrics and lowering gearing.
- Valuations stabilizing, with a second consecutive period of valuation growth supported by market rent growth and leasing outcomes.
Guidance reaffirmed; distribution yield highlighted
Cheung reaffirmed full-year guidance of funds from operations (FFO) of AUD 0.111 to AUD 0.115 per unit and distribution guidance of AUD 0.101 per unit, with distributions expected to be paid quarterly. Based on the REIT’s recent trading price, management said the distribution guidance implied a yield of 9.5%.
During Q&A, Cheung said there was “no change” to the view that FY2026 would be a trough year for earnings, noting the REIT has taken conservative assumptions on leasing up vacancies, particularly in Docklands and St Leonards. She also said the guidance range is largely driven by leasing outcomes for vacancies, adding that there is potential for outcomes to swing, but it was “too early” to speculate.
Leasing activity: renewals dominated; spreads and incentives discussed
Cheung said leasing was a major focus during the half, with more than 70% of leasing completed coming from renewals, helping minimize downtime. The REIT completed 21,500 square meters of renewals and 7,800 square meters of new leases.
Management highlighted several transactions:
- 8 Central Avenue, Eveleigh: 9,700 square meters across a renewal and a lease to a new tenant
- 101 Moray Street: two renewals totaling 4,700 square meters
- 100 Brookes Street: two renewals totaling 3,500 square meters
- 825 Ann Street: two renewals and one new lease totaling 3,300 square meters
Cheung said leasing contributed to extending weighted average lease expiry (WALE) and helped capture rent growth, with Eveleigh and Fortitude Valley assets generating “significant valuation growth” during the period.
Asked about leasing spreads, Cheung said they were “just over 2%” on average and positive for the period. On incentives, she said the average was about 35% overall, with new leases around 36% and renewals around 33%.
Cheung also said the REIT achieved a material reduction in FY2026 lease expiries, de-risking expiries by 9.6% so that 3.9% remained. She flagged Docklands and St Leonards as more challenging leasing markets and said management continues to focus on vacancies and upcoming expiries.
On strategy in those markets, Cheung said St Leonards has seen better traction after shifting from leasing full floors to splitting floors into separate suites. For 818 Bourke Street in Docklands, she said the market remains challenging due to supply and softer demand; the asset has spec space available and management is actively pursuing inquiries.
Financial results: FFO delivered; debt costs and hedging outlined
Senior Fund Analyst Cameron Mullen said the REIT delivered FFO of AUD 33.4 million, or AUD 0.056 per unit. He said gross property income increased, driven by 3% like-for-like income growth year-on-year.
Finance costs rose by AUD 1.8 million to AUD 24.7 million for the first half. Mullen said the average all-in cost of debt for HY2026 was 5.2%, with expected all-in cost of debt for FY2026 at 5.4%.
COF declared and paid distributions of AUD 0.0505 per unit for the period in quarterly installments, representing a payout ratio of 90.2%.
On the balance sheet, Mullen said COF was 78.5% hedged at 31 December 2025, which he described as a defensive position as the Reserve Bank of Australia lifted the cash rate to 3.85%. COF’s weighted average debt expiry was 2.9 years, with no near-term maturities and the first tranche maturing in FY2028. Interest cover was 2.1x and loan-to-value ratio was 46.1%, compared with covenant requirements of 1.75x and 60%.
Cheung also clarified hedging during Q&A, explaining that the hedge book itself had not changed, but presentation differed due to an assumption that a bank will exercise an option attached to a swap to shorten the swap by one year.
Divestment and valuations: Chatswood sale and second straight uplift
Cheung said COF exchanged contracts in December to sell 9 Help Street, Chatswood, with settlement anticipated in June. Mullen said the divestment price was AUD 90 million gross, and net proceeds are expected to be used to repay debt, reducing pro forma gearing to 42.5%.
Cheung said the sale achieved a 12.5% premium to book value and “over 12%” internal rate of return during COF’s ownership. She said it would reduce exposure to secondary assets, mitigate near-term leasing and downtime risk, and have minimal earnings impact because the passing yield was relatively in line with COF’s cost of debt.
On valuations, Cheung reported a like-for-like valuation gain of AUD 42.8 million for the half, marking the REIT’s second consecutive period of positive valuation gains. She said this suggested a stabilization trend across at least 72% of the portfolio. The weighted average capitalization rate was 6.92%, reflecting a minor 3 basis point expansion from the prior reporting period, while market rental growth averaging 4% adopted in valuations supported the uplift. Cheung cited notable valuation gains at 8 Central Avenue, 100 Brookes Street, and 825 Ann Street following leasing outcomes.
Management also discussed replacement cost dynamics, stating the cost to replace a metropolitan A-grade office was estimated at over AUD 15,000 per square meter, which they said was more than twice COF’s current book valuation per square meter. Cheung said the implied cap rate for the portfolio was 8.66% based on the trading price, which management characterized as misaligned with market evidence and comparable sales referenced in the presentation materials.
In other Q&A items, management attributed higher property expenses to increases in statutory charges (including land tax and council rates), insurance, a relatively larger exposure to gross leases, and the impact of higher average vacancy levels on expense recoveries. They also discussed capital expenditure related to the ResetData development, stating the total cost was about AUD 21 million with “maybe four more” (million) still to spend, and noted that cash flow payments for investment properties reflected various CapEx items across the portfolio, with a larger portion tied to the data center build.
About Centuria Office REIT (ASX:COF)
COF is Australia’s largest ASX listed pure play office REIT and is included in the S&P/ASX300 Index. COF owns a portfolio of high quality office assets situated in core submarkets throughout Australia. COF is overseen by a hands-on, active manager and provides investors with income and the opportunity for capital growth from a pure play portfolio of high-quality Australian office assets. Centuria Property Funds Limited (CPFL) is the Responsible Entity for the ASX listed Centuria Office REIT (COF) (ARSN 124 364 718).
