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AOF Achieve Targets Ahead of Takeover Decision


Australian Unity announced AOF’s results for the 2019 financial year with earnings and distributions in line with previous guidance, however as the case with many REIT's profits are well down on last year as a result of lower valuation gains.

The Fund remains the subject of a proposed takeover by Charter Hall and Abacus with the pair currently finalising due diligence on the $668m portfolio. The current takeover offer stands at $3.04per unit valuing the ASX-listed property trust at $494.9 million.

Despite the takeover, the REIT has not kept pace with the ASX200 AREIT Index which has risen 13.3% over the past 12 months vs 10.6% for AOF.

The funds' performance in 2019 financial year reflects the teams attempts to enhance the value of the portfolio with a focus on leasing and development activities.

Highlights

  • Profit for the year of $44.8 million down -$52.5 million from the prior year, primarily due to slower growth in asset valuations in FY19 compared to FY18.

  • Funds from Operations (“FFO”) of $28.2 million, or 17.3 cents per unit which was within guidance;

  • Net tangible assets (“NTA”) of $2.79 per unit, an increase of 12 cents per unit, or 4.5%, from $2.67 per unit at 30 June 2018;

  • Portfolio value of $668.4 million, which increased by $32.9 million reflecting capitalisation rate compression (31bps) and market rental growth;

  • Total debt facilities remained at $220 million

  • Gearing of 29.5%

  • Weighted average cost of debt 3.7%

  • Weighted average term to maturity 3.1 years

  • Interest cover ratio 4.57x

  • Hedged debt 97.7%; and

  • Gateway Determination received for proposed development at 2 Valentine Ave, Parramatta, community consultation complete; and draft development application for ~28,000 square metre office building complete and ready to be lodged this week.

Mark Lumby, Fund Manager of AOF said ‘AOF has managed to capitalise on solid tenant demand in the metropolitan office markets. Occupancy has increased to 95.3% through pro-active leasing strategies. This active management, when combined with strong institutional investment demand and market rental growth, has led to a $32.9 million increase in the value of the portfolio, with the total portfolio value now $668.4 million.’

‘Since AOF listed on the ASX a little more than three years ago, we have met or exceeded our earnings and distribution guidance each year, and have delivered a total return to investors of 83%3 - equivalent to approximately 21% per annum.’

Asset Valuations

All properties were revalued as at 30 June 2019 in line with AOF’s valuation policy and reflecting the Independent Board Committee’s request to revalue the entire portfolio in the context of the non-binding indicative offer of $3.04 cash per unit from a consortium comprising Abacus Property Group and Charter Hall Group.

The portfolio value increased by nearly $33 million to $668 million as a result of solid leasing activity, combined with capitalisation rate compression and market rental growth.

Leasing Approximately

12,200 square metres of leasing activity was completed in the 2019 financial year via 35 separate transactions, representing approximately 11.4% of AOF’s portfolio by area. This contributed to the portfolio occupancy increasing to 95.3% as at 30 June 2019.

The fund has no significant lease expiries until FY22. With only two expiries of greater than 1,000 square metres during FY20, and with approximately 60% of the portfolio leased to investment grade tenants such as Telstra, State and Federal Government, Boeing and GE, AOF is well placed to continue delivering sustainable income returns.

Development

AOF is pursuing a development scheme for a commercial office building with net lettable area of approximately 28,000 square metres at 2 Valentine Avenue, Parramatta, which is on the same title as AOF's existing property at 10 Valentine Avenue.

In April 2018, development consent was received to build an office building of approximately 8,000 square metres. AOF is currently pursuing a site specific planning proposal to amend the building height and floor space ratio standards that apply to the site at 2-10 Valentine Ave, Parramatta that would enable a larger office building to be developed of approximately 28,000 square metres. The proposal has been referred for Gateway Determination (an enabler to the development application). The outcome of the Gateway Determination is expected to be finalised by 29 February 2020.

AOF is targeting a fully-let yield on cost, including tenant incentives and finance costs, of between 7% and 8%. The indicative value range of the completed new building is between $250 million and $300 million.

Outlook

AOF provided FFO guidance for the 2020 financial year of between 17.3 and 17.7 cents per unit, and distribution guidance of 16.0 cents per unit for the same period.

AOF Trading Chart vs ASX200 AREIT Blue - AOF, Purple ASX200 AREIT Last 12 months

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