Australian Unity Office Fund FY17 Report


Australian Unity Office Fund released its annual results on Tuesday announcing that it exceeded its forecasts in income and capital growth. In a clear case of under promise and over delivery, the Fund achieved a Statutory Net Profit of $60.6M, up from their PDS forecast of $18M, though predominantly due to an increase in market valuations of $48.3M.

AOF contains a portfolio of 8 commercial assets containing 97,580 sqm with a total value of $441M.

AOF achieved a 4.2% increase above its PDS Forecast in FFO to 17.1 cpu and increased its NTA from $1.96 to $2.23 as a result of an uplift in valuations.

The Fund is trading at approximately $2.27 per security.

Funds from Operations

The Fund generated FFO of $24M which is an increase of $900K on the PDS forecast. The improvement in FFO was primarily a result of better than forecast leasing outcomes which contributed to $1.9M in additional revenue, and lower than forecast borrowing costs -$380k. These gains were offset by lower than planned adjustments for tenant incentives and leasing commissions.

Balance Sheet

The Balance Sheet showed a positive variation of $39.5M due predominantly to $48.3M in valuation gains (CapEx+Fair Value Adjustments), but offset by reductions in cash (-$6.4M), higher distributions ($-4.8m) and higher borrowings ($-4.7M).

The increase in valuation was mainly driven by cap rate compression with the average cap rate moving from 7.8% in Dec 16 to 7.5% in June 17.


The portfolio comprises assets across most states with a higher concentration in NSW and SA. The NSW assets (which comprise 50% of the portfolio) are located in secondary markets of Parramatta and Macquaire Park, mostly with single tenant exposures.

One of the key risks in the portfolio is the occupancy by the State Government of 100% of 10 Valentine Ave, Parramatta. The Govt have an option to hand back half of this space with notice issued prior to Dec 2018. Given that the Government are pre-committing to other new buildings in Parramatta, there is a risk this space may become vacant.

The portfolio has approximately 6.5% vacancy across the board but with a high vacancy in Brisbane (14.7%), all of which is broadly in line with the market.

AOF have successfully concluded an 8yr lease renewal of the key tenant at 5 Eden Park Drive 12 months ahead of the expiry which had been the biggest lease expiry risk in the portfolio at 5% of NLA. All up AOF concluded leasing deals on 18% of the portfolio by NLA.

AOF will look to take advantage of the development potential of its Valentine Ave asset in Parramatta which contains a freestanding car park capable of being developed into a 25,000sqm office tower.

Key Risks

  • Potential for leasing outcomes in Brisbane (both rental rates and incentives) to be lower than valuation and cash flow forecast estimates.

  • Potential for State Govt to hand back 5 floors in Parramatta in 2019.

  • Softening cap rates and consequential declining values.

  • Potentially higher cost of new a debt facility in 2019 for 50% of borrowed funds.

  • Potential for acquisitions in the current cycle to dilute performance.

Key Opportunities

  • Development potential for site in Parramatta

  • Pursue rental growth on lease expires in tight markets


AOF expects to maintain FFO at 17.1cpu for 2017/18 with a distribution guidance of 15.6cpu.

AOF will seek to unlock value in the car park adjacent to its Parramatta asset as well as from addressing current portfolio vacancy.